Mortgage overpayment - reducing payments, or insist on reducing term

Hi,

Firstly, I have read a lot of the threads here already on mortgage overpayments, and found several (linked in the Key Posts thread) very helpful, and another one (which I now can't find!) which explained what happens when the overpayment reduces the monthly payment.

I'm still a little bit confused though, so I am hoping that someone can help me to understand the impact of my mortgage overpayment, whether I should be looking for term reduction or monthly payment reduction, or whether I'm just worrying about nothing because there's little difference between the two!

My info:

• Variable rate mortgage for 126960 over 35 years with AIB, almost 1 year in now.
• Currently receiving first time buyers TRS (got in just before they got rid of it!)
• 28 y/o single, no dependants, limited expenses
• No other borrowings (overpaid my only loan, for my car, and cleared it early)

I have spoken to AIB, and they have told me that I can write to them and ask them to increase my DD with them, and that this will result in a reduced term. They have said, over the phone, that I can write in the future and ask for my payments to be reduced to the original payment, but a few threads on here make me a little bit nervous about committing to changing that DD on their word over the phone!

I ask about other methods of overpayment, e.g. transferring money to the mortgage account, setting up my own SO to transfer a set amount each month. I was told that it would go off the capital (rather than be held in credit) and that this would reduce my monthly payment, not the term. Apparently, if I wanted a given "ad-hoc" payment to reduce the term, I'd have to write to them to state that every single time...

Ultimately, my goal is to overpay the mortgage as much as humanly possible while my circumstances allow it. I don't want to take 35 years to pay this loan, and at the moment, I am on a good salary, have some savings, and am in a good position to overpay by at least 1-200 per month (plus the "leftover" money at month end).

Does it matter, long term, if my extra payments end up reducing my monthly payment rather than my term, if I'm overpaying anyway? Won't I still end up shortening the term, even if not officially, simply by paying it off sooner than planned? I think I'd feel more comfortable with my own SO making the overpayments, as it would allow me to stop more easily if my circumstances do change unexpectedly, but I also want to be sensible with the money I've got, and make the most of it while things are good for me.

Can anybody advise if I've understood the posts here correctly, and if I should just go ahead and set up my SO and have done with it?

Thanks!

Hi zenbuffy,

it does matter.

Basically setting up an SO would mean that AIB would take less in the DD as they don't need to take the full direct debit amount to make your monthly payment. Meaning... you would simply be paying your current monthly amount, one bit with your standing order the other bit with your direct debit - this would mean no benefit to you in terms of clearing the debt sooner or reducing the amount of interest you are paying.

Increasing your direct debit will result in it being paid off sooner but it is very important to give them clear instruction on this matter as you do not want them to reduce the contracted term.

You have to ask them to take an additional payment of €xxx to be paid off the capital without any change to the term. The amount you repay monthly will go up, and you will pay off a bit sooner but the agreed term is the same.

Alternatively if you do not want to touch the direct debit, you could set up a savings account and once a year request to pay off a capital lump sum again specifying that you do not want to change the term.

Or you can leave your direct debit as is, and simply transfer your additional amounts at the end of every month into the mortgage account.
I do this using online banking, set up as a transfer account and it means that some months if I decide not to- it is of no concern to anyone.
Every year or two I make a decision on whether to decrease the term again or not.

I don't think that is correct, the direct debit will still go through for the full amount due as set up on the account. The standing order, which will be under the OP's control, will go through and be extra. The computer systems are not smart enough to check the account each month and see how much do we need to make up the full payment or at least I doubt they work that way, I have not encountered them working that way in my experience.

This in my opinion is the correct way to overpay as at least you control the standing order and there is no issue with asking the bank to change anything. As you said it makes no difference whether or not you officially reduce the term (which I would not do, just in case of problems extending it again), the loan will simply be paid off earlier if you are overpaying which is in effect reducing the term.

I was picking up on this from the OP
"I was told that it would go off the capital (rather than be held in credit) and that this would reduce my monthly payment, not the term."
The important thing is to keep the monthly payment at the same level, otherwise the benefit is lost.
The key things are not to officially reduce the term, not to reduce the agreed payment, keep the bank informed, request they respond in writing confirming your communication and keep all correspondence. Oh and obviously to keep a careful eye on it!

As the other posters are saying, always reduce the payment amount rather than the term, this gives you maximum flexibility and there is virtually now down side other than paying fractionally more interest.
I reduced my term a few times & regret it now although I haven't yet asked to have my original term reinstated.

ebs_customer, I think we all were advocating keeping the repayment, not reducing it, and insisting the term remains the same, that way you will pay off early and pay less interest but can stop the overpayment if you need to.

Thanks for all of the replies, much appreciated! I've got a lot to think about...

If they do automatically reduce my monthly payment as I overpay, is there anything to be said for simply keeping an eye on it, and increasing my overpayment to match - so, if my mortgage payment of 600 and my overpayment of 200, for example, reduces my mortgage payment to 550, I increase my overpayment to 250 (as if I was still paying the 600)? I realise this would be a bit more work than simply having the bank increase their DD.

They won't reduce the payment automatically if you overpay, the direct debit dips into your account for the amount specified as being the repayment, the system does not check your mortgage each month to see how much does it need to meet the payment, it is an automatic process.

AIB have told us they are automatically recalculating the DD payment- not sure how often though. So it may be recalc'd.

so-crates said:

ebs_customer, I think we all were advocating keeping the repayment, not reducing it, and insisting the term remains the same, that way you will pay off early and pay less interest but can stop the overpayment if you need to.

Click to expand...

You are reducing the mandatory element of the payment though which was what I meant. I agree that topping it up monthly may be a good idea to maintain savings discipline & minimise interest.
However someone that ever manages additional payments probably has the self discipline to continue to do so, even if it's on an as hoc basis.

I would go with so-crates option of saving up yearly and once a year request that amount to be taken off the capital, but not changing the term.

Be careful. I increased my repayments with Danske (then NIB) for a period of time and then when I reduced them again I received a letter implying that I was in financial difficulty. It took a lot of silly phone calls to eventually get a note stating that I was not in any difficulty and that my credit rating was not effected. Why can't Banks make it easy to do business??