Importance of the Term

F

fin999

Guest
Hi,

I have mortgage with NIB which I changed about 18 months ago to avail of their great value tracker. I'd have to say that I have found them very difficult to deal with for various reasons. Maybe, it is the particular branch. Anyway, one thing has always bugged me since we signed up. The term. We found that because the rate was so good we could make extra payments against the mortgage. At the time we had 12 years to run on the term our mortgage. While sorting out paperwork I asked them to reduce the term to 9 years. However, when all the legal stuff arrived at our solicitor it was all so bad I had to make a page long list of errors in the document. One of which was the term was down as 15 years. After several attempts they fixed all but this mistake. I asked them whether this made any difference in real terms and was told that is didn't. They said that in fact that I would be better off having a longer term because rates were due to rise. So they suggested that we simply accept the term but make additional payments if we wish to pay off earlier.

I was wondering if someone can confirm for me or otherwise. Surely that is incorrect. The longer the term the more the interest. Today I using an online mortgage calculator and am horrified by what I see. It make a huge difference doing it this way.

Can someone also tell me how difficult it is to change the term. Do solicitors have to get involved?

If this is true, then I think that this should be highlighted as a warning anyone out there trying to pay off a mortgage early.

Many thanks
Fin
 
If you are on a variable rate you can just make overpayments which will automatically reduce the term, saving you more in interest.
 
Out of my depth a bit here but your story definitely rings a bell...

It may not have been on AAM but I'm sure I've seen a warning about mortgage providers taking your early repayments and offsetting them only against the interest, not the premium, thereby retaining the same term and not giving you the full effect of your intended payment...

Open to correction, of course.
 
usrbin said:
[...] mortgage providers taking your early repayments and offsetting them only against the interest, not the premium, thereby retaining the same term and not giving you the full effect of your intended payment...
Click to expand...
That doesn't really make sense, I think. What you may have seen is warnings that some mortgage providers will not incrementally reduce your term so every time the interest rate changes the new payment is calculated based on the original maturity date. I tend to throw in a minor rant about that every few weeks, given any question I can use to bring it up!
 
As I understood it the problem arises when you don't make it clear that you want to overpay by a fixed amount.
Say your mortgage is 1000 a month and you decide overpay by 200. If interest rates go up and your new repayment is, say 1050 the mortgage provider still takes 1200 from you so you're only overpaying by 150.
You've got to be crystal clear about what you want.
 
The term in the contract is totally irrelevant.

The time it will take you to pay off your mortgage will be determined by your actual monthly repayment and the interest rate.

If they tell you that it is a 15 year mortgage and your repayment is €1,000 per month, but you pay €1,200, your mortgage will be paid off in 12 years.

If they tell you that it is a 7 year mortgage and your repayment is €2,000 per month, but you pay €1,200 your mortgage will still be paid off in 12 years.

Brendan
 
Nope. 'S not what happened to me. I pecifically said, please add an overpayment of (say) €200 to my payment. And on it went for a while and that was fine. Then the rate went up and my payment went down, and I thought , but left it because I was househunting. Then the rate went up again, and my payment went up a tiny bit but less than it "should" have, and I thought "aah!". And - giving you the heavily synopsised version - I phoned my provider and said "Why haven't you applied my payments to reduce my term, as I asked?", and they said "'Cause we don't do that."

So the payment was being deducted from the capital all right, and indeed the overpayment was being applied to the new payment, it's just that with every rate change they recalculate the payment based on original maturity unless you change it.

It's a combination of clarity of instruction, and what their systems capability is.
 
I'm beginning to think that NIB are a bit of a disaster. I thought I was the only one having problems. We took out a discounted variable rate in Dec 06 but since that period NIB have only once adjusted the interest rate and the repayment amount that we have been paying.
Every time the interest rates have gone up they have taken a higher amount of interest from our payment but have not changed the amount coming off the capital and the overall payment has stayed the same.
I had terrible trouble trying to put this right last year and thought that I had, but discovered last week that the probem is ongoing.
I have an appointment next week to talk to the same mortgage man in the branch that was supposed to sort the problem out last year.
Can I ask the bank to detail how much their mistake has cost us (in terms of them continuing to charge interest on the proportion of capital that we have underpaid, through no fault of our own). Would I be entitled to ask them to waive this as the fault is entirely theirs and has now been pointed out to them on many occasions?
 
