Is this a genius idea to pay off a mortgage or am I missing something?

[trefl]

Say a 25 year mortgage is £1000 a month.
And a 30 year mortgage is £900 a month.

If I took the 30 year mortgage but then overpaid an extra 100 a month, that would go on the capital, right? And bring the term to less than 25 years overall...

So why don’t we all take out long term mortgages but then overpay and chip away at the capital?

@trefl

Say a 25 year mortgage is £1000 a month. And a 30 year mortgage is £900 a month.

If I took the 30 year mortgage but then overpaid an extra 100 a month, that would go on the capital, right? And bring the term to less than 25 years overall...

So why don’t we all take out long term mortgages but then overpay and chip away at the capital?

Lol I did that, but it’s only suitable if you have the discipline for it and keep the overpayment going

Totally doable. Two things to check with your provider:

1. You won't attract an Early Repayment Charge
2. That they know you want to decrease the term and not your payment levels (my mortgage defaults to reduce the monthly payments if you overpay but its easy to change it to reduce the term).

We did this for the flexibility. However as we get closer to paying it off we may get hit by early repayment charge for overpayments. Capped at 10% pa by our lender. Will probably switch to a different product.

And although we are decreasing the term, the monthly payment automatically deceases too.

Ooh we do this by default, can only overpay in lumps of 1k and they reduce the payment not the term. So every 1k takes the monthly bill down by about a fiver which we then add to the overpayment amount.

I was going to slash the term when we remortgage but the flexibility you all mention is actually very appealing!

Well, for us the interest rate on the mortgage is so low (1.5% for a 25 year fix) that the money would give far better returns by being invested.

You haven't invented the idea that's what most people do! A very quick Google of any money saving site has that fairly high up on the list!

I do this too. I thought long and hard about shortening the term when remortgaging, but fundamentally I like the security of knowing that I can drop to the base payment if I hit a financial dip. As above, the only risk is not going over the 10% threshold on the overpayments.

We overpay but aren't reducing the term. We have a mortgage that allows overpayments without penalties and we can if we need to reduce repayments in a year to reflect overpay. I like that we have that security.

We could at the moment pay off a chunk, but with interest rates being so low debating whether it's better to invest in stocks and shares.

DH job means our income varies a fair bit so we've always borrowed less than we can to get us through lean times. My parents were always mortgaged to the hilt and it was so stressful I always wanted to avoid being in that position.

This is what we do. We pay double what we should every month and it will be paid off in almost half the time. There are restrictions on how much we can overpay annually.

Many mortgage deals (excluding variable rates) are capped at how much you can overpay a year. This is to guarantee the lender a set profit

We got a ridiculously low rate interest only mortgage at the height of the boom which switched to something like +1.5% when the term finished. We could only pay back a % of the total owed for 10 years and then after that we could pay back as much as we could afford and then if we could pay it off we could pay a £50 early closing fee.

It's not a wonder our mortgage company stopped doing mortgages, they seem pretty bad at making money. As long as one of us was employed at any time and we were strict with having different pots of money for different things, it really worked in our favour.

We did similar. We took out the max mortgage (30 year) to get a big house. Then, when we re-mortgaged and salaries were higher, we reduced the period of the loan.

Just do a what-if analysis and be aware of penalty clauses.

We’ve done that for what it feels forever @trefl.
We didn’t take a 30 years mortgage with the intention of paying it in 25 years but just overpAid consistently every month.
We have also put savings into the mortgage rather than just savings because the interest rates are so low.

It sounds like a very sensible idea tbh.

@LemonMeringueThreePointOneFour

Overpaying is definitely a good idea if you can afford it - and assuming your mortgage is sufficiently flexible that there are no penalties for doing so.

However you're not going to cheat the system by overpaying by £100 on this 30 year mortgage you've described and somehow end up with a less than 25-year term if that's what you mean!

The 30-year mortgage is more over all not because it's longer per se, but because you're paying an extra five years of interest. Therefore if you reduce the terms to 25 years (even if that's unofficially by overpaying) you're also reducing the total interest.

Just maths, innit?

Yes If you pay over 25 years = £1000 a month or Pay over 30 years £ 900 plus £100 extra and reduce term to £25 years Its the same thing

We did it. Our mortgage all;owed you to pay up to 10% extra a year. We saved that up and paid it over once a year, the month before the statement was due. You maintain the original payment so get a double benefit from the savings as the mortgage goes down . For the last 2 years we have been £830 pcm better off, wonderful.

It's exactly what I've done. I took on a 30yr mortgage at £650 a month and have overpaid significantly - I'm with First Direct so have the ability to do this without incurring penalties.

I used a lump sum to wipe off a chunk of the capital, and then overpay by double. Seems sensible to me as the interest alone on the £650 is £250, so the savings I make by lowering the amount of interest, is better than any benefit from savings.

Not sure if FD allow me to take a mortgage holiday if I need to, but the main reason for me taking on a 30yr mortgage with lower repayments was to protect myself. I could still pay £650 a month without too many difficulties even with an extended period of unemployment, though obviously not ideal.

yanbu if that's really more money savvy go for it.
however you need to get the calculator out to figure out which is the 'cheapest' way to go.

I do this. Mortgage was for 2O yrs at £900 a month. We overpay by £900 a month so could clear it in half that time. We are restricted to overpayments of no more than 10% of outstanding loan each year though. When we remortgage in a couple of years we'll cut the term significantly as we've proven to ourselves that we can manage with the overpayment.

We've pretty much always done this, as and when we can afford to. My DH & I both work freelance, so it gives us some extra flexibility should we need it. Like others have mentioned, if you're on fixed term deal, say a three or five year fix, then usually your overpayments are capped at 10% a year. Once you're out of the fixed term and default to the standard variable rate in my experience you can generally overpay by whatever you like (although the savings you'd get by taking out a new fix might not make this worth your while). Its great if you've got the discipline to keep it up, we just set up an extra standing order and then think of it as one of our monthly bills and forget about it. What's also great about doing it this way is that when you first move in and you've got lots of extra expenses you can choose not to overpay those first few months and it makes everything a bit less stressful.