Overpaying vs reducing term?

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krinpit

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I rang my bank yesterday to discuss my mortgage, as my fixed interest period is now up.

As I'm now in a better position financially than when I initially took out the mortgage, I wanted to reduce the term of the mortgage down from 35 years to 30 years.

As an alternative to explicitly reducing the term, she suggested that I "overpay" by a regular amount each month, thereby having the effect of paying off the principal quicker and also having the added benefit of being more flexible.

I can barely get my head around this concept, so if anybody can explain this to me in layperson's terms I'd be delighted.

Is it a scam (pardon my cynacism)?
Will it increase my "equity owned" significantly over the next 4-5 years?
Does this actually reduce the term of my mortgage or does it just reduce the payments due in the later years of the originally agreed 35 years?
Any other pitfalls?


PS: I've used the mortgage calculator here: http://www.jeacle.ie/mortgage/ie/, but it doesn't give me the option of entering overpayments for comparison purposes
 
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If you check the box for term instead of the box for repayment, you can then slide the repayment slider up/down and this will reduce the term accordingly.
 
Ah yes, thanks for that. Works pretty well. Thanks plant43

So, any comments on the remainder of my questions? Using the mortgage calculator, it appears to have the effect of reducing the term alright, but not quite as good value (very close though)
 
It is not a scam.

I overpay my mortgage.

The effect will be that it will be paid off in 17 years rather than the original 20 years.

I also switched to fortnightly repayments, which also helps to reduce the overall interest bill.
 
krinpit said:
PS: I've used the mortgage calculator here: http://www.jeacle.ie/mortgage/ie/, but it doesn't give me the option of entering overpayments for comparison purposes
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Not sure what you mean but if you enter different sets of figures, one at a time, then you can compare the results.

Your thread title is a little misleading since it makes it sould like overpaying (accelerated lump sum or regular capital repayments) and reducing the term are mutually exclusive when, in fact, they can be a win-win situation!
 
What the banker was telling you (and fair play to them for pointing it out) is that if you want to reduce the term, you do so by paying higher monthly amounts (naturally), but by specifying to reduce the term, you are locked in to paying the new, higher monthly amounts. All this takes paperwork and administration by the bank.

Whereas, if you just ask them to increase the payments, this requires very little administration on their part, and has the same net effect (i.e. it reduces the term). If your circumstances change in the future, you can always stop the increased payments and go back to the original amount without any hassle.

Or to put it in financial terms.

You owe 12000, you pay 1200 a month. This will pay off the loan in 10 months. You tell the bank you want to pay it off in 5 months, they renegotiate the loan and tell you your new monthly payments are 2400.

OR

You owe 12000, you pay 1200 a month. This will pay off the loan in 10 months. You tell the bank you want to overpay each month by 1200 (total each month being 2400). This will pay off the loan in 5 months.

Both are the same, but the second option allows you more flexibility.


The only extra cost in the second senario is that you are still paying life assurance over the term of the loan, which hasn't changed. The yearly premiums may be slightly higher, but that is a small price to pay for the added flexibility. You will cancel the policy once the loan is finished.
 
Note that you may not be locked in indefinitely. I did this before with EBS and just told them to fix the repayments at a specific level above the "normal" variable rate mortgage repayment and I was able to revert to the normal repayment at will (by informing them obviously).
 
Sorry about the misleading thread title. Highlights my lack of understanding of the subject - hence the thread

Thanks for all your input everybody - you've already made my decision a lot easier - This thread should be useful for others in a similar situation.

So to address the last outstanding questions
  1. Will increasing my payments actually reduce the term of my loan from 35 years to, say, 25 years?
  2. When I sell my property in 5 years time, will I own more of the sale value?
 
krinpit said:
Will increasing my payments actually reduce the term of my loan from 35 years to, say, 25 years?
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Making accelerated capital repayments will reduce the effective term of your mortgage. The only way this would not be so would be if you made a lump sum capital repayment and then had your normal repayment reduced but stuck to the originally agreed term.
When I sell my property in 5 years time, will I own more of the sale value?
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Yes.
 
The only extra cost in the second senario is that you are still paying life assurance over the term of the loan, which hasn't changed. The yearly premiums may be slightly higher, but that is a small price to pay for the added flexibility.
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Don't forget that if, God forbid, you died then the mortgage protection will pay off the balance of the loan. There should be a small balance left over that will be paid to your estate.
 
asdfg said:
Don't forget that if, God forbid, you died then the mortgage protection will pay off the balance of the loan. There should be a small balance left over that will be paid to your estate.
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I thought that the mortgage protection only clears the outstanding balance on the mortgage, regardless of whether that ends up being lower than the original payment plan had forecast, and that you get nothing 'left over' - which is why I always understood it to be important to review your life mortgage protection regularly if you do decided to accelerate your repayments, and reduce the level of cover if necessary.
 
In the case of having a large lump sum would you advise to simply make a one off payment or would it be better to arrange to reduce the term?
 
No - level term will always pay out the sum originally borrowed. Most or all decreasing term policies reduce the amount payable at some rate over the term of the mortgage so accelerated repayment of the capital amount could lead to the policy paying out more than is due back to the lender.
 
OtherMe said:
In the case of having a large lump sum would you advise to simply make a one off payment or would it be better to arrange to reduce the term?
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What do you mean? You can do both - make the lump sum capital repayment and keep your normal/regular repayments at their already agreed level thereby reducing the effective term. Or you could keep the original term but reduce your ongoing repayments. The former approach yields the best savings though.
 
I've just made a large capital sum repayment against my mortgage and am awaiting the bank to confirm it in writing. Presumably my life insurance is linked to the size of the mortgage too and I can therefore reduce this??
 
Baz2005 said:
Presumably my life insurance is linked to the size of the mortgage too and I can therefore reduce this??
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Is it a level or reducing term policy?

Mortgage Protection and Mortgage Repayment Protection Policies

Either way it's possible that you could save a few bob by putting in place a lower level of cover. You should shop around for cover for the remaining capital sum and term and see what you find. If you do find that you can save and decide to switch then put the new cover in place first and then contact your lender before cancelling the original cover.
 
i did this for the past year but stopped last month as we are now buying a site and need the cash,

if you go to bankrate.com and go into calculators you can add in how much your paying, then press show amortisation table and you can see how much capitial your paying off, remember the interest figure will be off because or Tax relief at source but its a great website,

i couldnt believe how much a few extra hundred can knock off! the beuty is that if you find it a little bit tough you can change how much you pay back with out rearranging your mortgage

http://www.bankrate.com/brm/mortgag...eAdditionalYear=2006&paidOffDate=May+24,+2009
 
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