Hi there,

Thanks for all your replies. Brendan, I would have thought that to be the case, that regardless of the term if you make additional payments that you simply shorten the term of your and that that is all that happens. However, I am not convinced. Surely mortages are calculated using compound interest, with the interest compounded to the term of you mortgage. So if you are saying that the term of your mortgage is 15 years, then this is used in the fomula to calculate interest, not the actual term that you end up with due to your additional payments:

I have used an online calculator to help on this:
http://mortgage-x.com/calculators/extra_payments.asp

I entered term 15years, interest rate 4.6, amount 100k, additional payments of 400 per month. This told me that I would end up saving over 6 years of my loan and that I would end up paying 21,387 in interest.

So I re-ran the same query only changing the term to 10 years. The results of this change said that I would end up paying 16,914 in interest. That is almost 5k less in interest just by shortening the term!

Perhaps the mortgage calculator is wrong, or maybe I am missing something. Perhaps not!

Maybe someone can shed some light on this please.

Details of my mortgage-calculator results are below.

Many thanks
Fin

This is what was returned:
Query 1:
Term of the loan: 15 Years | Loan amount: $100,000.00 | Interest rate: 4.600%
Starting date of the loan: July, 2007
Monthly mortgage payments: $770.11 Prepayments Monthly prepayments of $400.00 beginning from July, 2007Calculation Results Total interest paid over the life of the loan (no pre-payment): $38,620.51
Total interest paid over the life of the loan (with pre-payment): $21,387.20 Your Savings: Total interest saved: $17,233.30
6 years and 4 months shorter loan

However if I run the same calculation for but simply changing the term to 10 years. I get the following:

Term of the loan: 10 Years | Loan amount: $100,000.00 | Interest rate: 4.600%
Starting date of the loan: July, 2007
Monthly mortgage payments: $1,041.21 Prepayments Monthly prepayments of $400.00 beginning from July, 2007Calculation Results Total interest paid over the life of the loan (no pre-payment): $24,945.35
Total interest paid over the life of the loan (with pre-payment): $16,914.98 Your Savings: Total interest saved: $8,030.37
2 years and 7 months shorter loan
 
Hi Fin999

the term is important as it dictates the caluculation of interest based on mortgage amount and interest rate, if you leave it at 15 years and accept that, the ball is in your court to be disciplined to overpay to counteract the difference of 6 years interest

given the issues you have I would feel that its possible NIB lending criteria may have made this impossible to authorise and therefore without discussion the term was pushed out to 15 years rather than 9 years, the response from NIB is not satisfactory and you need to ask do they have a minimum mortgage term or is there a issue re lending criteria?

from there, you can make your decision to push for an amended offer for 9 years as originally requested or accept the 15 year term and be as disciplined as you can be

regards

Deirdre L

www.rea.ie
 
Thank you for that Deirdre L.

That is what I guessed. They told me it made no difference, which was a lie. I really think that this is sharp practice on their behalf. All of the other things that I had to pull them up on were things that would ultimately cost me money, or more to the point, made them money. They seized every opportunity.

Anyway, for anyone else out there considering making regular extra repayments to pay off you mortgage 'early'. Consider shortening the term instead, or as well as, making the extra payments. Remember, the term of you mortgage IS very important. Shortening it may save you 1000s.

Regards

Fin999
 
If you have a €100,000 mortgage with an interest rate of 4.6% the repayments over 15 years would be €770 pm; over 10 years it would cost €1041 pm. But by paying €1041 pm your mortgage would be repaid within 10 years, even if your original loan was scheduled over 15 years.

Obviously the figures I quoted do not take inerest rate increases into account so you would need adjust your repayment in line with these.

You seem to think that by paying your loan over a shorter term, you will pay the same interest as if you paid it over its original, longer term - this is incorrect. The interest is you pay is based on the outstanding balance of your mortgage so the more you pay each month the faster you are reducing the balance and therefore paying less in interest. The interest isn't calculated based on the original term and then added onto your mortgage - if that was the case people would to pay back the original sum borrowed as well as the interest that would have been payable if they decided to repay their mortgage early.

By having a longer term and making overpayments you have the opportunity to take payment breaks or even reduce your payments in times of financial difficulty. But if you still want to reduce the term you should contact NIB - bear in mind though, that the main reason for lenders insisting on longer terms is due to affordability. Maybe at the time of your original application you didn't qualify for the amount you required over the term that you requested.
 
Normally if you increase the term you also have to update your life insurance. Surprised they didn't ask for this.
 
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