Mortgage - what am I missing?

[Snoopysimaginaryfriend]

Our fixed rate is up in 12 months. We have been overpaying by about a third of the monthly payment each month but with interest rates the way they are, most of our current overpayment will be swallowed up into regular repayments.

I have been playing with the mortgage calculators and if I extend our mortgage term by 2 years (still before retirement age) our monthly repayments are of course lower. We would then be able to continue higher overpayments. If we then continue overpaying we will save more in interest and pay off the mortgage more quickly than if we just keep the term as it is and make a much smaller overpayment.

Am I missing something very important here or is this a good idea?

Don’t extend it.

Have a look online at Karl Jeacles mortgage calculator (the old version) and you can move the numbers around so you will have all the information.

That seems unlikely. Normally with a longer repayment term, more of the original payments go to interest so while you would be overpaying more, less of the overpayment will reduce your debt (i.e. reduce the amount owed). Therefore the sum on which interest is payable will be the same as the shorter term / lower overpayment mortgage.

That means it would cost you the same.

Or am I now missing something?

You’re not missing anything but it would be difficult to calculate whether you would actually save money overall as it would depend on how much you are overpaying, your overall term etc. In general longer term loans mean that you pay more interest.

That doesn't make sense to me.

Overpaying means reducing the term and therefore saving interest.

Extending the term is doing the opposite, i.e. paying more interest.

So if you extend term (+interest) then overpay (-interest), you will probably be net, something like zero. Hard to say for sure depending on interest rates, exact terms and exact amount overpaid but I wouldn't bother changing the term, just make payments as much as you are able to.

Have a look at the total interest you would pay if you extended your mortgage term versus not. You might be very surprised!

When we remortgaged last year I got told by the bank that if we paid £35 a month extra to reduce our mortgage term duration (22 years) by a year, we would save £10k over the length of the mortgage in interest. £70 a month extra would save £20k in interest etc. We decided to reduce our mortgage length by a year.

Worth considering if you can afford it but I recognise the big interest rate increases might prevent this.

Are the savings relative to the original term, or the longer term? Extending the term of a mortgage will be more expensive overall when considered in isolation, but it does give you some headroom should your situation change.

It’s hard to provide a meaningful comments without figures to illustrate your query. Ultimately, the faster you pay off the mortgage, the less interest you’ll pay (setting any penalties aside)