Question on lump sum payment on mortgage.

[Josey Wales]

Hi,

My wife and I are trying to decide whether to sell our house and move, or to stay and pay-off a large chunk of our existing mortgage and extend the house. I have a specific question about paying a lump sum on the mortgage.

I spoke with the bank today and got the following information:

Existing mortgage - €324,000 with 32 years left. We could pay off around €150,000 (could be more but keeping money back for an extension).

• If we reduce repayments monthly but keep the same term we could save €550 per month.
• If we reduce the term there will only be 13 years left.

The question: I was told that the option to reduce the term would mean the mortgage would be paid off in 13 years. It would leave the repayments at the same rate. I was a little unclear on this point. If we made a lump sum payment that reduces the principal. So does that mean the monthly repayments should reduce quickly or will it stay at the current amount for the remainder of the term?

 

[goingforgold]

Are you in negative equity? Could you clear existing mortgage with savings...need more detail to give a measured response.

 

[orka]

Are you in negative equity? Could you clear existing mortgage with savings...need more detail to give a measured response.

We really don't - it's a fairly straightforward technical question.

The question: I was told that the option to reduce the term would mean the mortgage would be paid off in 13 years. It would leave the repayments at the same rate. I was a little unclear on this point. If we made a lump sum payment that reduces the principal. So does that mean the monthly repayments should reduce quickly or will it stay at the current amount for the remainder of the term?

If you opt for a reduced term, your repayments will stay the same.

If your repayments are currently, say, 1,220 (guesstimate) to repay 324K over 32 years and you pay off 150K leaving a 174K balance, you can either
(1) repay the 174K over 32 years paying 670 a month OR
(2) repay the 174K over 13 years by continuing to pay 1,220 per month for the full 13 years
[Or you could probably do something in between if that suited you better and the bank agreed - pay 920 for 20 years for example].

To give yourselves the most flexibility, the best option is probably to choose the 'pay less for 32 years' option - you can then overpay (with no obligation to always do so) if you have the money, which will automatically reduce the term. If you choose the 'pay the same for a shorter term' option, the bank may not let you reduce payments/lengthen the term if your circumstances change in the future.

 

[goingforgold]

We really don't - it's a fairly straightforward technical question.

Disagree. If OP can clear mortgage and add equity in current house to current savings, then he may be able to move somewhere else (possibly somewhere cheaper than current location) and live mortgage free (life is short after all).

The original question is whether to extend or move. Above requested information would determine my response to OP. And with respect I am entitled to ask OP any question I feel would impact any advice I could potentially give...up to OP and not you they wish to provide same

 

[leonmahon]

Yes, the repayments stay the same.

The total interest you pay will be much less in the 13 year scenario, however.

As mentioned, you can restructure the remaining repayments to whatever amount/time frame you wish.

 

[Josey Wales]

Are you in negative equity? Could you clear existing mortgage with savings...need more detail to give a measured response.

Yes we are in negative equity. And no, we could not clear the total mortgage. We were told today that we might be allowed to bring some of the negative equity with us onto a new mortgage if we chose to move.

We really don't - it's a fairly straightforward technical question.
If you opt for a reduced term, your repayments will stay the same.

If your repayments are currently, say, 1,220 (guesstimate) to repay 324K over 32 years and you pay off 150K leaving a 174K balance, you can either
(1) repay the 174K over 32 years paying 670 a month OR
(2) repay the 174K over 13 years by continuing to pay 1,220 per month for the full 13 years
[Or you could probably do something in between if that suited you better and the bank agreed - pay 920 for 20 years for example].

To give yourselves the most flexibility, the best option is probably to choose the 'pay less for 32 years' option - you can then overpay (with no obligation to always do so) if you have the money, which will automatically reduce the term. If you choose the 'pay the same for a shorter term' option, the bank may not let you reduce payments/lengthen the term if your circumstances change in the future.

Thanks for the reply, it answered my question. We have a big decision to make.

