Mortgage: reduce term or monthly payments?

[Ponchodreams]

I'm about to get a small ish lump sum, although big to me. We are late 40s with large mortgage, would you reduce monthly payments or reduce the term? Im thinking we would like to reduce the term as would like to start chipping away and get this thing paid off. Before it seemed so undo-able (and it was), but at this age it seems like the right thing to do as we don't want to be working full time in our 70s. Just wondering if there's anything to consider that we hadn't thought of. I think psychologically it will be good.

We reduced the term on ours in similar circumstances. Unless you’re struggling to make ends meet every month - at which point the extra headroom would make sense.

Reduce the term.

Paying the remaining off quicker will mean less interest added. So with large overpayment and then continuing at same rate you will really reduce term a lot

If you're ok with the current monthly payments then reducing the term is better long term you'll clear your mortgage quicker for less cost. Just be sure to tell your mortgage lender that you want that option in advance as their default is to reduce monthly payments (it's better for them)

You can over pay 10% per year to reduce term.

Thank you. Im not missing anything I need to know am I? We can afford the monthly payments as much as anyone can at the moment. Feel lucky to have 3.3%.

You need to check with your lender if they allow lump sum overpayments if you're in a deal.

My lender (Newcastle) allows 10% (of outstanding balance) overpayment per year plus £499 per month, and you have to speak to them separately about reducing the term.

If you can manage the monthly pay for now, reduce the term. You could save thousands in interest payments.

You can always change later if needed as you would have already overpaid

Ie if you currently pay £1500, and you carry on paying £1500, but they would have offered £1000 a month if you kept the same term. So if you keep paying £1500 now, but in 5 years decide everything else is too much you can ask to pay say £1250 a month instead. It will just bring term years up again a bit, but no where near what it currently is

Ah brilliant! Thanks all.

Reduce the term.

Reduce the term. 10% overpayment is standard without having to pay fees, but all banks vary. NatWest is 20% on some mortgages. Call them and ask when your mortgage year begins and ends, you might decide to split into 2 overpayments.

So if the mortgage balance is 200k we could pay 10% each year, so 20k?

I would shorten the period - it saves a lot in interest and you will be mortgage-free much sooner. Just make sure you have backup savings in case surprises happen in life.

If you want to take a quick look at how structures between term vs. payment work, HUD's homeowner's page summarises it pretty decently. This provides an interesting and simple look at how repayment terms front load payments earlier in life.

We're mid 40s as well and did the same thing - best decision we made. It is great seeing those years come off!

Our mortgage has the following options:-

Monthly overpayment (less than x3 is held in a holding account to reduce term)

An overpayment x3 of monthly amount will reduce the monthly payment

Overpayment of 10% per annum

Early repayment up to 90% of outstanding within 90days of product ending can be made without incurring early repayment charge

I think to change the term of our mortgage would be a alteration to terms and conditions so would be done when the currently product ends

We have been quite motivated to pay our mortgage off early - I think it’s a great place to be and peace of mind.

HOWEVER - I would also say I have recently learned about SIPPs and return on investment and financially speaking it maybe more efficient to do this. It depends what your goals are.

So very recently I have diverted small lumps sums to a SIPP which means I get the tax back instantly 20%boost and the return on the investment, which is earns more than the interest I’d have saved paying. But this depends on your timings of what is more important and attitude to risk.

It’s worth also considering how to maximise the returns on the lump sum - paying off a low interest mortgage has the advantage of security, but the disadvantage that you’re missing out on potential interest. E.g. if you put £50k into a pension as a higher rate taxpayer, and get a fairly realistic average return of 7% over a decade, in ten years the £50k (with relief) will be worth £140k. Whereas if you pay the lump sum on your mortgage at 3.3%, you’d avoid about £9000 in interest on £50k over a decade - but unless you’re very disciplined and put all the saved payments into your pension, you won’t have the same pension pot in a decade. Money saving expert has lots on these types of equations and depends on your personal values as much as anything, but worth exploring before you pay a lump sum.

While the interest rate is 3.3% you don't want to rush to overpay, you can beat that with standard savings accounts, let alone investments.

But to answer your question it doesn't really matter because if you're overpaying you just send spare money until the mortgage is paid off. The end of the term is when you don't owe any more.

I’m with Santander- they allow 10% a year. Each time I make an overpayment I can choice whether I want to reduce the term or the monthly payment, so it’s very flexible. I always reduce the term

Going against the grain - reduce monthly payments then continue to overpay. Gives greater flexibility for future adjustments.

Money Saving Expert has advice on when each option is best.

Thank you. Interesting:

If you officially shorten the term, you'll lock yourself in to higher monthly payments. So if your income goes down, or your interest rate rises, you might struggle to repay. Whereas if you're overpaying, you can choose to stop overpaying – giving you more wiggle room.

In short, overpaying has the same practical effect, but with that extra flexibility.

My mortgage put any overpayments into a notional “offset” pot so if we ever needed a payment holiday in future we could draw on that first to avoid arrears. It made no difference mathematically in terms of paying it off but gave me confidence to reduce the term without worrying about the future.

Reduce the term. My adult DS just remortgaged and askedy advice on this. I told him reduce the term, keep paying the same every month and you'll save tons of interest payments overall.

I always reduce the term, seems a better option for me. 14 years still to go! Hope to get rid of it in 8 though 🤞