Mortgage Overpayments - confused

[kerry19834]

I am now able to start paying a small amount extra on my mortgage I want to pay £100 extra a month.

When I set it up it gave me too options

Use it to reduce the term of my mortgage or to continue to pay to the same term,

My Mortgage payment was £679 and it is now £779. I am on a 2 year fix.

Surley this will result in the length of the term going down as I am paying a £100 extra. Why would the length of the term not go down? The amount I pay is going up by the amount I want to overpay,

Added to that it wont let me reduce the term unless I pay 250 extra a month

Don't worry about it. If you're overpaying, you just keep sending extra money to the mortgage until you've paid it all off. The term is academic.

If they reduce the payment amount, increase the overpayment so the total each month is what you want to pay.

If you continue overpaying, yes, the term will eventually reduce. But, by not officially "reducing the term", you give yourself more flexibility over the full length of the mortgage.

The £250 minimum will reduce the term by a certain period of a year/ number of years. £100, might only reduce it by months. It is still worthwhile though, as you are reducing the amount of interest you will pay them!

Pay to the same term. If your financial circumstances do change you can drop back to £679 again.

I think if you don’t change the term, they will adjust your monthly payment down (so say you now owe 98k over 20 years rather than 100k, each payment is a bit lower).

if your intention is to pay it off earlier, you will need to gradually increase the overpayment to compensate for the decreasing committed payment.

You are on a 2 year fix interest rate so the monthly repayment amount is pre-set as agreed. Your over payments above that are reducing the outstanding capital. The nominal end date of your mortgage doesn't change. At the end of your fix when you remortgage you will have a smaller outstanding debt which (unless you change the term at that point) would be repaid by the original end date. So your monthly payments drop at the point of remortgage.

The responses on this have really confused me! We're overpaying and reducing the term rather than reducing the payments. Is that an OK way to do it or is it better to keep the same term and reduce the payment amount?

Either way is fine. Like I said before, the term is irrelevant. If you're regularly overpaying, in effect you just keep sending money to the mortgage until its paid off. The term is constantly changing.

But if you reduce the term, you're giving up flexibility that you might need later unless you have a mortgage that allows you to call on previous overpayments if you need to reduce what you pay for whatever reason.

It's good to remember that common wisdom about mortgages is rarely correct. People always say 'you'll save thousands by overpaying and when you do, always ask for the overpayment to reduce the term' but in the last 30 years its almost always been the case that savings have paid more than mortgage rates so it's usually better to save the money instead.

In fact a lot of people would do better to let the relatively low rate mortgage run as long as possible and invest instead either in an ISA or pension as over time it will almost certainly grow quicker than the rate their mortgage is costing them.

On the reduction of term vs payment, if they do reduce the payment, the extra money just builds up in your current account so you can either make a larger overpayment to compensate or save it separately, which brings us back to point 1 about it being likely that this will earn more interest/grow faster than what your mortgage is costing you.

They are asking you if you wish to shorten the term of your mortgage and make it this amount permanently. If you don’t wish to do that, just keep to current term. It doesn’t make any difference to when it’s actually paid off.

If you are overlaying to pay it off quicker you choose to reduce the term.

If you can overpay a lump sum, for example from a bonus, you could choose the reduce the payments to a lower amount to make it more manageable each month or ease cash flow.

Over paying reduces the term because you will repay sooner. As others have said, if you choose to formally reduce the term you lose flexibility. We have been overpaying the full 10% allowed without penalty for several years now. Our statement still says that the remaining term is almost 10 years but we know that if we continue with our current overpayment strategy we will have paid in full within four years.

On our mortgage (not necessarily on all mortgages), we haven't reduced the term but the amount we have overpaid by has built up to give us a buffer. So for example if we had built up an overpayment buffer of £6000, we could reduce our payments to £500 under the agreed repayment amount for a year until that £6000 buffer was used up. This can be useful for things like maternity leave but also if you unexpectedly lose your job etc.

I agree that this is confusing. I was on a 5-year fix and overpaying quite a bit, but without asking to reduce the term of the mortgage. Twice during the 5-year fix my bank wrote to me out of the blue to say they were reducing my repayment amounts because I had overpaid a chunk of the mortgage without reducing the term.

This came in really handy when I remortgaged and the rates went up; if I hadn't overpaid, my mortgage payments now would be a strain on my budget.

So I would just do you've set out to do, allow the direct debit to be changed to the higher figure, and leave the term as is. Chances are eventually the bank will be in touch to suggest lower repayments; either way, when you remortgage, your overall debt will be smaller and you'll have saved some interest. At that point you can decide whether to leave the term as is, or shorten it.

But I agree with previous posters that having the longer term to the mortgage means that you have flexibility with whether or not to overpay.