Overpay? Reduce term or repayment?

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billy-bob

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As of this year, I've been overpaying my mortgage each month, paying a fixed amount which will stay fixed as along as the actual charge is below it. I've now come into some money and am thinking of paying off a lump sum from the mortgage (I've hummed and hawed over the value of this based on my mortgage rate etc, but quite like the idea of being mortgage free before I'm dead).

My question is if I continue to overpay monthly, should I use the one off overpayment to reduce the term or the capital? I've tried Karl's mortgage calc to work it out, but there's so much info in there.

So say I've got 100k and 25 years left on my mortgage. At the prevailing rate, I should be paying 800 off that per month, but am overpaying at 1000 per month. That takes say 5 years off my term. If I use the overpayment of say 30k to reduce the capital, the amt I should be paying will go down to say 700 per month, but I'll continue to pay 1000 for the full term. Is that going to be worth more or less to me than using the overpay to reduce the term to say 15 years, but continuing to pay only 200 above the 800? Or is it as I suspect, much of a muchness?

I think I need an actual example that I can plug in my real figures and take a look, but I'd be interested in I dunno gut feelings too?
 
Paying the 30k in lump sum reduces the amount of interest you pay each month so the 700 you see above means that you are paying 100 more of the capital each month i.e. 800 - 700. This in turn means that the period of paying back will reduce quicker.
 
Hi Billy Bob
Keep the term as it is and continue to overpay as you are doing. The main reason being if there comes a time when the amount per month might be a struggle (interest rates increasing) at least you have remained on the same term and are not committed by agreement with the term reduction to having to pay the bigger amount each month. The loan will end automatically in the quicker time by continuing to over pay anyway and you dont have to officiate this by officially nominating a shorter term, you are doing this anyway with the overpayment. Remember dont pay a lump sum off the capital if you are in a fixed rate good luck Padraic.
 
Totally agree with PadKiss on this. That was pretty much how I managed mortgages over the years
 

I'm not sure I understand, Padraic. Are you saying use the 30k overpayment to pay off the capital and keep my regular 1000 per month overpayment, or are you suggesting using the 30k to finance the regular overpayment going forward in case times get tough?
 
Hi billy bob use the 30k to pay down the capital keep the same payment going and term as it is currently Padraic
 
I think the OP is somewhat confused, so hopefully to clarify and not to confuse further:

Reducing the capital balance on your mortgage will automatically reduce the term. You don't need to formally request a change in term.
If you formally request a change of term (say to 15 years), this locks you into a repayment schedule that gives you no flexibility in the event of a financial shock in future years (e.g. redundancy).

However my putting the lump sum you have against the capital you get an immediate win as your mortgage will be paid off much sooner anyway based on your current repayments but you retain the flexibility of the repayment terms you are contracted to delivering.

One way to calculate the impact on the term is to:
Do a calculation on a mortgage calculator of what the mortgage repayments would be on a new mortgage for (current balance - lump sum) with a term of (remaining years left on your current mortgage agreement). This is the figure you could revert to if in difficulty down the line

Now in the calculator keep lowering the term until the suggested repayment matches what you are currently paying in the overpayment. When that happens you will have identified the "real" term left on your mortgage if you pay off the lump sum and keep up the overpayments. You might get a nice surprise!
 
Ok, I was a little confused. I thought when you sent a one off overpayment, you had to decide whether it comes off the capital or off the term. It does sound like reducing the term would have a long term effect which I hadn't considered, so thanks all for that
 
If you continue overpaying your mortgage, then it will make no difference whether you tell them to apply it against the repayments or the term. The difference is that if you tell them to apply it to the term, you are locked in at your current repayments of €800. If you tell them to apply it against the repayments, your official payments will drop down to €700, which means you have more flexibility down the line if money becomes tight.
 
Tks all, esp kmick, that xls is very helpful, lets me plug in various capitals and terms and see the effect going forward. Seems that overpaying 30k now would save nearly 4 years of mortgage payments (all things being equal) - that's not inconsiderable.

(Of course, since I posted this, I've continued reading and still haven't ultimately decided on going this route - I need to get some professional advice)
 
Billy Bob the one thing about making an overpayment of 30k is that the 30k could be used for something else and this raises the issue of opportunity cost. You are already overpaying on the mortgage but the most practical, prudent and low risk option is to throw the 30k in there as well. I dont know what rate you are paying but essentially it release you 4 years early and reduces your current payments. If it were me I would perhaps split it. Maybe put 15k into the mortgage and 15k into someting like this low cost fund of funds (this is just one of many of these types of funds)
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One serious caveat is that I would wait until the current bubble in equities explodes once the fed stops printing money.

The point is is that the 30k is liquid assets. If you put it into your mortgage it is gone until you sell the property (which is a slightly less liquid asset).
 
Point taken, kmick, and it's this idea of basically 'spending' this even though it might be a good deal in the long run that has me thinking twice; once it's gone, it's gone and it might be nice to have that sum on tap for whatever life throws at me.

However, I'm in a pretty good position where I have a sizeable emergency fund, and live below my means month to month, so if it's a choice between spending it to save myself 4 years of mortgage payment and just frittering it away on shiny electronics and weekends away, I know which I'd choose.
 
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