Key Post Is there any difference in interest savings if you reduce the term v reducing the monthly payment?

Yes, could be significant difference.
Do you want to provide a scenario and I'll explain with numbers?
 
that would be great.

Say 500k mortgage 20 years left 2.5% interest rate.

Over pay 25k, difference between reducing the term and reducing the monthly repayment in interest costs over the life of the mortgage
 
Starting point:
Term 240 months
Repayment 2,650 per month.
Total interest 135,883

Overpay 25,000. Keep term at 240 months
New repayment 2,517
Total interest 129,090

Keep repayment at 2,650
New term is 225 months
Total interest 120,298
 
thanks i was a little consfused as i always though reducing the term was more beneficial, but a response to a recent money makeover gave me pause.
 
Looking at the total interest over a period of 20 years is meaningless and is likely to lead to the wrong decisions.

If you pay more every month, of course you will pay less interest over the long term.

So Blackrock, what you are asking is

If I pay €2,650 a month instead of €2,517 a month will I pay less interest? Of course you will.

By the same token if you pay €5,000 a month, you will pay a lot less interest.

Brendan
 
The correct thing to do with an overpayment is to reduce the repayment and leave the term the same.

Then if you want to overpay in the future, you can do so.

If you reduce the term, and later can't meet the repayment, you will need the bank's agreement to reschedule it and it will be noted on your credit record.

Brendan
 
Brendan Burgess said:
The correct thing to do with an overpayment is to reduce the repayment and leave the term the same.

Then if you want to overpay in the future, you can do so.

If you reduce the term, and later can't meet the repayment, you will need the bank's agreement to reschedule it and it will be noted on your credit record.

Brendan
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ok, i have been relatively aggressively overpaying my mortgage and hope to continue to do so over the next few years. Balance currently is €465k fixed at 2.5% for 5 years. I should be in a position to make the maximum over payment each year of 10% of the outstanding principal (which would hopefully have me repaying the mortgage in the next 10-12 years as i will be able to make a bigger repayment once the fixed term ends).

I have always reduced the term (because this effectively allows me the repay more, if i reduced the repayment my capital repayment each month will be less) but perhaps i should re think. i may not always have as much excess funds and in the medium term we would like my wife to be able to cut back a bit on work and a smaller mortgage repayment would help in that regard.
 
Blackrock1 said:
I have always reduced the term (because this effectively allows me the repay more,
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I don't really follow this. What is the rule? Is it 10% of the balance or 10% of the repayment? If it's the repayment, then your theory works.

Blackrock1 said:
i will be able to make a bigger repayment once the fixed term ends
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You can make a repayment in part at any time.

If you still have money left after your 10%, then get a quote for the break fee and see if it's worth it.

Brendan
 
Brendan Burgess said:
I don't really follow this. What is the rule? Is it 10% of the balance or 10% of the repayment? If it's the repayment, then your theory works.



You can make a repayment in part at any time.

If you still have money left after your 10%, then get a quote for the break fee and see if it's worth it.

Brendan
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the rule is you can overpay a maximum of the os balance.
 
twofor1 said:
Have you tried the PREPAYMENT or EXTRA functions at the bottom ?
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i have, thats what i use to see how much off the term i save with each extra payment,

correct me if im wrong but i dont see the ability to keep the term the same but to decrease the monthly payment?
 
ok so in my situation. 466k o/s 18 years left give or take, currently fixed for next few years at 2.5%. Total interest charge €113k, monthly payment 2.6k

If i make the maximum allowable repayment (without incurring a redemtption charge) over the next 5 years it works out as follows.

Year 1 repayment 46k
Year 2 repayment 39k
Year 3 repayment 33k
Year 4 repayment 27.5k
Year 5 repayment 22k

If i elect to reduce the term at each stage i end up repaying the mortgage in 11 years or so and save 61.5k of the interest.

If i elect to reduce the repayments i end up with a monthly payment of 1.6k after the year 5 repayment but the same term and i would save 36k of the interest.

So whats the best approach? Obviously i would rather repay the mortgage sooner and pay as little interest as possible but conversely i would like to have the option for my wife to significantly cut back on work which the lower repayments would assist with.
 
Blackrock1 said:
ok so in my situation. 466k o/s 18 years left give or take, currently fixed for next few years at 2.5%. Total interest charge €113k, monthly payment 2.6k

If i make the maximum allowable repayment (without incurring a redemtption charge) over the next 5 years it works out as follows.

Year 1 repayment 46k
Year 2 repayment 39k
Year 3 repayment 33k
Year 4 repayment 27.5k
Year 5 repayment 22k

If i elect to reduce the term at each stage i end up repaying the mortgage in 11 years or so and save 61.5k of the interest.

If i elect to reduce the repayments i end up with a monthly payment of 1.6k after the year 5 repayment but the same term and i would save 36k of the interest.

So whats the best approach? Obviously i would rather repay the mortgage sooner and pay as little interest as possible but conversely i would like to have the option for my wife to significantly cut back on work which the lower repayments would assist with.
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My thinking was similar to yours. I wanted to pay it off quick but also get the payment low so my wife could stay at home with the kids. What I did was reduce the payments low enough to where I would feel comfortable with that payment and now I reduce the term.
 
Blackrock1 said:
ok so in my situation. 466k o/s 18 years left give or take, currently fixed for next few years at 2.5%. Total interest charge €113k, monthly payment 2.6k

If i make the maximum allowable repayment (without incurring a redemtption charge) over the next 5 years it works out as follows.

Year 1 repayment 46k
Year 2 repayment 39k
Year 3 repayment 33k
Year 4 repayment 27.5k
Year 5 repayment 22k

If i elect to reduce the term at each stage i end up repaying the mortgage in 11 years or so and save 61.5k of the interest.

If i elect to reduce the repayments i end up with a monthly payment of 1.6k after the year 5 repayment but the same term and i would save 36k of the interest.

So whats the best approach? Obviously i would rather repay the mortgage sooner and pay as little interest as possible but conversely i would like to have the option for my wife to significantly cut back on work which the lower repayments would assist with.
Click to expand...

The mathematically best approach is the one that saves you the most interest. However, you have answered the question yourself as you want to lower the payment to allow your wife to cut back on work.
 
Guys, you are making this unnecessarily complicated.

A mortgage is just renting money..

The larger the amount your rent, the more rent or interest you will pay.
The longer you rent for, the more rent or interest you will pay.

If your scheduled mortgage payment is €500 a month and you pay €900 , you will reduce the size of the mortgage quicker and so you will pay less interest.

It does not matter to this calculation if the lender thinks that you have 20 years left or 15 years left. It doesn't matter if they schedule your repayment at €500 or at €400.

If you pay €900 every month, your account will be exactly the same, whether the loan term is officially set at 20 years or 15 years.

Brendan
 
Brendan Burgess said:
If your schedul*ed mortgage payment is €500 a month and you pay €900 , you will reduce the size of the mortgage quicker and so you will pay less interest.

It does not matter to this calculation if the lender thinks that you have 20 years left or 15 years left. It doesn't matter if they schedule your repayment at €500 or at €400.

If you pay €900 every month, your account will be exactly the same, whether the loan term is officially set at 20 years or 15 years.

Brendan
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Agreed. The caveat is that certain lenders will only allow you to overpay by 10% of your regular payment. In this scenario, if you choose to reduce the payment instead of the term, then you'll be limited in how much you'll be able to pay in future without incurring a break fee.

If you reduce the term, then you can continue paying at payment*110% indefinitely. If you reduce the payment then you'll be restricted to new payment*110%, a lower amount, hence incurring more interest over the lifetime of the loan.
 
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