Mortgage: Reduce term or monthly payment?

[Outwith]

I'm sorry, I think that this is probably really obvious , but when you over-pay your mortgage, is it better to reduce the term or the monthly payment?

We're over-paying at the moment, but our mortgage company aren't exactly being very clear about what's happening!

Thanks.

Reducing the term costs less in interest.

Not necessarily - it depends on your circumstances as to which is better.

If you formally reduce the term, it means you are committed to whatever the higher monthly cost of that will be - in other words, there's no way to drop back to your current 'official' payment amount should you wish to.

If, however, you keep the current term (so 25 years or whatever) and inform the mortgage company that you wish them to take any over-payment off the principal every month then you can still pay off faster, but keep the flexibility to go back to only paying the 'official' amount at any point should you need to.

Paying a lump sum at the right time each year is another way to do it too.

Martin Lewis sets the various options out quite well here.

With our mortgage (Nationwide) the default position was that any overpayment would be used to reduce the monthly payment. We had to elect to use the overpayments to reduce the term instead. That was our preference to save on the interest.

If you can comfortably afford what you are paying each month now, then keep that the same, and then, by default, you will "run out of debt" sooner, without formally agreeing with your mortgage company that you want to reduce the term.
Just need to check that you aren't in some kind of tie-in deal where they charge you to overpay. Sometimes it's better to get a lower interest rate deal and save elsewhere, then pay off in a lump sum once you are out of the deal, but other mortgages only allow you to overpay 10% in a year, etc - it's going to vary how you do it, but it's always going to be good news to pay off sooner, as you save thousands in interest payments.

Yes, we can only over-pay 10% every year. I'm going to look out the paperwork, and get to the bottom of this! We can afford our current over-payment (and I think we should consider over-paying more).

I understand that reducing the term makes sense in one way, but I also worry about interest rates rising in the future, so I wonder whether reducing the monthly payment might make sense...?

If your mortgage is with nationwide you can keep your monthly payments the same and only pay interest on the outstanding balance but the overpayment can be offset against future payments at any time if you wish. DP has been made redundant and we are using our overpayment reserve to pay the mortgage for a while. You could use this if payments went up later.

Thanks everyone, we'll get onto this!

Check with your lender how they have been treating the overpayments. Some use it as advanced interest payments and won't reduce the balance at all unless you specifically ask them.

If you have concerns that interests may rise, then I'd have thought that was all the more reason to reduce the total debt you are paying interest on, before that happens.
If you start having that bit more to spend each month, it will soon get absorbed into your monthly living expenses more than likely, and you'll still have the same debt as if you weren't overpaying, so you will have to pay the higher interest rate on the bigger sum. Doesn't make any sense to me.