Overpaying mortgage and 'term' of same - clarification sought

I'm all confused. My bank gives me two options of overpaying my mortgage:

1. the overpayments can never be withdrawn again and:
2. the reverse, in that yes, you can withdraw any of the overpayments at any time.

The latter does 'not reduce the term of the mortgage' but you will probably end up paying off your mortgage in full sooner they say.

So, am I correct in understanding (and please don't laugh at my ignorance) that the 'term' means the period for which interest is calculated and that option one above would actually reduce the interest due?

Thank you in advance!

The term is the length of the mortgage.

The first option will reduce the capital amount (the amount you actually owe) and hence the term. In this option the money is "spent", so you can not withdraw it again.

The second will sit in an account earning interest and will be offset against your mortgage interest. This will not reduce the term, but will mean you pay less interest per month. The money is also available to be withdrawn later, which will obviously increase the amount of interest you pay month to month again.

The reason it will probably end up paying off your mortgage in full is that, assuming you keep overpaying, eventually the account will build up to such a level and the mortgage will reduce to a point that they converge. i.e. you will have overpaid so much that you can use the banked money to make a once off lump sum payment to clear the mortgage.

Think of the second one as being basically a savings scheme rather than debt repayment. The first option will cost you less in the longterm than the second but the second is more flexible if you wish to keep use of the money. Personally I wouldn't go with the second option myself as there is no statement of the interest rate accruing to you.

Also, be very careful if choosing option 1. If you reduce your term, the bank may not increase it again for you should you ever wish to reduce your repayments.

Thanks everyone. The reason I am opting for the retrievable overpayment at the moment is because I have got very little funds elsewhere as is usually advised for emergencies. I only have about €4k in savings so this doubles as an emergency fund should I ever need it (short term).

The reason I am trying to payoff the mortgage a little faster than normal is because I was on interest only for the first 3 years of the mortgage (after having topped up by €30k) but then when i decided I would like to move to a larger apartment the bank laughed at me even though I was not in negative equity (barely). They declared my loan to value percentage was too low (basically the mortgage was €195k and I still owe €193k) and as I said, I have very little savings.

So, if anyone has any alternate advice for me on how better to manage my funds? I am 42, unmarried, no children and earn approx €60k per annum. I have a very small pension also, but am loath to start pumping money into such a risky area.

As you can probably guess the elephant in the room is that I was a total disaster with my money for many years when I should have been saving so I'm really just starting from scratch. I guess some people just mature later than others.

Hi Fostra, your post may be better suited to the money makeover forum here as it is not looking exclusively for mortgage advice.

www.moneybackmortgages.ie

Thanks NorfBank. I will swap camps.