Overpaying on the mortgage

[buttery81]

DH and I are considering whether to make an overpayment once a year on our mortgage. At the moment we have 25 years left on the mortgage, but overpaying by something like £3k per year could apparently reduce the term by almost five years.

I'm just a bit confused as to whether I should be asking the bank to reduce my monthly payments or shorten the term. If the latter, does that mean my monthly payments will go up or will they stay the same? We're on a five-year fixed deal at the moment.

Also, do all banks offer the option of shortening the term or do some only allow you to reduce the monthly payments (without shortening the term)? I can't find anything in my T&Cs on this - it just states that when the bank receives an overpayment they will recalculate the amount we owe and the interest we will pay.

I'm amazed by how £3k a year can cut so many years off the mortgage - I can't quite believe it, but that's what the Money Saving Expert calculator seems to suggest. Does that sound about right?

Best checking with your bank regarding overpayments, we asked for our monthly payments to stay the same if they keep reducing the term you will see be paying for x number of years but you will see the reduction. It is highly likely the calculator is correct, even small overpayments make a big difference.

Shorten the term, there's no point in reducing your monthly payments when what you're after is to pay it off quicker.

Yes,

£3k now saves 25 years interest on that £3k. And £3k next year saves 24 years interest on that £4K. And £3k the following year saves 23 years interest in that £3k. And so on.
If you reduce your monthly payments in line, you’ll cancel out the benefit.

Hi,yes,it does sound right! I pay a monthly over payment which I believe is better for me as it checks the balance and interest daily,so I'm saving more. I just cant pay more than 10% a year. The term is reduced on mine,not the monthly payments.
Once out of my five year deal I can over pay more as wont have the 10%

An offset mortgage would work even better if you have decent incomes and savings. It also doesn’t tie up your money like overpayments do.

If you can switch without paying penalties it might be worth looking into.

Please check with your mortgage provider, as how much and when you are allowed to overpay varies between providers (I’m surprised you can’t find it in the T & Cs). Also be aware that if you redeem it early there may be a financial penalty (so it might be better to pay it right down but not redeem it). I overpaid a set sum each month but left the term as it was, so the payments reduced - I wasn’t intending to take out another mortgage though.

Great, thanks all. So just to confirm, if I ask the bank to reduce the term and pay a lump sum overpayment of £3k per year, my monthly repayments will stay the same? I don't want to pay the £3k per year and have increased monthly payments, IYSWIM.

I'd double check with your bank first that it will actually reduce the term and not lower you payments.

If you can do it it def makes sense, I wouldn't reduce the term though just in case something unexpected happens and you need a bit of leeway

@MrsFezziwig It states how much I can overpay by in the T&Cs, but not whether the bank will allow this by a) reducing the monthly payments, b) reducing the term or c) giving me the choice.

When we asked to shorten the term they said they'd charge us £2,000 AND they thought we were more of a risk and couldn't afford it so couldn't guarantee we would be accepted

So I called them and had them work out how much I could overpay by every year (10%) and have now more than doubled my mortgage payment - will be paying it off in 10 years instead of 21.

They just make shit up to get money out of you

I overpay and just called them up to increase my DD. No fuss. Nothing happened to the term officially but I know it’s coming down through the overpayments.

My mortgage deal is a 5yr fix, we plan on overpaying. We can overpay 10% of the balance every year without fees. Our bank allows upto a £2k payment before they drop the monthly mortgage payments, however you can call them and advise you'd like to keep them the same.
So just check what policies they have in place.

If you make an overpayment and then drop your payments your aren’t overpaying.

It'll be (b), but if you aren't sure, talk to them about how you make the overpayment and what effect it will have.

If you make an overpayment, why would they increase your monthly amount??

Sorry, worded badly.

If you pay in a lump sum of £3000, why would the bank then also increase your monthly amount?

We're in a fixed 5 yr deal with Nationwide and we can pay 10% of the initial sum per annum so £16800. As interest is calculated daily, we're making monthly over payments rather than an annual lump sum.

I can view it on line and its used to reduce the interest we pay so can see each month what a difference it's making which spurs me on more to make the over payments and get to my target within 5 years (love a spreadsheet!) 😀

What's the interest on your mortgage? Is there a penalty for overpaying? I actually earn more interest keeping my money in a bond than paying off my mortgage. I certainly wouldn't over pay. In 3 years when I remortgage I might use the savings to take some money off the loan if it means I get a much better deal.

Yes but what is the interest rate on your mortgage - those savings in fixed term bond would be making at least 2% per year so there would be no point in overpaying on your mortgage. Better to save it until the end of your 5 year deal then pay it off then.

As others have said, check details with your bank.
I can overpay by up to 10% per year, but only in one payment per year. So we are putting a certain amount aside per month and then will pay off the chunk.
Don't need to decide now whether to take shorter term or reduce future payments, will see where we are at in future

If you make an overpayment, why would they increase your monthly amount??

I thought maybe they would because you're shortening the term? Sorry, I'm probably being really silly - I'm not too good at this stuff!

My interest rate is a fraction under 2%.

Agree with above regarding interest.
Check how much you could get for you £3k a year if in a high interest saver then if better then overpaying then use that 15k when you remortgage to lower the total of your new loan and shorten the term.

Why don't you remortgage if you are at the end of your term. Get a completely new better deal, put down whatever deposit you want (your overpayment) and organise the term and the monthly payments to suit.

If you're on a 5 year deal or whatever you over pay as much as you want within the limit for 5 years. At the end of the term you then reduce the term on the next deal you take out.

We did this last year. Reduced term to 12 years from 15. After the next 5 years will reduce term again.

We paid off our mortgage twice by overpaying. Our first mortgage had interest added annually and overpayments were only credited once a year. When we had the second mortgage at the next house, we overpaid each month as the interest was calculated daily. We specified that we wanted the overpayments to reduce the term- otherwise some companies would try to reduce the payment each month to keep the term the same. Sometimes there was a maximum you could overpay each year. We also remortgaged whenever our deals came to an end, but reduced the outstanding term every time by a year. All this was when interest rates were dropping, so it was possible.
It is worth doing, even if you can only afford £25 or £50 per month. With our first mortgage, we had a standing order, and when interest rates went down we did not amend it- we were surprised to see what a big difference that £20 or £30 per month made back then. This was at a time of 9 or 10% interest rates.