Can someone help me understand how to pay off my mortgage earlier.

[ThisIsStartingToBoreMe]

When I took my mortgage out I had bad credit and had to accept a rubbish rate of 4.5% I can't remortgage now because i've gone part time and my earnings have been cut but I do have spare cash from a lodger that I would like to use.

Last month I gave them (Pepper Homeloans) £1000 overpayment but instead of reducing the length of the term of the mortgage they just made my monthly payments lower which wasn't what I really wanted. I rang them and they said that they don't reduce the length of the mortgage they only reduce the payments monthly.

My questions are

1. Are they allowed to do this or can I insist in it coming of the length of the mortgage?
2. Is it still worth over-paying and getting the monthly payments reduced or would I be better off putting the approximately £400 extra into an ISA or my pension?

thanks for any help

You can use lodger income on a mortgage application. Why not re-mortgage?

Just remortgage for a shorter mortgage.

How do they charge interest? If they calculate it daily, it's still probably worth overpaying, because every time you make an overpayment, it reduces the amount they charge interest on.

What's the outstanding amount, loan to value and income multiple? Are you in a fixed term deal and are there any early repayment penalties? Depending on how these numbers stack up, it could be worth talking to a broker to see if you qualify for a mortgage elsewhere.

Or if you put the money in your pension, you'd get tax relief so worth more than the interest. But it's locked up until you're 55 or so.

go to an independent broker who looks at the whole mortgage market and remortgage op you should be able to easily halve that rate...

can you save up the lodger monthly payments and then pay off a lump sum? wouldn't this mean the interest you're paying would be less over time?

If you're paying an amount off the capital, you need to be specific

It sounds like you need to know the terms of your mortgage. Some don't allow these payments.

You might benefit from a remortgage.

Unless you have a savings account earning 4.5% interest, you would be better off over paying Vs saving.
Of course if you have any debts I'd pay those off first.
It is correct that over paying does not reduce the term of the mortgage, but eventually you could chip the mortgage amount down to an amount that you can pay off as a lump sum (taking into account early repayment charge) and then it's irrelevant how long the term of the mortgage was.

If you are going to overpay regularly it will shorten the length of your mortgage as you will pay it off quicker. So with my mortgage we overpay every month and although my term remains the same I can see on my online account that if we continue to pay at this level I will be paying off 7 years earlier than planned

You need to know the terms. For mine there was a fee to make overpayments, but it was free to change the term and increase/decrease monthly payments, so I turned the payments up when I had spare money and down to normal when I didn't.

They're all different and if your terms aren't that great just do what you can and switch to a better provider next time when you have better LTV.

instead of reducing the length of the term of the mortgage they just made my monthly payments lower which wasn't what I really wanted. I rang them and they said that they don't reduce the length of the mortgage they only reduce the payments monthly.

My mortgage provider tried this on me, too. It took a couple of goes to get it sorted.

What do the terms and conditions of your mortgage say? Mine was a flexible one with no penalty for paying off sooner but therefore not the cheapest. I paid off the 25 year mortgage in ten years so totally worth it.

If you work out how much more interest they get from you by reducing the monthly payment rather than the capital, you will see why they try to do this.

Well you absolutely NEED to read your terms and conditions of your mortgage.

It will include a section in there about overpayments and what is permitted, any caps etc.

All the mortgages I’ve had you’ve been able to overpay up to 10% of the balance per year.
The overpayments go straight onto the capital.
Even on my interest only buy to lets.

But you have to check your t&cs.

If you find that you can’t overpay on the capital and bring the term down then you’ll be better saving your excess money up whilst you look for a better mortgage.

Speak to a broker who can look at whole of market. You might be surprised by what you can get.

If you really can’t remortgage then how about a s&s isa that you put the money into and save it up until your situation changes enough to change your mortgage, I currently have a s&s issue which is returning about 8.5%. It’s higher risk but as it’s a longer term one and it’s only got about 50-100 a month going in, I’m prepared to take the risk.

You need to balance the cost of the interest to see if it’s worth putting it into the mortgage and reducing the payment versus putting in a savings account

You need to check your mortgage offer T&Cs, and check what it says about overpayments. I found some T&Cs from 2017 for them, an that suggests they will keep the term the same but reduce the monthly repayments. The ones I found from 2019 say to refer to the mortgage offer

You do need to read T&Cs.

This happened to me and I kept on overpaying, I ended up with month repayments of £2.38! At that point (15 years in) I asked for a redemption figure and ended the mortgage 10 years early.

They will be keeping the term the same, but assuming that you have no limits on overpayments in your contract (some have limits of 10% before ERCs), just keep overpaying everyone month, so add on the extra to keep your monthly payments the same. Mathematically your term will be shorter, and you’ll pay off sooner.

How long is since you took out your mortgage, if it was a while a go and the bad credit is now several years ago you might well be able to get a better rate

In your position I would overpay mortgage (as long as no penalty/ as long as you don’t have more cash than 10% or whatever you are allowed to overpay).
Then if you have lodger move out/work difficulties you have lower payments to meet. Also you are not paying 4.5% on it.

In time you will have more equity and ?depending on how bad your bad credit score is, you might later be able to remortgage for better rate?

If you keep your monthly payment the same as prior to the overpayment you will continue to bring down the amount and eventually finish the mortgage earlier.
I don't know about other providers but with first direct you get unlimited overpayments and can terminate early provided you are not currently on a fixed deal. So you could overpay until there was a small amount left and then wait until your fixed period ends and then pay off the remaining in full

@Alpinechalet

You do need to read T&Cs.

This happened to me and I kept on overpaying, I ended up with month repayments of £2.38! At that point (15 years in) I asked for a redemption figure and ended the mortgage 10 years early.

If this is the case, as in they will only reduce the payment not the term, it doesn't actually matter, unless they don't calculate the interest charged on the daily balance (they should do, I think they have to now, but read the contract).

If they reduce the standard monthly payment, just make the overpayment bigger, the effect is the same. And then when you get down to a level like *Alpine& did, where there's so little left that you can pay it all off, just do that. Get a settlement figure and pay it all off, and there you have the shorter term that you wanted in the first place.

But do talk to a broker in case there's a cheaper provider who will give you a mortgage. Or see if there is a new product your existing lender can offer you.