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  • FIRST POST
    • Former MSE Helen
    • By Former MSE Helen 16th Mar 15, 10:43 AM
    • 2,324Posts
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    Former MSE Helen
    MSE News: 'Decrease the term or overpay my mortgage?' Martin Lewis answers
    • #1
    • 16th Mar 15, 10:43 AM
    MSE News: 'Decrease the term or overpay my mortgage?' Martin Lewis answers 16th Mar 15 at 10:43 AM
    Overpaying and shortening a mortgage term do the same thing, yet overpaying has the advantage that you can stop it...

    Read the full story:

    'Decrease the term or overpay my mortgage?' Martin Lewis answers




    Click reply below to discuss. If you havent already, join the forum to reply. If you arent sure how it all works, read our New to Forum? Intro Guide.

Page 1
    • magpiecottage
    • By magpiecottage 16th Mar 15, 11:06 AM
    • 9,114 Posts
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    magpiecottage
    • #2
    • 16th Mar 15, 11:06 AM
    • #2
    • 16th Mar 15, 11:06 AM
    Always remember you do not "borrow" money in the sense that you might "borrow" a mate's bike.

    You do not pay your mate to use his bike (except perhaps to buy him a pint).

    On the other hand, if you hire a car you have to pay money for all the time you have it. If it is sitting around doing nothing then you are paying the owner for the privelege of having it sitting around doing nothing. So you would normally give it back if you did not need it.

    Our local Scout Group hires a lorry to take its kit to camp. It is cheaper to pay to drive it all the way back home then hire it again the following weekend than to leave it sitting around doing nothing all week.

    Money works like that. You are really hiring it - so if it is sitting around doing nothing it is probably better to give it back - although you need to weigh up whether the cost of paying it back early and/or getting it back again if you need it later - makes it worthwhile.
    • VT82
    • By VT82 16th Mar 15, 11:22 AM
    • 1,038 Posts
    • 877 Thanks
    VT82
    • #3
    • 16th Mar 15, 11:22 AM
    • #3
    • 16th Mar 15, 11:22 AM
    Nice article. Covers the question from every angle for most people.

    I do wish the bit about inflation was left out though. Inflation has the same effect on every 'do I overpay or not?' scenario, so it adds nothing to bring it up, and will only confuse or worry people who might otherwise have got it.
    • JimmyTheWig
    • By JimmyTheWig 16th Mar 15, 11:57 AM
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    JimmyTheWig
    • #4
    • 16th Mar 15, 11:57 AM
    • #4
    • 16th Mar 15, 11:57 AM
    Not quite sure how this is news when it was on Martin's blog 6 months ago?
    http://blog.moneysavingexpert.com/2014/10/09/dont-shorten-your-mortgage-term-if-you-can-overpay/
    • Thrugelmir
    • By Thrugelmir 16th Mar 15, 12:29 PM
    • 63,137 Posts
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    Thrugelmir
    • #5
    • 16th Mar 15, 12:29 PM
    • #5
    • 16th Mar 15, 12:29 PM

    I do wish the bit about inflation was left out though. Inflation has the same effect on every 'do I overpay or not?' scenario, so it adds nothing to bring it up, and will only confuse or worry people who might otherwise have got it.
    Originally posted by VT82
    With many people on static or falling levels of income. Erosion of debt by wage inflation certainly isn't what it is.
    "'The true investor . . . will do better if he forgets about the stock market and pays attention to their dividend returns and to the operating results of their companies.'" - John Bogle
  • tielle
    • #6
    • 16th Mar 15, 1:41 PM
    Reducing monthly payments
    • #6
    • 16th Mar 15, 1:41 PM
    Another flexibility advantage for overpaying to reduce monthly payments is that if you can't keep up the overpayments, your monthly payment is now lower i.e more affordable.
    • Pincher
    • By Pincher 16th Mar 15, 2:23 PM
    • 6,516 Posts
    • 2,491 Thanks
    Pincher
    • #7
    • 16th Mar 15, 2:23 PM
    • #7
    • 16th Mar 15, 2:23 PM
    Ideally, you want to have an offset mortgage, so you can use the money in the offset account if you need to, without paying arrangement fees again.


