Reduce term or over pay

moremoneyplease111

I have 20 years and 6 months left on my mortgage, I owe 77000. I'm due to remortage in October but I've done the maths and I can figure out which is best to reduce my term to 15 years making my monthly mortage 560 and over paying bringing it to 650 a month, or remotage for 20 years making my monthly payment around 441 and over paying to bring it up to 650 a month, I am only doing the maths on the loan amount and not the intrest so which is better, t works out over 5 yesrs im still paying arounf 39000 off with both options, which will be the best choice at this point the intrest rate offered is 4.04%. We are wanting to have out mortage paid off in 10 years!  

la531983

You would incur the same interest either way.

Assuming you dont want to overpay any more than the amounts you gave above, the problem with option 1 is that it would likely require a full affordability check and more information asked for, as you would be making a material change to the mortgage (reducing term, resulting in a higher minimum payment). If you kept it at option 2 there would be none of that, and gives you the option not to have to pay anymore than £441 if funds were tight.

Exodi

@la531983 is spot on.

The result in option 2 would be that you would end up paying your mortgage off early, at the same time as you would have in option 1.

Personally option 2 makes the most sense as it affords better flexibility and doesn't require a new check. You're then free to overpay as you desire, especially as you hope to clear the mortgage after 10 years.

To evidence this I've run the two scenarios on the MSE overpayment calculator (I used a balance of £75.5k since you're not due to remortgage till October and your monthly repayment amounts didn't marry up otherwise).

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

The first is the '15 year mortgage' with a monthly repayment of £560+£90 overpayment = £650 in total.

As you can see, the debt is cleared in a little over 12 years with a total repayment of £95,950.

The second is the '20 year mortgage' with a monthly repayment of £460+£190 overpayment = £650 in total.

As you can see again, the debit is cleared in a little over 12 years with a total repayment of £95,990

(in reality the result is exactly the same, I suspect the slight difference is just down to rounding to whole pounds in the payment amounts).

moremoneyplease111

My husband wants option 1 and I feel option two is the best as we will be taking it  over 5 years and it gives you the security that if circumstances change you have the flexibility, but I thought by reducing the overall term by 5 years it would be better in terms of the intrest saved as this accrued daily?  Also this means in 5 years time I will have 15 years remaining and my plan was to shave 5 years off this year and again in 5 years time meaning my last term would be 5 years 

la531983

moremoneyplease111 said:

My husband wants option 1 and I feel option two is the best as we will be taking it  over 5 years and it gives you the security that if circumstances change you have the flexibility, but I thought by reducing the overall term by 5 years it would be better in terms of the intrest saved as this accrued daily?  Also this means in 5 years time I will have 15 years remaining and my plan was to shave 5 years off this year and again in 5 years time meaning my last term would be 5 years 

In both options your balance is exactly the same. Therefore if you pay £650pm off it....the daily interest is exactly the same too.

Option 2 just gives you more flexibility if you cant afford to overpay on occasion and wont require the back doing a full credit check and affordability checks.

saajan_12

moremoneyplease111 said:

My husband wants option 1 and I feel option two is the best as we will be taking it  over 5 years and it gives you the security that if circumstances change you have the flexibility, but I thought by reducing the overall term by 5 years it would be better in terms of the intrest saved as this accrued daily?  Also this means in 5 years time I will have 15 years remaining and my plan was to shave 5 years off this year and again in 5 years time meaning my last term would be 5 years 

It doesn't make a difference to the actual timeframe. It'll only actually be the 15/20 years if you don't overpay at all. In your example if the total amount going towards capital is the same then you'll pay off the mortgage in the same number of years. 

So the only difference is in softer aspects: 
- with a lower required payment, you have the flexibility if you need to reduce the overpayment due to job loss, affordability, etc
- with a higher required payment, you have the flexibility of overpaying more than planned, as you have more room before reaching the 10% limit on most mortgages when you start attracting early repayment charges. 

Exodi

moremoneyplease111 said:

My husband wants option 1 and I feel option two is the best as we will be taking it  over 5 years and it gives you the security that if circumstances change you have the flexibility, but I thought by reducing the overall term by 5 years it would be better in terms of the intrest saved as this accrued daily?  Also this means in 5 years time I will have 15 years remaining and my plan was to shave 5 years off this year and again in 5 years time meaning my last term would be 5 years 

Please take some time to read and fully digest the responses given.

moremoneyplease111

Exodi said:

@la531983 is spot on.

The result in option 2 would be that you would end up paying your mortgage off early, at the same time as you would have in option 1.

Personally option 2 makes the most sense as it affords better flexibility and doesn't require a new check. You're then free to overpay as you desire, especially as you hope to clear the mortgage after 10 years.

To evidence this I've run the two scenarios on the MSE overpayment calculator (I used a balance of £75.5k since you're not due to remortgage till October and your monthly repayment amounts didn't marry up otherwise).

