Overpayment to reduce mortgage term requires a contract variation and fee - worth it?

Zemzelett

Hello everyone. I have searched for this topic on the forums here and have found some useful information, but am still looking for a bit more guidance.

I have a mortgage with a smaller lender (Marsden Building Society), and was fortunate recently to save enough for my first overpayment (at the maximum 5% per year allowed).

When I contacted Marsden to ask them to use the overpayment to reduce the term, they said they could only use it to decrease the monthly payments. Any other approach would be treated as a contract variation. As they put it: "If you require a term amendment this will be treated as a variation to contract and would require a referral to our Mediation Team to carry out an affordability assessment and would incur a fee." I have asked to be referred, if only to see what the process involves and how much it will cost, but nothing further has happened yet.

No doubt they're within their rights to do this; it's a bit disappointing, but evidently not unknown given other posts here. However, the benefits of using the overpayment to reduce the term seem very significant compared to just reducing the monthly payments, so I would consider paying a fee and going through some hassle for the privilege. Has anyone else come across this situation? If so, did you go through with the contract variation and was it worth it?

Grateful for any views. Thanks in advance.

P.S. From previous forum posts, I think I might also get people saying - you can make the payment to reduce the monthly payments, then just keep the DD the same as it was before. However, this sounds like it differs by lender, in terms of whether this would be considered a further overpayment or not (see e.g. https://forums.moneysavingexpert.com/discussion/6496310/halifax-not-reducing-term-with-overpayment/). It sounds as if I'll therefore have to ask the lender what rules apply with them.

Hoenir

The mortgage term is contractual. Any change now results in the lender reassessing affordability. A byproduct of the Duty of Care towards Customrs imposed by the FSA. 

When I contacted Marsden to ask them to use the overpayment to reduce the term, they said they could only use it to decrease the monthly payments.

Put the difference aside and at the earliest opportunity make a further overpayment to your mortgage account. 

While you won't be reducing the term. The capital balance will be coming down saving you £'s in interest. Settling a mortgage is best viewed as a marathon rather than a sprint. 

Brie

P.S. From previous forum posts, I think I might also get people saying - you can make the payment to reduce the monthly payments, then just keep the DD the same as it was before. However, this sounds like it differs by lender, in terms of whether this would be considered a further overpayment or not (see e.g. https://forums.moneysavingexpert.com/discussion/6496310/halifax-not-reducing-term-with-overpayment/). It sounds as if I'll therefore have to ask the lender what rules apply with them.

Um, no DDs don't work that way.  Marsden will change the DD to what they consider the appropriate amount now and take that.  You can then set up a standing order for the difference between the old and new DD amounts and pay that - after checking that doing so would exceed  the 5% annual overpayment you are allowed.  And check if they will accept monthly SOs too.  If not, put the money aside and pay it annually.

I'd stick to doing this for a few years (5?) and then maybe apply for the change of term to save too much paperwork and fees.

Altior

Answer seems a palpable no.

What's the interest rate on the mortgage, and why do you want to reduce the term?

Zemzelett

Thanks everyone, really appreciate the advice. Responses below:

- Mortgage term is now contractual - thanks, I wasn't aware of that. I have now heard back from Marsden, and the process seems surprisingly simple (especially for a lender with no online portal and no ability to generate monthly interest figures, but that's another story...) Essentially, you submit a form on their website and pay £50, and the term can be amended subject to said affordability checks. The only potential complication is that this is a separate process to any repayments, so they might be temporarily assessing against a higher monthly payment than I will actually be paying once the overpayment has been paid in.

- DDs - noted, but this point is moot, because Marsden confirmed that they consider any uplift in monthly payments a further overpayment which would exceed the 5% allowance. This seems to differ by lender, but at least I now know the stance of my own.

- Interest rate is 6.09%, and the mortgage is also large (our place is in London), so any reduction of the capital will generate a lot of interest savings. Also, I'm an expat (hence the dreadful rate), so I can't open savings accounts and don't have any existing ones that even come close to a decent rate, so I don't really have anywhere useful to stash the money I'd be saving for a later overpayment.

