Mortgage Overpayments or reduce term

Hi,

My 2 year fixed rate is coming to an end in July and L&C have been contacting me advising this and asking if they can look for a new deal etc. I've no problem with this so they are going away to do this.

They come back with some figures and advised a longer fixed period. My question is would we be better off having a lower monthly repayment over the longer term which is currently 33 years and overpaying every month (the difference being what we pay now) as we are comfortable paying this. Or would it be better to continue paying what we pay now and knock the term down from 33 to 23 years.

I've tried to do all the overpayment calculators and what not but there doesn't seem to be much difference in doing it either way. Maybe a small small saving if you reduce the term by 10 years but on the flip side your paying the higher amount.

We are only 2 years into our first ever mortgage so this is all relatively new to us in terms of remortgaging to a better deal etc.

We currently pay £580 a month with nationwide on around 4.24% I think which was the best rate available as FTBs.

L&C have come back with 2.41% fixed with Barclay's for 5 years at £452 a month over 33 or £583 a month over 23 years. No fees etc just a £35 telegraphic transfer fee.

Any advice would be very much appreciated.

Thanks
 

davidjohnson

Distinguished Member
Only you know what is the best option for you at this time.

If I could do it all again, I would do everything I could to get it all paid off as early as possible, but that is the perspective of a 51 year old who wishes he didn't still have a mortgage to pay.
 

maddy

Distinguished Member
I've tried to do all the overpayment calculators and what not but there doesn't seem to be much difference in doing it either way. Maybe a small small saving if you reduce the term by 10 years but on the flip side your paying the higher amount.
You're not paying a mortgage for what would have been those last ten years which saves ~£18,000 based on the numbers you've posted.

I can't advise you on what to do, but I've paid our mortgage off very early and it's a massive freedom to have.

Also bear in mind that you'll likely move house many times in your life and so extra capital in your house may help with the next move.

Finally, think long and hard about whether this money would be better put into paying off the mortgage or a building up a pension.
 

Toasty

Distinguished Member
Clearly future interest rates will dictate the sums, but face value, the shorter term looks like an £18k saving, but what I'd also point out is you'd be mortgage free 10 years earlier and what we did when we paid off early was to divert the monthly mortgage payments to a savings account and treat it like we still have the bill. So in your case you could:

- Save £18k on the mortgage
- Have £70k in savings by the time the 33 years would have been up

Of course personal circumstances, whether you move house in the future, affordability, etc have an effect on your decision and is something only you can determine, but there's a lot of value in having zero debt earlier in life..
 

SimonSays

Active Member
Don’t know which is best, but I do remember (from the days when I had a mortgage :D) that having a fixed rate meant that I was only allowed to overpay (by doing a lump sum reduction as they called it) a certain percentage (Eg 10%) of the mortgage per year. So that might be worth checking if you’d rather overpay as and when. I recall they were happy to either lower the monthly repayment or the remaining term if and when chose to overpay. I chose to reduce the term with each lump sum I saved and knocked off the total and the money was mine for other things until that point. Just what I did, and food for thought, not a recommendation!
 

Trollslayer

Distinguished Member
Overpayments - discretionary so you don't get into trouble if you don't make them but it can be easy to stop making them.
Shorter term - you don't need to remember them but affordability could be difficult in the long term although you could change the mortgage later.
A personal decision really but you could do a bit of both which would help to manage risk due to possible cash flow issues.
 

jassco

Distinguished Member
We do the longer term so that we've got flexibility - during mat leave we can drop down to lower payments easier, but then overpay the rest of the time to normal levels

Also, around 2.5% is high, you should be getting under 2% at the moment (depending on equity %)
 

Doyle

Active Member
You need to decide how to make your money work best for you. Rather than overpaying you may, as mentioned above, prefer to put the extra money into savings if your gains there are greater than the cost of borrowing in your mortgage. That 'pot' offers flexibility and you can use it when circumstances call for it - period of unemployment, wedding, university fees, house extension, middle-aged-crisis-sportscar, pension, or use it to pay off your mortgage early at some point in the future.

Alternatively you may view your house as your savings/pension pot, and ploughing money into it. If circumstances call for it, you can of course always take money back out of your house.

Certainly a personal decision taking into account your own risk, goals, and general circumstances. You will have plenty of opportunity to change your strategy over the next 2 - 3 decades, so don't worry too much about getting it wrong. Everyone's circumstances change unexpectedly at some point - it's just a case of adapting when they do!
 

DPinBucks

Distinguished Member
If the rate's the same on both options, which it seems to be from your post, then there's no difference between opting for the shorter term or paying the £583 per month into the longer-term contract, so long as the lender allows it. They'll both pay off in 23 years, giving you an extra £18,000-odd plus 10 years' accumulated investment interest.

The advantage of the longer-term option, as @Trollslayer points out, is that you have more flexibility over how you manage your finances.
 

Trollslayer

Distinguished Member
It is a matter of how much you save on compounded interest versus what you could do with that lump sum.
Interest from banks will be less than the interest for a number of years for example.
 

joust

Well-known Member
This....

If the rate's the same on both options, which it seems to be from your post, then there's no difference between opting for the shorter term or paying the £583 per month into the longer-term contract, so long as the lender allows it. They'll both pay off in 23 years, giving you an extra £18,000-odd plus 10 years' accumulated investment interest.

The advantage of the longer-term option, as @Trollslayer points out, is that you have more flexibility over how you manage your finances.

