Overpayments - do they reduce mortgage term?

HalfMoonBoy

Hi all,

I recently opened a mortgage with Halifax to buy my first house, and I am planning to contribute with overpayments.

My understanding of overpayments is that they will lower the borrowed amount of money, hence lowering interests when calculated each month. All the overpayment calculators, therefore, show that by having a constant overpayment the mortgage will be paid in advance.

However, looking at the Halifax app it seems that the three overpayments Halifax did not decrease the number of remaining years/months. Also, I read on Halifax webpage that “Making overpayments will reduce your mortgage balance. Any overpayments won’t automatically reduce your mortgage term or monthly payment. But when we next recalculate your monthly payments, we’ll use your new balance. Your term will remain the same” (I cannot yet post links).

Do overpayments reduce the term (as shown on all calculators, including Halifax’s one) or not? If yes, shall I ask them to update the remaining term counter (I thought this would have been automated)?

Apologies if my question is naïve, I am not British so this is my first experience of a mortgage in this country.

grumpy_codger

This question keeps popping up frequently here*.
Of course, overpayments reduce the term ultimately - just keep overpaying. 
However, if there is a limit on the annual overpayment and you are close to the limit, I think next year you'll probably won't be able to overpay as much as now because your contractual monthly payment will get smaller.
Let's say currently the contractual payment is 500 and the maximum to overpay is 400 p.m., i.e. you can pay 900 p.m.
Next year the contractual payment drops to, say 450. If the overpayment limit remains the same, the maximum you'll be able to pay without penalties will be 850 (i.e. 350 on the top of the original contractual payment).

Also, if it's a fixed-rate mortgage, in this country the rate is fixed only for few years, typically 2 or 5. When the term expires and you don't like their standard variable rate, you re-mortgage with the same or some other provider. At this point you can change the total term if you wish.

* e.g. https://forums.moneysavingexpert.com/discussion/6496310/halifax-not-reducing-term-with-overpayment/p1

YBR

Most providers, overpayments can Either reduce the term Or result in lower monthly payments on the same term. For most fixed term products you can overpay up to 10% of the loan value each year, my last one it was 10% of the amount originally borrowed. Your mortgage may have different conditions.

Mostly I used my overpayments to reduce the term as it is the best MSE strategy provided you steer clear of any penalties. When it came close to the end of my mortgage I switched to reducing the payments to avoid early repayment fees.

HalfMoonBoy

Hi grumpy_codger and YBR,

Thanks for your replies. My current mortgage is a 5-year fixed 30 years (started in December 2024) repayment mortgage, and - as you correctly pointed out - there is a limit on overpayments (10% of the remaining loan, calculated each year). My understanding is that - with time - my ability to contribute with overpayments may decrease (if higher than 10% of the residual loan on January that year). In the meantime, overpayments should nonetheless help in reducing the term.

Would you agree?

YBR

Yes, I forgot to say I had to tell my provider whether I wanted a reduced term or lower payments. It was easy to do via the website IIRC.

Yorkie1

I always chose to keep the term the same, and live with reducing monthly payments (which I then overpaid more on, up to the original payment amount, as described earlier). This was because if I needed ever to reduce my outgoings, I could simply stop the overpayments. Whereas if I reduced the term, I had no flexibility.

I will have paid the mortgage off several years early through this approach.

You might also find that some lenders go through full affordability if you ask to shorten the term.

Hoenir

Overpayments, if maintained, will ultimately reduce the mortgage term. Rather than micro manage the situation. Approach it in the same way you would if you planned to run a marathon. Anything could happen in your personal lives over the next 30 years. Much outside of your own control. Then there's interest rates which will rise and fall as macro economic conditions change. 

Many people move property during their lives. Overpaying the mortgage will increase the amount of equity at your disposal should you decide to move up the ladder. 

400ixl

Overpayments with Halifax do not necessarily reduce the term.

You need to check what the T&C's of your mortgage say. Some Halifax mortgages do adjust the term, some on the other hand get a yearly review and the monthly payment amount gets reduced and the term kept the same.

You need to speak to Halifax to see what your mortgage is set up to do. They can usually change it is it is not set up to reduce the term I believe.

Hoenir

400ixl said:

Overpayments with Halifax do not necessarily reduce the term.

Mathematically that's what happens. As the capital balance reduces then less interest is charged. Lenders have adopted different approaches to amending the contractual term.  While shortening it may seem to be the clever thing to do. There might an occcasion in the years ahead when the flexibility to reduces monthly outgoings is usefull. As extending the mortgage term is at the behest of the lender. 

HalfMoonBoy

Many thanks you all - a lot of useful information and food for thoughts!

I re-checked the terms & conditions of the mortgage. It's written that:

• lump-sum overpayments will not result in automatically recalculate the monthly payment (this is what we are currently doing - every month we do a lump sum overpayment, we were just testing it before thinking of a regular overpayment). This means that the monthly payment will not be affected by the overpayments.
• the charged interest will be calculated based on the reduced balance (hence, the interest is affected by the overpayment).

Then, they say (as correctly reported in the forum by many users) that overpayments do not reduce the mortgage term, and that we will need to speak to a qualified Mortgage Adviser to do so.

Nonetheless, if the overpayment reduces the owed balance (and the interests) without affecting the monthly payment, how is it possible that it won't translate into a term reduction? Sooner or later the balance will reach 0, and it will happen sooner than the expected 30 years (provided that monthly payments and overpayments are constants), no? Am I missing the obvious? 

Hoenir

HalfMoonBoy said:

Nonetheless, if the overpayment reduces the owed balance (and the interests) without affecting the monthly payment, how is it possible that it won't translate into a term reduction? Sooner or later the balance will reach 0, and it will happen sooner than the expected 30 years (provided that monthly payments and overpayments are constants), no? Am I missing the obvious? 

That's the correct line of thinking. 

As an example. Take a 30 year repayment mortgage at 4% interest for the entire term. If somebody was to overpay by £50 per month. The mortgage term would shorten to 25 years and 1 month (  i.e. 59 months shorter). Compared to the full mortgage term there'd be a saving of £13,247 in interest.