Should I reduce my mortgage term to save interest?

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PaddyW

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I currently have outstanding loans and bills but, due to a fortunate family happening, I will now be debt free in the next 3-6 months. I have a mortgage which I took out over 35 years, but after looking at online calculators, have found that I would vastly reduce the amount of interest paid if I was to shorten the mortgage term. Although repayments would obviously be higher in the meantime (I can comfortably manage these, being debt free), I would save, from what I can gather, 60k + on interest. Does switching the term of my mortgage involve many implications. Would there be much hassle in doing this. I am currently on fixed rate, but once I come off this I want to change the term to save interest repaid. Hope this makes sense!
 
A bit more info. The mortgage is for 96,000 over 35 years. Payments are currently 499.29 before TRS. I could easily afford to pay 700 or more a month now. Is reducing the term best, or is overpaying a better option.
 
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If it's fixed for another 5 years you will most likely pay penalties for paying it off early. I suggest saving the 700 extra a month for the next 5 years and paying off a lump sum when the fixed rate expires. Then get as short a period of mortgage as possible for the rest and just hit it down.
 
I would go in and ask your bank/building socient specific questions
1. What are the penalties for breaking the fixed term?
2. If you don't break the term, and when the term is up pay a lump sum of 6K (this is assuming that you save 200 euro a month x 30 months*), and then increase your repayments to 700 what is the total amount of interest you will pay
3. If you do break the fixed term and stary paying repayments of 700 now, then what is the total amount of interest you will pay. Then factor in the cost of breaking the fixed term.

These will need to make assumptions on present interest rates, but at least it will give you something to compare.

With respect to paying off the capital or reducing the term, I don't understand the neuances of the difference in interest that would be paid - ie I don't know.

Note that there are some posts recently that have suggested that some banks have not been charging people for breaking their fixed term. But you need to ask your bank.

*If you go with this, set up a separate savings account and have the money come out by direct debit so you don't see it.
 
Good suggestions thanks. Instead of risking penalties for breaking terms I may just go with a high interest savings account and put the extra 200 a month into this for now and pay lump sum at end of fixed rate. Change term after that maybe.

Thanks
 
PaddyW said:
I will now be debt free in the next 3-6 months. I have a mortgage which I took out over 35 years
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This is an interesting sentence.
You either are debt free in 3-6 months OR you have a 35 years mortgage.
It is probably a weird idea but a mortgage is a debt, strange as it may seem.

Anyway - put the 200 into a high interest regular savings, you should get something around 7.5% or so. Even after DIRT this might be more than you pay on your fixed term rate. Once the fixed term is over, put it in as a lump sum repayment.
 
Sorry, yes, mortgage is a debt. I should have said, besides the mortgage. Thanks.
 
PaddyW said:
I currently have outstanding loans and bills but, due to a fortunate family happening, I will now be debt free in the next 3-6 months. I have a mortgage which I took out over 35 years, but after looking at online calculators, have found that I would vastly reduce the amount of interest paid if I was to shorten the mortgage term. Although repayments would obviously be higher in the meantime (I can comfortably manage these, being debt free), I would save, from what I can gather, 60k + on interest. Does switching the term of my mortgage involve many implications. Would there be much hassle in doing this. I am currently on fixed rate, but once I come off this I want to change the term to save interest repaid. Hope this makes sense!
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Making accelerated lump sum or regular capital repayments over and above your repayment schedule and then reducing the effective term of the mortgage will yield significant savings. Use Karl Jeacle's mortgage calculator to model the possibilities.
 
I would think that most people knew you meant debt free apart from the mortgage. However let that be a lesson to us all, mortgage is in fact a debt, and dont forget it!
 
It wasn't that obvious from the original post. The original poster mentioned "debt free" twice and yet still has a mortgage.
 
Sorry about the confusion, debt free APART from the mortgage.

One more question, if I do these extra payments every month, will they all go towards capital only or will some go to interest, or is the interest all ready fully covered in the existing payments. Silly question probably, just wanted to be totally sure.
 
flid said:
I would think that most people knew you meant debt free apart from the mortgage. However let that be a lesson to us all, mortgage is in fact a debt, and dont forget it!
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I don't think there are too many people who forgot, maybe just yourself and the OP?
 
PaddyW said:
One more question, if I do these extra payments every month, will they all go towards capital only or will some go to interest, or is the interest all ready fully covered in the existing payments. Silly question probably, just wanted to be totally sure.
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Not a silly question at all. If you are going to make lump sum or regular accelerated capital repayments then get agreement with your lender IN WRITING that these will be paid off the capital balance once made and that the effective term of your mortgage will be reduced. If you don't do this then some lenders may not do it automatically.
 
Hi, have a question on this too.
We paid a lump sum off our mortgage 2 months ago. From viewing our mortgage a\c online it seems that the bank did take the money off the capital balance alright. The next mortgage repayment after this was lower than what we previously were paying. Does this mean that they have kept our current repayment schedule and lowered the monthly repayments or are we just seeing the benefit of reducing the capital balance and the term is effectively reduced too?

We have also upped our monthly payments starting from the next payment so should this extra amount come off our capital balance and reduce the term too?
 
Hi Gribr,
it sounds like your mortgage provider have not reduced the term of your
mortgage, as a result of your lump payment. They would be unlikely to do this without being asked to by you.

Have you told the bank in writing that the extra payments are to come off the capital. If not, do this. This will reduce the term of the mortgage.
 
As OP asked it does switching the term of mortgage involve many implications? Would there be much hassle in doing this ( P60, solocitor's fee, )?
 
korpy said:
Would there be much hassle in doing this ( P60, solocitor's fee, )?
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No you won't need P60s etc. Check with your lender if a penalty applies for amending your term There may be if you are currently on a fixed rate.

Also check how much your increased repayments will be on your current/revised rate if you have not already done so.

If you decide to go ahead, a letter to your lender advising that you would like to decrease your term by X (number of months) with effect from X (date) should suffice.
 
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