 

[orka]

Disagree. ...The original question is whether to extend or move.

Where do you get that from? The OP provides some background about extending/moving but not only does the he say

I have a specific question about paying a lump sum on the mortgage.

he also helpfully bolds the start of his question

The question: ... So does that mean the monthly repayments should reduce quickly or will it stay at the current amount for the remainder of the term?

One simple technical question - looking for an answer, not advice. Nothing about negative equity, moving, extending or living mortgage free in a cheaper location.

And with respect I am entitled to ask OP any question I feel would impact any advice I could potentially give...up to OP and not you they wish to provide same

I don't think it's fair to tell a poster that their question can't be answered without further information when that's not the case. Some posters don't mind providing the information and getting unsolicited advice on their life and finances. Others won't provide the info and will go away disappointed that their question couldn't be answered without providing unnecessary personal information. But, as you say, you are entitled to ask whatever you want.

 

[goingforgold]

I don't think it's fair to tell a poster that their question can't be answered without further information when that's not the case. Some posters don't mind providing the information and getting unsolicited advice on their life and finances. Others won't provide the info and will go away disappointed that their question couldn't be answered without providing unnecessary personal information. But, as you say, you are entitled to ask whatever you want.

I don't want to get away from the task in hand here, ie offering advice to the OP. I am offering my advice on the overall context of the information provided. Ok, the OP may go on to ask some specific questions but I am offering my advice in the overall context as I often do. Thinking outside the box, different perspective...call it what you will. Let the OP decide if it's relevant.

 

[Josey Wales]

I don't want to get away from the task in hand here, ie offering advice to the OP. I am offering my advice on the overall context of the information provided. Ok, the OP may go on to ask some specific questions but I am offering my advice in the overall context as I often do. Thinking outside the box, different perspective...call it what you will. Let the OP decide if it's relevant.

The intention of my post was to have that one question answered about lump sum payments and it was. But if you have some advice to offer I'd be grateful to read it.

 

[goingforgold]

The intention of my post was to have that one question answered about lump sum payments and it was. But if you have some advice to offer I'd be grateful to read it.

I can only offer advice if my questions are answered (as per above messages).

 

[Josey Wales]

I can only offer advice if my questions are answered (as per above messages).

I answered those questions in Post 6 above but I've added a little detail below.

We are in negative equity. House is valued at around €180,000 and there is €324,000 left on the mortgage.

We could not clear the mortgage with our savings.

 

[goingforgold]

Apologies Josey...I missed post #6.

Ok, so my initial thoughts about selling, clearing the mortgage (with savings) and moving to a cheaper location mortgage free are not a runner then.

I'm not sure from the figures provided whether you are currently on a tracker mortgage but if you are then staying and extending would be a viable option, ie you won't lose your tracker by selling and getting new mortgage.

I would personally use the 150k to reduce the mortgage principal and try and reduce the mortgage term as much as possible. That way you are effectively paying a lot less to purchase your property and you can view the monthly payments as a saving scheme. In the meantime you can extend the property to suit the needs of your family.

 

[Josey Wales]

I would personally use the 150k to reduce the mortgage principal and try and reduce the mortgage term as much as possible. That way you are effectively paying a lot less to purchase your property and you can view the monthly payments as a saving scheme. In the meantime you can extend the property to suit the needs of your family.

This is what we have been thinking too. It really does seem like the most sensible route. Thanks for the response.

 

[goingforgold]

This is what we have been thinking too. It really does seem like the most sensible route. Thanks for the response.

One final thing...depending on what institution you have your mortgage with, there may be an opportunity to get some of the negative equity written off by way of a lump sum payment. Worth doing some research into this and figuring out if they would be open to this.

 

[44brendan]

Initial request where there are no arrears and lender believes mortgage is safe is likely to receive a negative response (unless Danske or Certus). Realistically banks are only likely to offer such an incentive where arrears are an issue and mortgage is considered to be "at risk".