Overpaying mortgage or reducing the term?

[Stripeyblue]

Are the two things in the title essentially the same thing?

My issue is that we have recently moved house. We wanted to keep the main part of our mortgage over 20 years and all insurance etc was set up for this (we have decreasing critical illness and life insurance). Just before it was all sorted our mortgage broker advised that the bank wanted us to have the mortgage over 25 years instead. He said the reason was affordability which didn’t make much sense as they had originally offered to lend us much more.

Anyway we agreed with the plan of reducing the term immediately on moving so it would match our insurance terms.

My question is, do we need to do this or will overpaying by the amount to make it up to the 20 year premium essentially do the same thing?

We also have a smaller part of our mortgage which has 14 years left. When this is paid we intend to put the whole lot towards what is left of the main part so we are hopeful we won’t need the full term anyway.

There aren’t any overpayment penalties for the amount we wish to overpay.

I’m just looking for a bit of advice as I’m not very financially minded and don’t understand fully how it works.

By reducing the term you'll be increasing your monthly payments - this could be an issue if you lose your job.

The only disadvantage with overpaying is that most banks have a yearly limit of how much you can overpay (usually a %age of remaining amount you owe) - this will mainly become a pain closer to the end of the mortgage as the overpay maximum decreases.

I did a combination of both to leave me some leeway in case I lose my job.

I have a set amount that l can afford to pay based on my incoming wage.

I am currently in a position to be able to over pay for the next few months. By over paying l am reducing the Term of the mortgage.

I am only able to overpay by 10% of the remaining balance per year or l incur charges but l wouldn't be hitting that amount anyway.

I have a few parts that make up my mortgage from where l re-mortgaged over the years and l am paying off the one with the largest % first

Thanks for replying all.

I like the flexibility of overpaying rather than decreasing the term. I’m worried about the insurance policies though. They are over 20 years so will be decreasing faster than the mortgage debt. Is that how it works?

But if you over pay then you are reducing your term - which is the idea, so it's paid off quicker.

Same thing provided you aren’t in a position to overpay more than 20%( per year )of your mortgage. If you can overpay more than 20 percent then reduce the term.

I overpay as I know if something happens I can go back to our tiny monthly payment (we current pay almost double) that the mortgage company may also reduce further if asked to recalculate.

We also have no limits on overpayment.

We overpaid our mortgage, but we had to specify to the building society that we wanted the overpayments to be used to reduce the term- initially they kept reducing the monthly payment to keep the term. Personally I would ask for an explanantion of the 25 year term requirement from the bank.
My understanding was that had we needed to we could have reverted to our original remaining term if we needed.

always overpay. Reducing the term is foolish

Re the insurance you can revisit your policies- we recently remortgaged and revised our critical insurance policies to match the new amount of mortgage outstanding

I see lots of confusion in the replies. OP, you really need to check with your bank, but, typically, overpaying does NOT reduce the term, unless you specifically agree so with your lender.

@cloudtree, why on Earth would reducing the term be foolish? Such harsh statements, without elaborating on the reasons, are not helpful for the OP. Reducing the term may or may not make sense depending on the situation of each borrower.

OP, as for the insurance, you need to check the terms. They will specify how quickly the cover decreases. Last time I checked, I seem to remember most policies tend to amortise at a rate, e.g. 6-8%, much higher than a typical mortgage rate: this means that the value of the cover will always be higher than the value of the mortgage. You need to check the terms, though.

“will overpaying by the amount to make it up to the 20 year premium essentially do the same thing?”
You need to run some numbers. Download one of the gazillion free mortgage amortisation template spreadsheets freely available, and compare a few options: with and without overpayment, etc. The key things to compare are 1) the total monthly instalment (how much can you afford it, obviously) and 2) the cost, i.e. the interest paid. The principal you repay is a cash outlay but not really a cost as it’s money you are repaying to yourself (it adds to your wealth). I’d focus on the comparison on the first 2-3 years as there’s little point in speculating where interest rates will be over the next decades.

Ours does not automatically reduce term or payments