    It certainly makes sense to offset a 4.5% mortgage, if all you can get is 1.5% interest.
    • getmore4less
    • By getmore4less 16th Mar 15, 3:52 PM
    • 35,851 Posts
    • 21,946 Thanks
    getmore4less
    • #8
    • 16th Mar 15, 3:52 PM
    • #8
    • 16th Mar 15, 3:52 PM
    If your mortgage provider alters your repayments to keep the term the same, although it will boost your monthly disposable income, you won't save on your interest paymentsand the lender will earn more, . So be sure to tell it to keep your monthly repayments fixed


    Woops,

    incorrect.
  • jamesd
    • #9
    • 16th Mar 15, 3:58 PM
    • #9
    • 16th Mar 15, 3:58 PM
    Inflation has the same effect on every 'do I overpay or not?' scenario, so it adds nothing to bring it up, and will only confuse or worry people who might otherwise have got it.
    Originally posted by VT82
    Inflation doesn't have the same effect on every overpay or not scenario.

    Easy cases first are those with plenty of spare money. In this case the inflation effect is quite similar for the overpay, save or invest cases.

    But that's not the whole picture. Overpaying usually does involve a sacrifice of some sort. That could be anything from stopping a TV subscription or having less new clothes for the children to a cheaper hotel room on holiday. For any household budget, the effect of delaying overpaying will be to make the sacrifices involved in overpaying lower.

    In some of the worst possible cases, overpaying is at the expense of lower or no pension contributions and the cost is more working time or far larger contributions later to try to make up for the lost compound growth above the mortgage interest rate for the years of overpaying.

    Knowing that pay typically rises at 1% over inflation, ignoring promotions, say we have a situation where overpaying means stopping a 600 a year subscription, the pay is net 15,000 a year, the mortgage payment is 5000 a year and inflation is 2%. After five years the pay has increased to 17,389 (at 3%), the mortgage is still the same 5,000 a year and the non-mortgage 10,000 spending has increased by 2% a year to 11,040. There's now 17,389 - 11,040 - 5,000 = 1,349 available to use for mortgage overpayments, spending, saving or investing.

    Instead of having a choice to cut the subscription to save the 600 to overpay the mortgage borrower now has substantial free income to allow them to do it with much reduced hardship or compromise potential.

    This is also why it tend to be good advice to people struggling with a mortgage to just stick with it, knowing that in time the usual workings of inflation and pay changes will make a hard situation tolerable then OK and finally easy.

    Similar reasoning also explains why interest only mortgages are the ideal product for first-time buyers, since they pay less each month at the time when it is most difficult to pay and can gradually move to repayment as more money becomes available. That increase could be a gradual ramp-up with affordabilty-based get-outs so that they don't stay on interest-only for the whole term unless they have a repayment strategy. Gradual and get-outs are needed because a sudden large increase substantially increases repossession risk, as happened in the US where products that were interest only for five years then switched to repayment with no options were sold.
    Last edited by jamesd; 16-03-2015 at 4:00 PM.
    • magpiecottage
    • By magpiecottage 16th Mar 15, 6:22 PM
    • 9,114 Posts
    • 5,584 Thanks
    magpiecottage
    Erosion of debt by wage inflation certainly isn't what it is.
    Originally posted by Thrugelmir
    It may not be what it WAS, Thrugelmir, but it most certainly is what it is!
    • funcomp40
    • By funcomp40 18th Mar 15, 7:14 AM
    • 13 Posts
    • 11 Thanks
    funcomp40
    I have no mortgage any more thanks to MSE
    I wanted to share my story with you, I am a single parent and bought my first home in 2001 it was a small bungalow, with only having one wage comming in and being very worried about such a large debt. I stumbled accross your site and kept hearing the message about getting rid of debt is far betting than saving. After two years my deal with the Halifax was up and I took a big decision against all my families advice and got a flexible mortgage with the one account. In 2013 I had fully paid off my 80,000 mortgage I am over the moon. I paid my wages into the account and took great delight every month to see the balance drop, My grandparents unfortunately passed away and the few thousand pound they left me was paid straight into the mortgage account. In fact I have kept the account open so that I have some cash if I need it at a low interest rate which i can pay off when I like.

