Overpayments: reducing term vs reducing installment
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When you make an overpayment, your lender may offer you two options:
- Either to reduce next month's payment by the amount you've overpaid, or
- To keep payments the same and reduce your mortgage term instead.
This is something to watch for – if you get it wrong, it means your overpayment won't actually help you out that much. If you get this choice always, always tell your lender you want to reduce the term of your mortgage.
It doesn't delve into details, unfortunately.
So far I've been paying every time that I could with more than 3x the monthly installment to reduce the next monthly installment, seeing the balance shrinking by the same amount as the overpayment. I reasoned that since the overpayment goes towards the capital the interests on the lower capital will shrink.
Can someone please explain if I may end up saving less (and by how much) with the installment reduction rather than with the term reduction, considering that I'm always overpaying by all that is left of the salary after the monthly installment (that basically means that my overpayment increases every month)?
For example, and just to use fake numbers, let's a fixed monthly salary N. With the installment decreasing by $50 pounds every month (due to how the lender recalculates the installment after the part redemption) to 950, 900, 850, 800..., with an overpayment of N-installment I would be overpaying £50 pounds more than the overpayment of the previous month, that would mean: 500, 550, 600, 650 and so on
Any practical example and saving comparison using the 2 methods?
Other question assuming that I end up repaying the mortgage early (balance at 0 before the expected date) without asking the bank to keep the term the same, can the bank refuse to close the mortgage early or can they ask me to keep paying them more money until the programmed end date?
My mortgage is a tracker that basically allow all kinds of overpayments.
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