Overpayments - Decrease term or Decrease Payments

Ginger_Winner

I have a 25yr tracker mortgage with the option to make overpayments. The mortgage started in Nov last year and the tracker deal is in place for 2yrs at which point I will look to remortgage.
I would like to make overpayments, if I do so these can either:

1. Reduce the term of the loan
2. Maintain the term but reduce my monthly payments

I would like to pay off my mortgage in 10 yrs but am confused as to the most cost effective way to progress...

Can anybody tell me which method would be the most cost effective?

homer_j_3

If you want to pay the mortgage off sooner then option 1 is the best way to do it.

ray123

Option one is the best option to reduce the term - I would say it is the only option!

Option two is a con which happens a lot. People are given the option of a reduction to monthly payments when making overpayments. In theory, most people believe that they are saving money. In reality, you will not reduce the term of the mortage, because the bank will attempt to reduce your monthly payments in order to cancel out any over-payments.
In the short-term you save, but in the long-term, to put it bluntly, you are shafted....

snarffie

Ginger_Winner wrote: »

I have a 25yr tracker mortgage with the option to make overpayments. The mortgage started in Nov last year and the tracker deal is in place for 2yrs at which point I will look to remortgage.
I would like to make overpayments, if I do so these can either:

1. Reduce the term of the loan
2. Maintain the term but reduce my monthly payments

I would like to pay off my mortgage in 10 yrs but am confused as to the most cost effective way to progress...

Can anybody tell me which method would be the most cost effective?

What about option 3!?

A mix of option 1 & 2.

Maintain the term, but increase the payments to that which you would be paying on a reduced term! The advantage of this is that if you fall on hard times/rates go up shockingly, you can then drop back to option 2 without having to remortgage.

We're just about to go on a lifetime tracker and have stretched the term back to 19 years (it was 14 years). The 'base' payment for 19 years is about £700, but we'll pay as if we're still aiming for 14 years (about £800). So I'll set up a DD for the difference of £100. We'll make overpayments on top of the extra £100, as and when we can, to bring it down from 14 years. Psychologically, it's completely against the grain to stretch out the term, but it is a sensible approach imo.

Sun

Do all lenders offer both overpayment methods?

I have seen only option 2 mentioned in the mortgage offer !

Steppy

Hi ya,

I'm not sure how much equity you have in your property, but have you thought about this..? Who knows where house prices will be in 2 year (The point when you'll be remortgaging). If you don't have much equity in your property then you could be in for a very nasty surprise when you come to remortgage with a hefty remortgage arrangement fee to pay.

You'll have to weigh it up... Overpay or start saving for the remortgage fee..

This is why I signed up for a +0.23% Term base rate tracker mortgage with no tie-ins about 3 months ago.. I didn't want any nasty surprises a few years down the road. I paid £599 for the arrangement fee.. a good deal I think, because I don't need to worry about remortgage fees... well unless interest rates start heading too high like the late 80's.

Personally, I would overpay, but only after building up a 2~3 month salary rainy day cash fund.

Steppy

TEDDYRUKSPIN

Actually the answer should be based on you!

ADVANTAGES:

By having the overpayments to reduce the monthly payments is actually very useful. You can just set up a standing order to overpay but you will need to keep on track frequently. The advantages? If you have month where you have to go on holiday you have the option to miss out that overpayments that month.

(b) Reducing term. Simple. Less hassle. Same monthly repayments each month. Reducing term, hence clearing it quick.

SOLUTION.

Both are actually the same. Just which hassle or benefits you want.

aliwali

Never really understood this. So if we reduce the payments but ensure that our overpayment increases to compensate then that is the same as reducing the term. But then wouldn't you evetually get down to say a monthly payment of £50, could you then change it to reducing the term so that you pay it off rather than have a mortgage that drags on for 5 years at £50 a month?

Still a little confused.
Alison

snarffie

aliwali wrote: »

Never really understood this. So if we reduce the payments but ensure that our overpayment increases to compensate then that is the same as reducing the term. But then wouldn't you evetually get down to say a monthly payment of £50, could you then change it to reducing the term so that you pay it off rather than have a mortgage that drags on for 5 years at £50 a month?

Still a little confused.
Alison

No. In my example, if I make overpayments on a 19 year term to reduce it to 14 years (£700 base payment + £100 overpayment=£800), then by year 14, there will be no more mortgage left to pay.

Importantly, over the 14 years, my total monthly payments will never decrease.

Some lenders will 'helpfully' reduce your monthly payments after you overpay. If they did this, I would just overpay more to keep the total payment to £800.