Does overpaying reduce term length?

RWHarris

A ridiculous question, I apologise! But this is a safe space...?  So I discussed this with my mortgage broker and mortgage lender before making a lump sum overpayment, and obviously my partner and I discussed it extensively. So it is a bit embarassing if I have somehow misunderstood this.

This was a lump sum overpayment, just shy of the allowed overpayment (so not incurring any fees). Using the simple online calc they provide (HSBC), the interest savings would be almost 209k and the potential term reduction with the lump sum payment was 7 years 11 months.

On our account, it shows the amount reduced, but that is it.

This is over a month ago and our regular payment has came out since, but nothing else has changed. Bit "bummed" about this but have I just completely misunderstood something here, somehow? Does it mean the "equivalent" of x-years reduced from the total mortgage, as the total is obviously reduced (without interest) ? 

movilogo

If you are in fixed mortgage, then overpayment will reduce the term - your monthly payment won't change.
If you are on a tracker rate, where usually unlimited overpayment is allowed, you may choose whether to reduce monthly payment or reduce the term keeping same monthly payment. However, depending on which bank you are with, you may or may not be given that option. 

BarelySentientAI

RWHarris said:

A ridiculous question, I apologise! But this is a safe space...?  So I discussed this with my mortgage broker and mortgage lender before making a lump sum overpayment, and obviously my partner and I discussed it extensively. So it is a bit embarassing if I have somehow misunderstood this.

This was a lump sum overpayment, just shy of the allowed overpayment (so not incurring any fees). Using the simple online calc they provide (HSBC), the interest savings would be almost 209k and the potential term reduction with the lump sum payment was 7 years 11 months.

On our account, it shows the amount reduced, but that is it.

This is over a month ago and our regular payment has came out since, but nothing else has changed. Bit "bummed" about this but have I just completely misunderstood something here, somehow? Does it mean the "equivalent" of x-years reduced from the total mortgage, as the total is obviously reduced (without interest) ? 

If your regular payment hasn't changed, then your mortgage has just got shorter.

If it has changed, then it's got cheaper but the same length.

If one has happened but you wanted the other, then speak to your lender, or change some of the terms at the next change of deal.

Exodi

movilogo said:

If you are in fixed mortgage, then overpayment will reduce the term - your monthly payment won't change.
If you are on a tracker rate, where usually unlimited overpayment is allowed, you may choose whether to reduce monthly payment or reduce the term keeping same monthly payment. However, depending on which bank you are with, you may or may not be given that option. 

Some banks allow you to choose between over-payments reducing the term or the monthly amount on a fixed rate mortgage.

@RWHarris if your monthly payment is the same (which is what you want), then the term will inevitably reduce (and it's exponential as lower balance = less interest, but the same monthly DD means you're now paying off more of the principal with each payment). At some point (I expect 7 years 11 months earlier) your balance will hit zero.

FYI Interest is calculated daily (but compounded monthly) on the balance.

RWHarris said:

This is over a month ago and our regular payment has came out since, but nothing else has changed. Bit "bummed" about this but have I just completely misunderstood something here, somehow?

I'm interested in how you thought it would work or what you'd think would change? Presumably your balance went down?

feynman33

RWHarris said:

A ridiculous question, I apologise! But this is a safe space...?  So I discussed this with my mortgage broker and mortgage lender before making a lump sum overpayment, and obviously my partner and I discussed it extensively. So it is a bit embarassing if I have somehow misunderstood this.

This was a lump sum overpayment, just shy of the allowed overpayment (so not incurring any fees). Using the simple online calc they provide (HSBC), the interest savings would be almost 209k and the potential term reduction with the lump sum payment was 7 years 11 months.

On our account, it shows the amount reduced, but that is it.

This is over a month ago and our regular payment has came out since, but nothing else has changed. Bit "bummed" about this but have I just completely misunderstood something here, somehow? Does it mean the "equivalent" of x-years reduced from the total mortgage, as the total is obviously reduced (without interest) ? 

Thats how it's supposed to work, if you dont ask for a term increase. Nothing else changes, and your mortgage will be payed off 7 years 11 months earler.

(((7 x 12) +11) x your monthly payment) - Your lump sum payment = ~The amount you'll save (In interest).

Hoenir

If you are in a fixed term product currently. Then your monthly mortgage payment will not change immediately. 

However when you switch to a new product whether it be variable or fixed your mortgage payment will be recalculated. By default this over the remaining contractual term of the mortgage. 

The way to offset this is by continuing to make overpayments as and when you are able. 

Alternatively you can request the lender to shorten the mortgage term. This will involve them conducting affordability checks. 

The less capital you owe. The lower the amount of interest you'll be charged. The quicker the mortgage will be gone. Though takes significant overpayments to shorten the mortgage term considerably. 

Edi81

Hoenir said:

If you are in a fixed term product currently. Then your monthly mortgage payment will not change immediately. 

However when you switch to a new product whether it be variable or fixed your mortgage payment will be recalculated. By default this over the remaining contractual term of the mortgage. 

The way to offset this is by continuing to make overpayments as and when you are able. 

Alternatively you can request the lender to shorten the mortgage term. This will involve them conducting affordability checks. 

The less capital you owe. The lower the amount of interest you'll be charged. The quicker the mortgage will be gone. Though takes significant overpayments to shorten the mortgage term considerably. 

Depending on who the lender is they may reduce the repayments whilst in a fixed term. Halifax do this (often queried on this forum).