To conclude, I think my best bet is going to be to make an overpayment shortly (since I'm near the tail end of the first 12 months), then apply to reduce the term. Based on the Marsden's online calculator (h ttps://www.themarsden.co.uk/mortgages/mortgage-calculator), I can determine the term that would result in a similar monthly payment by plugging in the capital I can repay. Looks like that might cut around 3 years off my term while keeping my monthly payments the same - which seems pretty good to me.

At least, that seems like the best move to me... But would be deeply grateful for any thoughts!

Altior

Ah yes, pretty high rate so OP logical.

One consideration that many people forget. Generally, the cash benefit from shortening the term comes at the tail end of the mortgage. When in real terms, the value of the £ will be significantly lower than it is today. However you begin the get the benefit from lower payments immediately, ie when the value of the £ is close to what it was at the time of the OP. So whilst in £ terms the interest saving is superior if shortening the term, lower payments now will likely be superior in real terms. 

My own opinion is that I'd rather benefit from the utility of lower payments now, than a quicker finishing line decades in the future. However the majority of people seem to prefer targeting being mortgage free. 

Zemzelett

Altior said:

Ah yes, pretty high rate so OP logical.

One consideration that many people forget. Generally, the cash benefit from shortening the term comes at the tail end of the mortgage. When in real terms, the value of the £ will be significantly lower than it is today. However you begin the get the benefit from lower payments immediately, ie when the value of the £ is close to what it was at the time of the OP. So whilst in £ terms the interest saving is superior if shortening the term, lower payments now will likely be superior in real terms. 

My own opinion is that I'd rather benefit from the utility of lower payments now, than a quicker finishing line decades in the future. However the majority of people seem to prefer targeting being mortgage free. 

I don't necessarily disagree with this up to a point - in fact I've used the same thinking to use interest-free credit cards for major purchases, on the basis that (provided you pay it all off on a strict schedule) the £ is worth less at the end of the payment period than at the beginning. Also, depending on your circumstances, the £ might be worth less to you later as well - for example, if you have debts to pay now that are squeezing you but will be paid off later, or if you get a salary rise or increment, etc.

Of course, it's not risk-free... and also, I'm digressing! Re: mortgages, I would tend to think about it in terms of the interest picture. If you owe a lot at a high rate like we do, any inroads into the capital has an outsize impact which seems to suggest that acting sooner is a good idea. If you have less left and a better rate, it's not so important and you can bide your time. A jammy friend of mine is sitting on a 5-year 1% fix, so suffice to say he isn't too bothered and is even considering increasing his mortgage for a rental property... but that's another story entirely.

Thanks all for your help. I've now made the overpayment and requested the term amendment. Hopefully all will go well...

Altior

Yes it's about interpretation and personal preference. I prefer to push mine out for lower monthly repayments as long as possible. It's just a consideration that rarely gets mentioned in relation with mortgages, but it's a significant factor to feed into the equation.

I personally fixed for 7 years just before rates took off. I'd like to think it wasn't jammy for me though, I simply did not believe the 'transitory' narrative emanating from the central banks. Quite the opposite. I even listened to the BoE MPC press conference before committing to the fix, for my sins! 

BikingBud

Compounding works on the way down as well as the way up. ie lower the capital sooner you pay significantly less and pay it off sooner.

The difference between the red and blue lines is the money you could save. Overpaying monthly will be the red line but consider the effect of a descending staircase as you overpay to the max once per year, it reduces the optimal and therefore the interest by a large step and that brings the red line back towards 15 years or even fewer.

Yes of course it is contractual but some building societies are now wanting their cake and to eat it as they recognise the blue/red gap is the lost profit. For £50, without understanding all the figures I would likely go for it.



Personal preference and saving money elsewhere for a better rate might influence the decision but it cannot change the maths.

theoretica

If you are near the tail end of the 12 months, something to think about is how soon you might be able to make the next overpayment?  You might only want to pay the £50 to reduce the term every other overpayment, or something like that.