Mortgage length / overpayments / overall interest paid

homeless9

Does it make any difference in how much interest you pay if you take out a 28 year mortgage at 4.5% or a 35 year mortgage at 4.5% if it only ends up taking only 20 years to pay off the mortgage because of overpayments you make.

I am not good with maths, so I am not sure. On the face of it I assume it would not make any difference in terms of interest you pay.

Due to making overpayments in the first 5 years of my mortgage term I have gone from starting with a 40 year term to my lender telling me this is now reduced to a 28 year term because of those overpayments. As I am about to renew my mortgage for another 5 years, I am wondering if I just go along with the 28 year term which means higher monthly payments, or I should ask them to put it up to 35 years (what it would have been if I had made 0 overpayments) and have less of a £ commitment per month.

I can afford the 28 year term - no problem, but if it will make no difference in interest rate costs over time by 'increasing' to a 35 year term, and again making overpayments over the next 5 years which will bring the next renewal in 5 years time to say ~20 years, then maybe it's worth going with the 35 year term and lower monthly payments for a slightly better peace of mind incase I lose my job etc.

With overpayments I aim to get my mortgage down to a 20 year term in 5 years time and stick with that as the payments will be low assuming rates don't shoot up.

I hope this makes sense. Thanks for your help.

Typhoon2000

No the the total amount you pay is the same if you pay off you mortgage in 20years, regardless of if the original term was 25 or 35years.
There earlier you start to overpay, the less you will pay in total.

grumpy_codger

I wouldn't say that the total amount is exactly the same or there isn't "any difference". Monthly payments are smaller for longer term, so it depends on the timing of overpayments. Also, AFAIK, the max yearly overpayment can be, say, 10% of either the original balance or the last year balance. If the latter, it depends on the contractual monthly payments, i.e. for shorter term the limit can be smaller.

However, yes, the difference will be very small.

Yorkie1

If you were thinking of staying with the same lender, consider whether you'd need to go through the full affordability check process if you wanted to extend the length of the mortgage - whereas a new product on the same length as the lender has already, is just a product transfer.

homeless9

Yorkie1 said:

If you were thinking of staying with the same lender, consider whether you'd need to go through the full affordability check process if you wanted to extend the length of the mortgage - whereas a new product on the same length as the lender has already, is just a product transfer.

Surely they would not need to do affordability checks (want payslips/bank statements) when my original term was 40 years which started 5 years ago and would now be 35 years if I had made no overpayments....

I now owe a lot less than I would have done without overpayments

I still want the term to be as long as possible to reduce my payments. I know it won't take me the 35/40 years to pay off as most likely in 5 years time I'll drop the term to 20 years due to overpayments and probably never extend it over 20 years again after.

The capital repayment part of my mortgage = ~£12,000 over the past 5 years.

The overpayments I have made = ~£17,000 over the past 5 years.

Again, surely they would not need to go through the whole process of wanting payslips etc if my mortgage was 'reset' to the 35 year term it should be at this stage, also with £17,000 less to pay on the mortgage than expected at this stage.

grumpy_codger

It's worth saying that although this can change in the following years, ATM it makes more sense  to put money into a cash ISA than to  overpay a fixed-rate mortgage. That said, by doing this you may lose your yearly overpayment allowance.

Hoenir

homeless9 said:

Yorkie1 said:

If you were thinking of staying with the same lender, consider whether you'd need to go through the full affordability check process if you wanted to extend the length of the mortgage - whereas a new product on the same length as the lender has already, is just a product transfer.

Surely they would not need to do affordability checks (want payslips/bank statements) when my original term was 40 years which started 5 years ago and would now be 35 years if I had made no overpayments....

All falls under the guise of irresponsible lending and duty of care towards customers. Banking is a highly regulated sector. Where failure to adhere is subject to stiff fines and penalties. Policies are created at the macro not micro level. The extent of the intrusion would be on a case by case basis. 

homeless9

Just signed up to a 4.42% 5 year fixed with no fee. Decided not to request that they put the term up to 35 years and instead stick to what it is set to currently - 28 years. I will just overpay each month and choose the option to reduce the monthly payments when I do so.

Hoenir

Five years time you can review the situation again. The only certainty in life is uncertainty.