Mortgage Overpayment - reduce monthly amount or reduce term

Learningjourney25

Hello, 

I'm (very fortunately) able to make a lump sum payment on my mortgage and also could make monthly overpayments. I took out a flexible mortgage so I can repay as much as I like whenever with no fees. When I go to the mortgage calculator I have the option to reduce monthly payments or shorten the term with the lump sum overpayment. On the face of it, it looks like I'd save more interest by electing to shorten the mortgage term.

However, I wondered if I would make a  greater saving by making a lump sum payment to reduce the monthly repayment amount and then also making voluntary monthly overpayments to still pay the previous monthly payment amount e.g. currently monthly repayments are £1,300, I make a lump sum overpayment to reduce those to £1,000, and then I voluntarily overpay £300 per month to take it back up to £1,300. 

Would I reduce interest more by doing this latter option, and if I make voluntary monthly overpayments will it go entirely towards the principal or does some of it go on interest?

Thanks very much!

El_Torro

If your primary goal is to reduce the total amount of interest paid over the life of the mortgage then either option is fine. 

If you reduce the term then this gives you less flexibility as you are still responsible for paying the high monthly mortgage fee, regardless of how much you overpay. You have less options to pay in less one month for whatever reason. 

If you reduce the monthly payment and continue to overpay you might get caught out with early repayment charges, depending on the rules of your mortgage deal and how much you pay off every year. Many mortgages only let you pay off 10% of the starting balance every year, any more than that and there's an early repayment charge.

I would personally go with reducing the monthly payment, you might think otherwise.

singhini

Learningjourney25 said:

Hello, 

I'm (very fortunately) able to make a lump sum payment on my mortgage and also could make monthly overpayments. I took out a flexible mortgage so I can repay as much as I like whenever with no fees. When I go to the mortgage calculator I have the option to reduce monthly payments or shorten the term with the lump sum overpayment. On the face of it, it looks like I'd save more interest by electing to shorten the mortgage term.

However, I wondered if I would make a  greater saving by making a lump sum payment to reduce the monthly repayment amount and then also making voluntary monthly overpayments to still pay the previous monthly payment amount e.g. currently monthly repayments are £1,300, I make a lump sum overpayment to reduce those to £1,000, and then I voluntarily overpay £300 per month to take it back up to £1,300. 

Would I reduce interest more by doing this latter option, and if I make voluntary monthly overpayments will it go entirely towards the principal or does some of it go on interest?

Thanks very much!

Are you saying you could (1) make the lump sum, and (2) make over payments if you (3) also reduced the term aswell?

If so, that is what i did
 
1 - i made the overpayment
2 - reduced the Term
3 - continued to make regular payment (in your case £1,300)
4 - also made overpayments (inyour case £300)

If i remember correctly, it saved the most amount of interest (but i don't know if that's true...... i could never worked it all out. None of my figures ever matched the banks and so i just wanted to get rid of the dam mortgage ASAP).