Mortgage overpayments

[Holliejollie22]

We have 2 years left on our very good 5 year mortgage deal and are currently overpaying so that we have to borrow a smaller amount at the higher rate when we need to remortgage. I opted to reduce the term as that is always the advice, but I’m wondering if that is the right option in our circumstances.

My logic is, we have decided a total amount to pay each month, all things being equal this will not change. If I request that this overpayment reduces the monthly payment, but then still pay the same total amount does this increase the overpayment and mean a greater reduction in total capital.

We can then ask for a shorter term on less capital when it comes to the remortgage.

I feel like this needs a spreadsheet, but if there is something really obvious that I’m missing please let me know before I spend 6 hours down an excel rabbit hole.

I think it will depend on how the repayments can be organized.
We could only specify "£200 over normal payment" so if you used it to reduce the payment, your monthly payment keep dropping. So, we had to use it to reduce the term.

Otherwise, I don't think it makes masses of difference. You are paying off the same amount each month, and will be doing a massive forward payment to yourself by reducing the mortgage amount outstanding.

I’m in the same predicament, but I have 3 years left, with Nationwide. Like you, I overpay, and opted to reduce the term. My interest rate is 1.5%.
Bottom line is: I’d like the total sum I still owe to be smaller at the end of the 3 years, because the interest rate will treble, so if I have to pay it, I might as well pay it on a smaller amount.
Can’t get my head around it.

The overpayment I will have in 3 years will be, say, £20,000 on a £60,000 mortgage. I don’t understand why I can’t start a new mortgage with £40,000 in 3 years’ time. Yes, I know it lowers the LTV and the term, but…

I understand why it makes sense overall to reduce the term to pay off the mortgage sooner, but if I’m getting a new mortgage in two years I can just get that for a shorter term having paid off more capital during the period when interest is lower.

Although I think I also had to just specify how much extra we wanted to pay rather than total payment, having to change that every month would be annoying - and forgetting a couple of times would probably negate any savings.

I have just checked my statement and since our overpayments kicked in the amount of interest paid each month has reduced so maybe that’s why it still makes sense to reduce the term because the period over which the interest is calculated reduces.

My mortgage rate is 1.64%. There are regular savings accounts paying 5% so I'm putting my mortgage overpayment into them and at the end of the term I'll put my savings into the mortgage reduce the balance.

The net impact has no effect assuming you remortgage at the end of your product lifespan. Both methods reduce the capital outstanding which is what the interest charges are based on. As long as you arrange a new product at the end of your old product it will make no difference.

In case your interested in what would happen if you did leave it: all that will change is if you just left it and stayed on the standard variable rate one would give you lower monthly payments for the same term and the other would mean the payments didn't reduce but the term was short.

(and to confirm I was on the phone to nationwide today checking this)

I don't understand what the dilemma is.

You can either reduce your monthly payment, or reduce your term. Both have the same effect on the capital. So it won't make any difference to remortgaging.

It does make a difference if you're not remortgaging, over the life of the mortgage, a shorter term means less interest overall.

But a spreadsheet won't help - paying an extra £100 means your borrowing is £100 less, any way you look at it.

I have just checked my statement and since our overpayments kicked in the amount of interest paid each month has reduced so maybe that’s why it still makes sense to reduce the term because the period over which the interest is calculated reduces.

No - the amount you are borrowing has reduced, therefore the interest is less. If you've overpaid £1k then you're not being charged interest on that £1k, or on the rest of the capital you've repaid as part of your monthly payment.

Over the term of the mortgage, for the first few years most of your monthly payment goes in interest, and a little bit pays off the capital. There comes a point where most of your monthly payment pays off capital, while a bit covers the interest. It's the same effect - less borrowing means less interest. If you keep your monthly repayment the same then it eats away at the capital more quickly, reducing the interest more quickly - so you benefit from reducing the capital even more.

Thanks @LordEmsworth you are making sense, but if the amount of interest isn’t related to the term, then why doesn’t reducing the standard monthly payment make more sense,

some made up figures for example.

currently pay £1000 + £500 overpayment

payment reduces to £990 - which means I can then overpay by £510

However, I can’t see anything online about this being a good idea so I think I may just crack on with what I’m doing.

I have thought about putting into savings instead and may also consider that.

www.moneysavingexpert.com/mortgages/mortgages-vs-savings/

You are over thinking it 😂. Basically from your example, you are reducing the term without knowing it.

If you overpay the next month by £510, the next month by £520, the next month by £530 then what happens is... You pay the mortgage off sooner. I.e. you have reduced the term

"Reducing monthly payments" means literally that - month 1 you pay £1000 plus £500, then the next however many months, you pay £990 instead of £1000.

So the obvious thing you're missing is that increasing the payments, and consequently reducing the capital, every month is the same as reducing the term...

Agree with the overthinking it!

Per previous posters, in your situation it is probably best to do neither and put overpayments in savings account earning higher interest rate than your mortgage rate and use to pay a lump sum when you remortgage.

If you're constantly overpaying, it doesn't matter whether you choose to reduce the monthly payment or term, because you just keep chucking money at the mortgage until its gone.

But if fixed 2 years ago, your interest rate is almost certainly much lower than current savings rates so you will be better off saving instead. Then you just send the money to the mortgage when you remortgage, assuming your new mortgage rate is higher than savings rates at the time.

Agree with others - just save the extra money in a higher interest account and then pay off a lump sum when due to remortgage.

OP, both your two options amount to the same thing. Math.

Paying into a savings account will differ by the difference in interest rates. If mortgage is higher rate then paying off the mortgage will save you money but likely not much in just 2 years.