I had the same conversation with my then neighbours a few years ago when they were re-mortgaging. If you take the longer term, but overpay (to the same amount as the shorter term), you would still pay off in the shorter term time frame, however, should circumstances change (and they will over this period) you have 'flexibility' to vary down to the minimum amount (i.e. normal) monthly payment. Given a choice, I would take the longer term with overpayments option every time.
 

Toasty

Distinguished Member
Yes, I should point out that we paid off early because we chose to overpay. It certainly offers flexibility and a safety net if needed..
 
Hi all, thanks for the advice, it seems its a very balanced opinion from all angles and is down to personal preference. My wife is keen to do the longer term for reasons mentioned above regarding personal circumstances (possibly kids etc) and things like that.

I was at first all for reducing it by 10 years but if you look at it both ways, there's not much difference in either apart from the flexibility of the longer term plus additional overpayments but as pointed out would still be paid off in a similar time frame should you with the overpayments.

Regarding the comment about getting a better rate, I believe this is the best we can get at present due to our LTV ratio. We are around 89% which is still high but as stated, only 20 months into the mortgage.

Think I'll discuss with the wife but lower payments + monthly overpayments seems like it's the best choice for us given what may happen going forward.

Thanks
 

Alaric

Well-known Member
L&C have come back with 2.41% fixed with Barclay's for 5 years at £452 a month over 33 or £583 a month over 23 years. No fees etc just a £35 telegraphic transfer fee.

I *REALLY* like fixed rates at the moment, 5yrs is good if you plan to stay where you are for a while. There's a LOT of up and we're pretty low at the moment and with the whole political thing no one has any idea where things are going!

As for longer and cheaper, it ISN'T.....It's a little less per month, but for a lot longer and you pay a LOT more interest over the time. It's a good earner for the bank.

On a £123,300 mortgage.
33yrs - £178,959
23yrs - £160,787

That's a massive difference, which makes the 23yrs look the better.

Overpaying by £131 a month would be the same difference and gives more flexibility, which is great. However most FIXED have a maximum you can overpay, £1572 may be over that amount so this is worth checking.
IF you can do this and stick to it, it's the best of both worlds.....If you dip into that over payment then it's less good!

A third option is split it....Go for say 27yrs at £518.....The over payment value of £66 will be less so probably won't hit the max over payment (£792 a year), it gives you some flexibility and still hits the same 23yr target!

Mortgage Overpayment Calculator: Pay off your debt early?...
 

Trollslayer

Distinguished Member
I am on 1.99% from two and a half years ago but didn't have to borrow much.
@JFRTDI - glad we could help.
 

Over by there

Well-known Member
Can I link in another forum? Money saving expert.
"My Excel mortgage spreadsheet" in google brings it up.

Not sure what the protocol is for someone else work.

Someone built an Excel spreadsheet to punch all the figures in. Far more detailed than the usual lenders versions and allows you to play with options. Not advocating it and nothing to do with it and not advice. Your own risk.
 

Trollslayer

Distinguished Member
I've just looked at it, not a mortgage expert but certainly the style and structure are what I would expect (At one job I built an Excel model for power consumption of new 4G modems and there are a lot of similarities).
 

Siamese Cat

Active Member
Sorry to complicate things a bit but do take into account making some pension payments. Starting a pension early has massive consequences on how much you'll have in your retirement thanks to the miracle of compound interest. So if you haven't done so already factor in some pension payments whilst doing your sums.

On the mortgage repayments I'd tend to lean towards the bigger earlier repayments if you can afford them as you'll have more room to manoeuvre in future for things like buying a more expensive house or increases in interest rates.
 

Trollslayer

Distinguished Member
Good point about pensions, that should be in the budgeting.
 

marksovereign

Well-known Member
No one can answer this without knowing all your circumstances. You would be best approaching an IFA for some proper advice.
 

mjn

Distinguished Member
Standard 25 year period here, but have been making 50% overpayments since the 3rd year :eek:

But if things went wrong, we can easily stop the overpayment and be several hundred pounds better off every month with zero effort.
 

jassco

Distinguished Member
90% mortgages

1.79 at 90% LTV with Lloyds, though you need to take into account fees, overpayment allowance etc.
 
D

Deleted member 27989

Guest
Standard 25 year period here, but have been making 50% overpayments since the 3rd year :eek:

But if things went wrong, we can easily stop the overpayment and be several hundred pounds better off every month with zero effort.
Same here. Well that is how we started. Standard repayment mortgage, 25 years based on one salary 3x multiples. That way it is easily affordable almost regardless of what may happen. And so far with interest rates dropping we managed to keep the payments the same but every time at renewal shorten the period by a year or two.

Ultimately it is ones own choice, but I quite like it knowing it’s all ours in as short a period as reasonably possible.

But hey to the OP only you and your other half will know what’s best for you.
 

SteveCritten

Distinguished Member
Not read all the replies but my advice would be to set up a savings account, Santander do a 3% for £200 a month account we have one each. Then at the end of the year, it has to be in there a year we then pay that off the mortgage. If for any reason though there is an emergency that money is needed it is there. If you have paid it off each month it would be harder to access.
 

hippo99

Distinguished Member
Not read all the replies but my advice would be to set up a savings account, Santander do a 3% for £200 a month account we have one each. Then at the end of the year, it has to be in there a year we then pay that off the mortgage. If for any reason though there is an emergency that money is needed it is there. If you have paid it off each month it would be harder to access.
Nationwide has a similar one but give 5% for up to £250 a month.
Flex Regular Online Saver Rates and Features | Nationwide
You have to have a current account with them though. I just have a free flex account with them, & just transfer some money from my ‘main’ current account to & from the flex account to fulfil their requirements. Don’t use the flex account to do any of my banking.
 

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