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

The first is the '15 year mortgage' with a monthly repayment of £560+£90 overpayment = £650 in total.

As you can see, the debt is cleared in a little over 12 years with a total repayment of £95,950.

The second is the '20 year mortgage' with a monthly repayment of £460+£190 overpayment = £650 in total.

As you can see again, the debit is cleared in a little over 12 years with a total repayment of £95,990

(in reality the result is exactly the same, I suspect the slight difference is just down to rounding to whole pounds in the payment amounts).

Bit I don't understand why the overpayment saving is so different in the graphs? And the depth cleared? 

moremoneyplease111

saajan_12 said:

moremoneyplease111 said:

My husband wants option 1 and I feel option two is the best as we will be taking it  over 5 years and it gives you the security that if circumstances change you have the flexibility, but I thought by reducing the overall term by 5 years it would be better in terms of the intrest saved as this accrued daily?  Also this means in 5 years time I will have 15 years remaining and my plan was to shave 5 years off this year and again in 5 years time meaning my last term would be 5 years 

It doesn't make a difference to the actual timeframe. It'll only actually be the 15/20 years if you don't overpay at all. In your example if the total amount going towards capital is the same then you'll pay off the mortgage in the same number of years. 

So the only difference is in softer aspects: 
- with a lower required payment, you have the flexibility if you need to reduce the overpayment due to job loss, affordability, etc
- with a higher required payment, you have the flexibility of overpaying more than planned, as you have more room before reaching the 10% limit on most mortgages when you start attracting early repayment charges. 

I was on the impression that if you took your mortgage over a time scale then applied the overpayment to the loan amount only and not the intrest this would be a more coat effective way of paying less intret overall is that not the case 

Exodi

moremoneyplease111 said:

Exodi said:

@la531983 is spot on.

The result in option 2 would be that you would end up paying your mortgage off early, at the same time as you would have in option 1.

Personally option 2 makes the most sense as it affords better flexibility and doesn't require a new check. You're then free to overpay as you desire, especially as you hope to clear the mortgage after 10 years.

To evidence this I've run the two scenarios on the MSE overpayment calculator (I used a balance of £75.5k since you're not due to remortgage till October and your monthly repayment amounts didn't marry up otherwise).

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

The first is the '15 year mortgage' with a monthly repayment of £560+£90 overpayment = £650 in total.

As you can see, the debt is cleared in a little over 12 years with a total repayment of £95,950.

The second is the '20 year mortgage' with a monthly repayment of £460+£190 overpayment = £650 in total.

As you can see again, the debit is cleared in a little over 12 years with a total repayment of £95,990

(in reality the result is exactly the same, I suspect the slight difference is just down to rounding to whole pounds in the payment amounts).

Bit I don't understand why the overpayment saving is so different in the graphs? And the depth cleared? 

Because the longer you borrow money for, the more interest you pay back. If you took a mortgage over 20 years and didn't overpay, you'd pay more in interest than if you took a mortgage over 15 years and didn't overpay. As you identified earlier, interest is accrued daily.

The debt cleared period denotes the same time frame (paying the 15 year mortgage back 2 years 8 months early is exactly the same as paying the 20 year mortgage back 7 years 8 months early).

Nonetheless, the principle is the same - if you paid the same amount monthly towards your mortgage in both scenarios, it doesn't matter whether you took out a 15/20/25/30/etc year long term, you'd pay the same amount of interest and pay it off in the same amount of time.

saajan_12

moremoneyplease111 said:

saajan_12 said:

moremoneyplease111 said:

My husband wants option 1 and I feel option two is the best as we will be taking it  over 5 years and it gives you the security that if circumstances change you have the flexibility, but I thought by reducing the overall term by 5 years it would be better in terms of the intrest saved as this accrued daily?  Also this means in 5 years time I will have 15 years remaining and my plan was to shave 5 years off this year and again in 5 years time meaning my last term would be 5 years 

It doesn't make a difference to the actual timeframe. It'll only actually be the 15/20 years if you don't overpay at all. In your example if the total amount going towards capital is the same then you'll pay off the mortgage in the same number of years. 

So the only difference is in softer aspects: 
- with a lower required payment, you have the flexibility if you need to reduce the overpayment due to job loss, affordability, etc
- with a higher required payment, you have the flexibility of overpaying more than planned, as you have more room before reaching the 10% limit on most mortgages when you start attracting early repayment charges. 

I was on the impression that if you took your mortgage over a time scale then applied the overpayment to the loan amount only and not the intrest this would be a more coat effective way of paying less intret overall is that not the case 

Not the case. The full interest is charged within the monthly payment prescribed by the lender, based on the balance at the time. Any overpayment is always applied to the capital, you've already paid the interest due. 
Between option (1) and option (2) if you're paying off £650 off the balance each month, then the balance next month is the same and hence the next month's interest is the same in both options. 
Repeat each month the balance reaches 0 on both methods at teh same time.
So the length of the mortgage and overall interest paid is the same.