    Flexible Mortgages are not for everyone, but I think for me it has made a mega difference. I have not been on holiday for over 8 years however I have just started to do up the house and paid cash for a new kitchen which I fitted myself last year, onwards and upwards, now to start saving. thanks again MSE.

    Ps I am new to posting but use your site every week.
    • giger
    • By giger 18th Mar 15, 8:13 AM
    • 163 Posts
    • 68 Thanks
    giger
    Given we all know that flexibility is a good idea and flexibility to overpay (without restriction) can bring huge savings in interest, reduce your term and ultimately help you pay off your mortgage early, I am surprised that offset mortgages are not more popular.
    I posted here asking about them and received a fairly negative response, or at least one that wasn't positive and didn't receive much attention. I ploughed ahead after doing my own calculations and secured a lifetime offset tracker style mortgage at a great rate and couldn't be happier - I have complete overpayment flexibility, of any amount and interest is calculated daily and directly reduces my term. I can offset my savings against the mortgage, which prevents paying interest on my mortgage to the equivalent amount which also reduces my term - I can take the offset savings out at anytime should I need to without penalty.

    The real benefit is using both the offset combined with overpaying - one artificially reduces the capital that I am paying the interest on, the other reduces the capital owed directly to significantly reduce the term.

    Suffice to say I can pull all my savings out, and stop overpayments and use the mortgage like a straight forward tracker style mortgage without penalty should the need arise.

    Because of the complete flexibility, if your circumstances change for the better or the worse, chances are you can flex the mortgage to suit; this may include unrestricted lump sump overpayments if you suddenly come in to some money, or changing your mortgage to reduce your monthly payments, rather than it reducing the term.


    If anyone is currently looking in to remortgaging, consider an offset. It may not be right for you, but equally, it may also save you a fortune.
    • morrismen
    • By morrismen 18th Mar 15, 9:29 AM
    • 14 Posts
    • 1 Thanks
    morrismen
    Are Overpayments really what they say they are?
    I was advised by Barclays Mortgage Dept an overpayment would reduce the capital as it was 1/10 of the mortgage. Good. I made the overpayment on-line.

    The following month they had reduced my monthly payments and kept the mortgage term the same.

    I questioned this with their Mortgage Dept as an overpayment of this size was supposed to have reduced the term because it was a capital repayment as I had discussed previously.

    The reply was their On-line "Overpayment" is actually only a "Payment" and will not reduce the mortgage term UNLESS you specifically ask a mortgage advisor to process it that way. I had, but on-line it doesn't do this. What? Yes, you guessed it there is no option for a capital mortgage repayment on-line and the overpayment is actually only a reduction in your monthly payments with term left as it is.

    Subsequently they had to alter my mortgage for a capital repayment but then added 1p to my monthly payments for the next 10 years for the privilege - the cheek of it. So I'll be looking for another mortgage.

    Take care because an overpayment on-line is not always what it states. Think twice about whether it's worth doing on-line. If you want to make a capital repayment to keep your monthly payments the same, then make sure your mortgage provider knows this. My sincere advice is book an appointment with a Mortgage advisor in a Branch to do it for you.
    Last edited by morrismen; 18-03-2015 at 10:11 AM.
    • Morgage Confused
    • By Morgage Confused 18th Mar 15, 9:37 AM
    • 391 Posts
    • 189 Thanks
    Morgage Confused
    Dont rely on anything the call centers tell you regarding barclays mortgages as they are worse than useless. Often the information they give you is plain wrong.

    All you should have done in the above scenario is just request that your payments are put back to their normal level...job done...capital reduced, term reduced.
    • Morgage Confused
    • By Morgage Confused 18th Mar 15, 9:43 AM
    • 391 Posts
    • 189 Thanks
    Morgage Confused
    "The reply was their On-line "Over-payment" is actually only a "Payment" and will not reduce the mortgage term UNLESS you specifically ask a mortgage advisor to process it that way. I had, but on-line it doesn't do this. What? Yes, you guessed it there is no option for a capital mortgage repayment on-line and the overpayment is actually misleading."

