Info need please, lender reduced monthly repayment after overpayments

BikingBud

Altior said:

Must be remembered that you only get the benefit from shortening the term at the end of the term. Which could be many years away. Keeping the term the same, and reducing the monthly payments gives you the benefit now.

Reducing the term gives you the best headline interest saving, however that does not consider the time value of money, and the true value of a pound will be significantly less at the end of the term than it is now.

Generally, there is only a benefit from overpaying a mortgage if the interest rate is higher than the market interest rate for cash savings and ISAs. You could just put the extra £100 pcm in cash savings, and do a lump sum payment if/when saving rates fall again. It would however be helpful to know what your fixed rate is. 

In pure cash terms! Time value of money doesn't accommodate failing health or desire to do things other than work.

Many people have other reasons to pay off a mortgage, not least freedom from having to work, to get up and do the daily grind.

If you can take a £1000 per month mortgage payment out of your budget the figure you will need to earn can drop by over £15k per year, hence the stress of work can be reduced if not removed.

Even if only 6 months early.

For me that exceeds any monetary value!

The best answer is likely a mix of approaches, high interest savings and overpaying larger lumps at key break points such as the end of a fixed rate period, but if you find you are working only to pay a mortgage......

@safester I cannot see what your fixed rate is. If quite low it might be more advantageous to pay the £100 into a monthly saver @6-7% but only you can decide if that is better. Perhaps you should be reasserting with the lender that you wish to retain your previously agreed payments.

Bizzywizard

Altior said:

Must be remembered that you only get the benefit from shortening the term at the end of the term. Which could be many years away. Keeping the term the same, and reducing the monthly payments gives you the benefit now.

Reducing the term gives you the best headline interest saving, however that does not consider the time value of money, and the true value of a pound will be significantly less at the end of the term than it is now.

Generally, there is only a benefit from overpaying a mortgage if the interest rate is higher than the market interest rate for cash savings and ISAs. You could just put the extra £100 pcm in cash savings, and do a lump sum payment if/when saving rates fall again. It would however be helpful to know what your fixed rate is. 

Altior said:

Must be remembered that you only get the benefit from shortening the term at the end of the term. Which could be many years away. Keeping the term the same, and reducing the monthly payments gives you the benefit now.

Reducing the term gives you the best headline interest saving, however that does not consider the time value of money, and the true value of a pound will be significantly less at the end of the term than it is now.

Generally, there is only a benefit from overpaying a mortgage if the interest rate is higher than the market interest rate for cash savings and ISAs. You could just put the extra £100 pcm in cash savings, and do a lump sum payment if/when saving rates fall again. It would however be helpful to know what your fixed rate is. 

My rate is 3.39% with 12 years remaining (We want it gone in 4.5 years time). DH and myself both save money in a 7% savings accounts which matures in November, which will take us just below the 10% threshhold, hence doing a 10% at the end of the year (unless we need it). When the rate was alot lower we used to just to it monthly, like you say its now worth adding it to a saving account first. To me it feels like we should of been given a choice from Halifax, as nothing says about reducing the term (which is what I would prefer).

Altior

My rate is 3.39% with 12 years remaining (We want it gone in 4.5 years time). DH and myself both save money in a 7% savings accounts which matures in November, which will take us just below the 10% threshhold, hence doing a 10% at the end of the year (unless we need it). When the rate was alot lower we used to just to it monthly, like you say its now worth adding it to a saving account first. To me it feels like we should of been given a choice from Halifax, as nothing says about reducing the term (which is what I would prefer).

So you are much better off in cash savings and using that to pay off the mortgage when the ERC no longer applies. Take advantage of the scenario would be my take on it. 

My mortgage is with Santander and the default is shortening the term for regular overpayments, and I'd get the option for one off payments.

It's too late now but you could have obtained a fixed rate cash bond/ISA over a fixed term, eg over three or four years and locked in a rate that was much higher than the mortgage rate. I can't think of a negative with that, only positive. 

Hoenir

safester said:

I think Brie's reply hits the nail on the head regarding what I was thinking, that the lender will get more interest over the longer term with reduced monthly repayments. 

Mortgage lending is highly regulated. Lenders clearly state their policies with regards to overpayments. Conspiracy theories hold no substance other than on socia media.  

Altior

In pure cash terms! Time value of money doesn't accommodate failing health or desire to do things other than work.

Many people have other reasons to pay off a mortgage, not least freedom from having to work, to get up and do the daily grind.

If you can take a £1000 per month mortgage payment out of your budget the figure you will need to earn can drop by over £15k per year, hence the stress of work can be reduced if not removed.

But I'm not suggesting burning the money that someone would have by achieving lower regular payments. Anyone doing this would then have accumulated a big fat lump sum of cash over time (I know, I'm doing just that!). Which they could use to pay off the mortgage at a later date, but there may also be more lucrative options at that point. There is also the huge bonus of having liquid cash to potentially lean on, should circumstances change (rather than personal capital being locked in an illiquid asset).