Overpaying mortgage

18
Posted 3rd Jan
When you decide to overpay your mortgage certain banks allow you to decide how the overpayment will affect the mortgage, you can choose between the following:

1). Reduce my mortgage term
2). Reduce my monthly mortgage payment
3). Keep my existing mortgage payment and term the same

Let's say you're on a 2 years fixed rate, and then you switch to svr. The full term is 25 years. Obviously option 2 is the least beneficial as it doesn't shorten the mortgage term. However, what's the real difference between option 1 and 3 above.
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We were told there are two options only. Shorten the term or lower the monthly payments. If you want to lower the payments it will trigger a mortgage reassessment every time. Whereas it won't when it shortens the term. And there is a 10% yearly overpayment allowance anything over that and you have to pay a penalty
I don't think option 3 is an option. It defeats the point in the overpayment.

I've always taken the reduced monthly payment option.
Edited by: "rimalpatel007" 3rd Jan
rimalpatel00703/01/2020 18:08

I don't think option 3 is an option. It defeats the point in the …I don't think option 3 is an option. It defeats the point in the overpayment.I've always taken the reduced monthly payment option.


Yeah, that's exactly what I thought when I saw it it's really strange to have that option available
When I was with skipton they just gave me the account number/sort code/reference so I could throw extra at it as and when. It didn’t reduce my monthly as that was what I didn’t want, the term didn’t reduce on the system either but showed less to pay on the balance. Could of been a computer glitch maybe?
Option 3 is actually the best option. Gives you same interest saving of option 2, but also added flexibility.
trancefreak8703/01/2020 18:12

Yeah, that's exactly what I thought when I saw it it's really strange …Yeah, that's exactly what I thought when I saw it it's really strange to have that option available



Overpaying capital reduces the mortgage balance as well as the monthly interest charged on the outstanding balance. As a result, it seems that under option three, although the amount you are paying doesn't change, a greater proportion of your monthly payment is repaying capital, allowing you to repay the mortgage sooner. If you can afford to make lump sum capital repayments, it makes sense to keep the same monthly payment. If you couldn't afford your current monthly payments in the first instance, then why would you be making overpayments? By reducing the monthly payment, are you not essentially counteracting the benefit of the overpayment?

If you're on an interest-only then the first option would be a terrible idea as I'm sure you are aware.
Hipppppooooo03/01/2020 18:23

Option 3 is actually the best option. Gives you same interest saving of …Option 3 is actually the best option. Gives you same interest saving of option 2, but also added flexibility.



Surely option 2 gives more flexibility as the monthly repayment is lower, yet you can still make overpayments when able? For a repayment mortgage, option 2 would be much better as the lower monthly liability gives you a larger buffer against financial trouble whilst you can still make overpayments. Unless you can afford to overpay more than 10% of your mortgage per calendar year, option 2 is far safer. The fact that the OP hasn't stated repayment or interest-only mortgage makes it difficult to judge.
Martin Lewis explains it better than I can
ndyanem03/01/2020 18:21

When I was with skipton they just gave me the account number/sort …When I was with skipton they just gave me the account number/sort code/reference so I could throw extra at it as and when. It didn’t reduce my monthly as that was what I didn’t want, the term didn’t reduce on the system either but showed less to pay on the balance. Could of been a computer glitch maybe?


I'm with RBS group and I can do the same. Doesn't change 'normal' payment or term.
nag_sup03/01/2020 18:30

The fact that the OP hasn't stated repayment or interest-only mortgage …The fact that the OP hasn't stated repayment or interest-only mortgage makes it difficult to judge.


Fair point, its a repayment mortgage
Shortens term so less interest is paid when you look at it long term
Edited by: "3ak" 3rd Jan
Option 3 lets you build up a reserve which you can use in the future to cover payment holidays, amend the term or adjust the monthl payments.

I would always reduce the term as you never know what the future holds.
I would think option 2 was good as it will reduce the overall amount and interest you are paying every month you pay in extra so if you pay it off early I would think it would still be beneficial. For example if you are paying £500 and month and it get reduced too £450. Onwards when you pay a lumpsum in and events it will go down too say under £100 a month if you keep doing this so I can't see why you think this wouldn't be beneficial.
MynameisM04/01/2020 21:24

I would think option 2 was good as it will reduce the overall amount and …I would think option 2 was good as it will reduce the overall amount and interest you are paying every month you pay in extra so if you pay it off early I would think it would still be beneficial. For example if you are paying £500 and month and it get reduced too £450. Onwards when you pay a lumpsum in and events it will go down too say under £100 a month if you keep doing this so I can't see why you think this wouldn't be beneficial.



Because you are better off reducing the length of the mortgage, if you can afford £500 per month + an aditional £100 there is no point reducing the payments to £450 per month and still have say 20 years left to pay it.

Its about the end game which is clearing your mortgage as fast as you can and reducing the term is a great way to motivate you to pay more.
MynameisM04/01/2020 21:24

I would think option 2 was good as it will reduce the overall amount and …I would think option 2 was good as it will reduce the overall amount and interest you are paying every month you pay in extra so if you pay it off early I would think it would still be beneficial. For example if you are paying £500 and month and it get reduced too £450. Onwards when you pay a lumpsum in and events it will go down too say under £100 a month if you keep doing this so I can't see why you think this wouldn't be beneficial.


Because it keeps you locked in almost to the same term of mortgage. So if its 30 years you will be paying it for 30 years - even if your payments suddenly go to £2. You also lose part of the benefit of overpaying as yes the capital reduces, but, its not being 'chipped at' as quickly - as the reduction in payment is usually largely down to additional savings on interest.

Zopa do this with their loans and it infuriates me.

So when you do option 1 and pay in money you are reducing what you've borrowed meaning next month slightly less of your payment goes on servicing that debt and more towards paying off the capital and so on and so on until a snowball effect takes place.
markmc99904/01/2020 23:40

Because it keeps you locked in almost to the same term of mortgage. So if …Because it keeps you locked in almost to the same term of mortgage. So if its 30 years you will be paying it for 30 years - even if your payments suddenly go to £2. You also lose part of the benefit of overpaying as yes the capital reduces, but, its not being 'chipped at' as quickly - as the reduction in payment is usually largely down to additional savings on interest. Zopa do this with their loans and it infuriates me. So when you do option 1 and pay in money you are reducing what you've borrowed meaning next month slightly less of your payment goes on servicing that debt and more towards paying off the capital and so on and so on until a snowball effect takes place.


Ok if that's correct then that's just silly. It doesn't make sense though, if you are paying more in and reduces the overall amount surely that would mean the interest paid has too be reduced aswell. And when it's gone low enough I would have thought you can just pay it all off if they have a clause saying that's not allowed then yes definitely don't doo this. And try the other options or probably better if you can move too a different provider whom doesn't have such silly rules.
Assuming you're on a standard repayment mortgage... Option one would normally save you the most interest in the long term, but the funds will be paid as a capital repayment and will generally not be accessible to you again in the future.

Option two would still save you money, but not as much as option one in the long term.

Option three is only available on certain types of mortage with certain companies, some will call it a savings pot or something similar. It's basically for offsetting the interest and is the most flexible of the options because you would likely have the ability to use this money for payment holidays etc later in the term if you come into any difficulties. This will work differently for different companies but in my experience, say you had a 10k mortgage, and overpaid by 1k, the 1k would sit in the pot. Your monthly instalment would collect at it's normal amount, but as you would no longer owe interest on the 1k, the interest element of your monthly payment that would normally have covered this would be added to your 1k overpayment balance. This would continue to build until it matches your mortgage balance or you use it for things like payment holidays etc.
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