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Overpaying a mortgage - embarrassing stupid question

(17 Posts)
Act12 Thu 16-Jul-15 13:19:39

I need some help! I apologise for my ignorance – I’m asking because I realise I should know this stuff.

If I put down all the figures, can someone help me out please? I’m not sure which figures are most relevant.

Mortgage is about 70K. House is worth about 420K.
I have 10 years left to pay on mortgage. Monthly repayments are about £210. I have been paying £300 because I can.

How does it work though? Will I keep paying this amount, but my mortgage will end sooner than the 10 years? Or will my mortgage term be kept the same length, but at some point I will be asked to reduce the amount I pay?

I know that overpaying the mortgage is a good idea, I just don’t quite know it pans out.

Thank you!

nottheOP Thu 16-Jul-15 13:20:39

You'll pay it off here - have a look at this calculator

FraterculaArctica Thu 16-Jul-15 13:22:53

Usually you get the option to reduce the term or reduce the payments. (They may have a default option so you should ask, as you may not be explicitly offered the choice!)

If you can afford maintaining the payments at the same level, it is much more in your interests long-term to reduce the term, as this will reduce (usually by a lot - even on a relatively modest overpayment per month) the total amount you have to repay.

FraterculaArctica Thu 16-Jul-15 13:24:29

Oh, and the lender's default option will often be to reduce the payments, because this way they make more money out of you overall!

I have no specialist knowledge but have done this on two mortgages I have held.

FatimaLovesBread Thu 16-Jul-15 13:24:31

Is your mortgage a repayment one or an interest only?
Just asking as £210 seems very low for a £70k mortgage with 10years left

JinglyJanglyJungleBigGameTours Thu 16-Jul-15 13:25:28

It might be worth checking your documents, some mortgages come with an early exit fee. Mine does, but it's only £50 so it's not worth worrying about but better to be aware.

SchnitzelVonKrumm Thu 16-Jul-15 13:27:25

Ours limits the amount you can overpay to 10 percent a year, you'd better check or you risk a penalty.

Doyouthinktheysaurus Thu 16-Jul-15 13:28:47

Is it me or do those sums not add up!

£210 a month for a £70 k mortgage, even with overpayments that you are making, surely they'd have to be a lot more than £300 a month to pay it off in 10 years?

I'm curious because we have a similar mortgage we are overpaying on.

FatimaLovesBread Thu 16-Jul-15 13:31:55

YY Doyou our £80k mortgage is £400+ with twice the length of term left. I wonder if it's interest only?

In which case the £210 will be paying off the interest, the £90 overpayment will be paying off the balance so in 10 years you'll have circa £60k to pay off instead of £70k

nottheOP Thu 16-Jul-15 13:33:19

It must be interest only as £70,000/120 = £583.33 pm

Metacentric Thu 16-Jul-15 13:33:47

Will I keep paying this amount, but my mortgage will end sooner than the 10 years?

Correct, but it would be worth thinking through what you are planning to achieve.

A 25 year repayment mortgage is "front loaded". In order to keep the repayments level throughout the course of the loan (leaving aside changes in interest rate), in the first few years you are paying mostly interest, and as time goes on more and more of the repayments are repaying capital. That means the effective interest rate on your future repayments falls, and towards the end almost all of the money you are paying is repaying capital. That makes paying mortgages off (or paying raised payments) in the later years of a mortgage isn't a fantastically good deal.

If you have a spare 90 pounds per month, you should compare the benefit of over paying your mortgage (which will at a rough guess chop about four years off) versus paying 90 pounds per month into, say, AVCs on your employer's pension scheme, which would attract tax relief at 20% or 40% and, if they offer salary sacrifice, a further saving on national insurance. Or saving for something else. The interest you're paying on your mortgage over the final years isn't huge, and you should consider carefully if you could use the money for something more effective instead.

Metacentric Thu 16-Jul-15 13:37:17

It must be interest only as £70,000/120 = £583.33 pm

Ah, I didn't notice that. It's not a repayment mortgage. Ignore what I wrote.

Act12 Thu 16-Jul-15 14:02:50

Thanks for all your responses! I was half expecting to be ignored.

Those of you that queried my figures – you are correct. It is a repayment mortgage. The mortgage is actually 45K, just in my head it is 70K as we have put a lump sum into in, which we might take out if we need to, so while the mortgage is currently at 45K, it might well go back up to 70K iyswim?

The link to the calculator is fab. Thank you.

So basically, I will most likely end paying off the mortgage early, if I maintain these figures, and should resist my lender suggesting I keep the term length and reduce the monthly amounts?

Ta very much.

Itscurtainsforyou Thu 16-Jul-15 14:06:34

That sounds right to me. The only thing I'd beware of us that some lenders cap your overpayments to a certain percentage of the mortgage (mine is 5%) and charge you if you overpay more than this.

Worth enquiring about.

Metacentric Thu 16-Jul-15 14:16:41

The mortgage is actually 45K

10 years at £210 per month is £25200.

10 years at £300 per month is £36000.

How can either repay £45000?

Act12 Thu 16-Jul-15 14:44:15

Metacentric you are right, they don't add up. I was being a little loose in my figures, just because I don't like to put everything out there! The total figure is give or take a few of thousand, and the years to go are a couple out too smile. Thank you for your calculations. I sense you have a better grasp on finances than I do blush

Metacentric Thu 16-Jul-15 15:05:30

My original point stands, in that case. You need to be careful calculating the value of overpaying repayment mortgages in their later years, and you should consider the opportunity cost of not doing something else. If you are a higher rate tax payer, in particular, it is worth looking at your pension situation, as that attracts tax relief and possibly gets you your child benefit back. If you are a standard rate tax payer and you have the possibility of salary sacrifice AVCs it is again very much worth looking at. The saving on interest over ten years is nothing like as much as the value of tax/NI relief on the same payments.

It would be, by the way, madness to overpay your mortgage whilst you have any other debt of any form. Mortgages are cheap borrowing, repayment mortgages in the later years doubly so.

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