    Before I had my mortgage changed to a Barclays offset all I did was quite simply to set a fixed monthly payment on my Barclays mortgage. Then ANY overpayments I made were term/capital reducing.
    • getmore4less
    • By getmore4less 18th Mar 15, 10:28 AM
    • 35,851 Posts
    • 21,946 Thanks
    getmore4less
    I was advised by Barclays Mortgage Dept an overpayment would reduce the capital as it was 1/10 of the mortgage. Good. I made the overpayment on-line.

    The following month they had reduced my monthly payments and kept the mortgage term the same.

    I questioned this with their Mortgage Dept as an overpayment of this size was supposed to have reduced the term because it was a capital repayment as I had discussed previously.

    The reply was their On-line "Overpayment" is actually only a "Payment" and will not reduce the mortgage term UNLESS you specifically ask a mortgage advisor to process it that way. I had, but on-line it doesn't do this. What? Yes, you guessed it there is no option for a capital mortgage repayment on-line and the overpayment is actually only a reduction in your monthly payments with term left as it is.

    Subsequently they had to alter my mortgage for a capital repayment but then added 1p to my monthly payments for the next 10 years for the privilege - the cheek of it. So I'll be looking for another mortgage.

    Take care because an overpayment on-line is not always what it states. Think twice about whether it's worth doing on-line. If you want to make a capital repayment to keep your monthly payments the same, then make sure your mortgage provider knows this. My sincere advice is book an appointment with a Mortgage advisor in a Branch to do it for you.
    Originally posted by morrismen
    My barclays mortgage the payment stays the same now matter how much I overpay or offset or if the rates drop.
    Sure the options were in the T&C.

    contractual term is not relevent anyway, it is what you pay that determines the real term, contractual payment goes down just over pay the difference would have saved you changing and paying that 1ppm.
    • stephen6885
    • By stephen6885 18th Mar 15, 11:51 AM
    • 6 Posts
    • 0 Thanks
    stephen6885
    I'm still really confused.
    I've posted in a couple of forums and never got a clear answer.
    If your monthly repayments go down, then you are still paying less. Why is it better to end paying early?

    If i pay off 350 off my capital, over 19 yrs that would save me 530 at 2.34%.
    If my mortgage provider reduces monthly payments by 3 over the remaining 228 months, that saves me 684.

    SO CONFUSED; why is it better to reduce the capital?
  • Bumph
    Mortgage repayments
    I have followed the article and the discussion and notice one glaring omission. You can drastically reduce the term of a mortgage and the total cost if you switch to weekly payments. I did this and the term dropped from 20 years to 12 years. When I did this, I was living in Canada and I wonder why this facility is not pursued/offered/considered in the UK. One of my friends to whom I told this was able to get a weekly repayment mortgage from Santander and also noticed the impact on the term and overall cost. I'd be interested to hear from anyone else who tries this in the UK.
    • TrickyDicky101
    • By TrickyDicky101 18th Mar 15, 12:00 PM
    • 3,309 Posts
    • 2,180 Thanks
    TrickyDicky101
    I'm still really confused.
    I've posted in a couple of forums and never got a clear answer.
    If your monthly repayments go down, then you are still paying less. Why is it better to end paying early?

    If i pay off 350 off my capital, over 19 yrs that would save me 530 at 2.34%.
    If my mortgage provider reduces monthly payments by 3 over the remaining 228 months, that saves me 684.

    SO CONFUSED; why is it better to reduce the capital?
    Originally posted by stephen6885
    It would save you 1.90 per month (not 3) if the provider reduced the monthly payment rather than the term.
    • TrickyDicky101
    • By TrickyDicky101 18th Mar 15, 12:01 PM
    • 3,309 Posts
    • 2,180 Thanks
    TrickyDicky101
    I have followed the article and the discussion and notice one glaring omission. You can drastically reduce the term of a mortgage and the total cost if you switch to weekly payments. I did this and the term dropped from 20 years to 12 years. When I did this, I was living in Canada and I wonder why this facility is not pursued/offered/considered in the UK. One of my friends to whom I told this was able to get a weekly repayment mortgage from Santander and also noticed the impact on the term and overall cost. I'd be interested to hear from anyone else who tries this in the UK.
    Originally posted by Bumph
    Maybe because people can't afford to make 4 times their monthly mortgage payments?

    Or did you mean the monthly payment split evenly over the c.4 weeks per month? In which case, it wasn't that that dramatically cut your term.
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