Overpayments: reducing term vs reducing installment

pieroabcd
pieroabcd Posts: 465
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edited 3 February at 11:31PM in Mortgages & endowments
Hi,
reading this page
https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/
I was impressed by this stamenent

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.

Thanks.

Comments

  • jackieblack
    jackieblack Posts: 10,290
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    I think the comment about having the MP reduced, rather than the term, not being beneficial assumes that the person then only pays the reduced monthly payment amount each month.
    If they continue to pay the previous/higher amount they will be overpaying every month which naturally reduces the mortgage term as the overpayments mean that the mortgage balance will be repaid sooner 
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  • Newbie_John
    Newbie_John Posts: 373
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    The amount of interest you pay comes from the remaining balance and the length of the mortgage.

    If you overpay your mortgage in either way and reduce balance by the same amount - they will be equal (just to be clear with reduced monthly payments you need to increase overpayments to match).

    The comment "always tell your lender you want to reduce the term of your mortgage" is a very safe comment to give to all people asking without looking at their individual circumstances. By reducing term you actually overpay more - hence bigger saving, but in your case it equals.


  • The downside to reducing your term is that if your circumstances change, you’ve tied yourself into a monthly payment.

    Personally, I prefer to overpay and keep the term the same, so if I need to drop the payments, I can.  

    Although the term stays the same, I’ll still pay it off earlier if I continue to pay more than the contractual payment. 
  • Yorkie1
    Yorkie1 Posts: 11,525
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    The downside to reducing your term is that if your circumstances change, you’ve tied yourself into a monthly payment.

    Personally, I prefer to overpay and keep the term the same, so if I need to drop the payments, I can.  

    Although the term stays the same, I’ll still pay it off earlier if I continue to pay more than the contractual payment. 
    This is the approach I took; I wanted to retain that flexibility in case circumstances changed. I will still have paid it off early, but without the added pressure.
  • jackieblack
    jackieblack Posts: 10,290
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    Yorkie1 said:
    The downside to reducing your term is that if your circumstances change, you’ve tied yourself into a monthly payment.

    Personally, I prefer to overpay and keep the term the same, so if I need to drop the payments, I can.  

    Although the term stays the same, I’ll still pay it off earlier if I continue to pay more than the contractual payment. 
    This is the approach I took; I wanted to retain that flexibility in case circumstances changed. I will still have paid it off early, but without the added pressure.
    Yes, me too

    2.22kWp Solar PV system installed Oct 2010, Fronius IG20 Inverter, south facing (-5 deg), 30 degree pitch, no shading
    Everything will be alright in the end so, if it’s not yet alright, it means it’s not yet the end
    MFW #4 OPs (offset): 2018 £866.89, 2019 £1322.33, 2020 £1337.07,
    2021 £1250.00, 2022 £1500.00, 2023 £1500
    Target for 2024 (offset) = £1200, YTD £0
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  • BikingBud
    BikingBud Posts: 1,641
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    edited 6 February at 10:34AM
    The downside to reducing your term is that if your circumstances change, you’ve tied yourself into a monthly payment.

    Personally, I prefer to overpay and keep the term the same, so if I need to drop the payments, I can.  

    Although the term stays the same, I’ll still pay it off earlier if I continue to pay more than the contractual payment. 
    How?

    Payments do not go up because you've overpaid!

    You're tied into the payments from the outset, subject to the contracted route to accommodate interest rate changes. 

    If you overpay, you owe less, therefore interest is less and you therefore need fewer of the same payments to pay off the outstanding capital and projected interest or

    You've overpaid, you owe less, therefore interest is less but you decide to reduce the payment and keep the term the same.

    We went through this on another thread where lots of differing options came in about what might be a better route for the cash to work but fundamentally, overpaying and reducing the term saves you most.

    https://forums.moneysavingexpert.com/discussion/6497684/mortgage-overpayment-reduces-monthly-repayment-amount/p1

    Try this:

    http://www.locostfireblade.co.uk/spreadsheet/Index.html

    You can fine tune the model to suit your own circumstances, set up Mortgage 1 as your current commitment and then change things on Mortgage2 such as set a fixed rate and follow on interest rates, overpayments (set the start year value *0.1) ad build this in every year to see where you might end up.

    Other routes to maximise the spare cash, saving, investment, Premium bonds, pensions etc should be understood and explored as these my realise more benefit.

    You must ensure your lender allows what you might wish to do as some appear to have alternative methods to deal with overpayment and you may be at risk of early resettlement fees.
    Mortgage: £200,000 (Sep 2021)                                      Initial MF date: Sep 2031 

    Int Rate:
    1.19% fixed until Nov 2026 (8.5% follow on rate?)
    Cap+Int Repaid: £65100 (32%)  £80,704 (40%) £82468 (40.48%)£89507 (43%) £91267 (44.7%) £98,309 (48.02%)

    Target MF date: Nov 2026  Current MF date: Dec 2029,  Nov 2029, Apr 2029, May 2029                                    
    Target Int Saving: £25,561 Current Int Saved: £12,350,   £13,421,  £16,991, £17,989, £18,699, £20,495

    Overpayments suspended and surplus cash currently being diverted to high interest savings.
  • pieroabcd
    pieroabcd Posts: 465
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    Thanks fir all the feedback so far.
    I think that I'll stick with the current plan: lower Installment plus ever increasing overpayment, so I'll have lower pressure and still overpay as much as possible.

    By the way, is there any lenser that shows in real time how much I've paid in interests and capital so far without having to wait for the yearly statement?
    Mine doesn't 
  • jrawle
    jrawle Posts: 586
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    pieroabcd said:
    reading this page
    https://www.moneysavingexpert.com/mortgages/mortgages-vs-savings/
    [...]

    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
    [...]
    While it doesn't change the outcome of this discussion, this sentence is incorrect. The next month's payment will not be "reduced by the amount you've overpaid". The next month's payment will be recalculated to take the overpayment into account, which will usually mean a small reduction.
    pieroabcd said:
    Thanks fir all the feedback so far.
    I think that I'll stick with the current plan: lower Installment plus ever increasing overpayment, so I'll have lower pressure and still overpay as much as possible.

    By the way, is there any lenser that shows in real time how much I've paid in interests and capital so far without having to wait for the yearly statement?
    Mine doesn't 
    The only thing to watch is whether you have an overpayment limit. The ever increasing overpayments you need to make to keep the monthly payment the same will mean you use this allowance up more quickly. If you are well within the limit, it may make no difference. For people who intend to overpay the full amount allowed, it makes sense to avoid having the regular payment recalculated each month.
    As for "real time" statements, Nationwide show the current balance, interest and all payments, updated daily in their internet banking. I'm sure other lenders are the same.
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