Quick Poll: Mortgage overpayment:

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  • Quick Poll: Mortgage overpayment:
  • Premier Icon Kryton57
    Subscriber

    In the current national environment;

    Better to pay an available lump sum and reduce the term, or use the same to reduce the montly payments and keep the same term?

    Whats cheaper / better?

    Ideally I’d like to reduce the term, but also I’d favor reducing the monthly’s if one day I get made redundant and have to settle for a lesser salary (no indication of that BTW).

    Possible to do this in conclusive single sentences? 😀

    jon1973
    Member

    I presonally prefer to reduce the term. I think this is better as that extra bit of interest you’re saving pays a little bit more off the mortgage priciple, instead of going in to your pocket.

    Premier Icon wwaswas
    Subscriber

    depends on the mortgage – some will charge interest annually, others monthly. You may be paying off a lump sum but having no affect on interest for a few months. Paying off sooner is generally better than spreading it out but look at short term impact. Also, if you have a tie-in it may affect how this works.

    Talk to lender/financial adviser.

    Premier Icon footflaps
    Subscriber

    In the current environment, I’d go for an offset mortgage as you then have all your savings to hand if you do lose your job.

    robowns
    Member

    Too many variables to give a one sentence answer.

    Id agree with the above, by having an offset mortgage.
    Reducing the term is great but you cant beat having a bit of liquid capital. If all of your money is in your mortgage and you get made redundant, what are you going to spend?

    Premier Icon jambalaya
    Subscriber

    Both !

    With interest rates low it’s not such a big advantage to shorten the term as with higher rates.

    I’d try and get best of both worlds – paydown balance and keep payments same (you could do this with informal overpayments vs “new schedule” – check interest calculation method though – then if cicumstances change you revert to lower payment original term

    EDIT: I have an offset mortgage but it does have it’s drawbacks – most significant one is mine is not a long term commitment (eg 20 years) it is a short term credit facility (eg 10 years)

    Premier Icon kimbers
    Subscriber

    another vote for offset

    yesiamtom
    Member

    On my mortage (halifax) I can overpay up to 10% of product fee per year which is around 10k I can overpay by! If I am correct I can withdrawn any money overpaid in the last year without any penalty. Worth checking if you can do this.

    mudshark
    Member

    Yep I have an offset – 0.48% over base rate which is nice.

    My mortgage calculator:

    https://docs.google.com/spreadsheet/ccc?key=0Al-Bq4gR-Hn7dHFmcjN6LVk2MmR3UlRMdWxsa1o2dUE

    Premier Icon Kryton57
    Subscriber

    I’m on a fixed interest for the next 2 years so no chance of offset – rate is 3.5% and interest is calculated daily – overpayments of £500+ are calculated next day, under the at the end of the year.

    I’m interested in what Jambalaya – says – so put half in into savings and half into monthly overpayments to keep my options open seem like a good idea?

    mudshark
    Member

    You’ve got a high rate so I’d shove it all in. If you’re happy with your repayment level then reduce the term – but you may end up moving into a new house sometime and may well start all over again then…!

    Premier Icon Kryton57
    Subscriber

    You’ve got a high rate…

    Not in today’s scheme of things, a consequence of getting a 2012 mortgage.

    No plans to move house – 2 kids to start / finish school yet.

    FuzzyWuzzy
    Member

    Depends how much total capital we’re talking about but I’d probably do half in premium bonds, half paying off lump sum on bike stuff

    Premier Icon footflaps
    Subscriber

    Depends how much total capital we’re talking about but I’d probably do half in premium bonds

    The return on premium bonds is very low right now as the prize pool is linked to inflation, which is historically low.

    rootes1
    Member

    In the current environment, I’d go for an offset mortgage as you then have all your savings to hand if you do lose your job.

    if you are with nationwide you can ask for all or part of the overpayments back if you need, they also charge interest daily and make adjustments in the same month as you make an overpayment.

    Premier Icon DaveP
    Subscriber

    nationwide – there is a fee though (about £100 off the top of my head).

    Premier Icon jambalaya
    Subscriber

    @Kryton – you have a great mortgage with overpayments adjusted next day so max flexibility. You should do your overpayments in lumps of £500+ (excuse statement of the obvious)

    I might suggest half into a repayment, half in a savings account. Keep monthly payments the same for the time being but being a bit cute with the implied repyaments making sure they are in lumps of £500.

    As above go and talk to the lender, there is no downside in my view, they cannot force you to pay the loan back early and you are in employment so you have total flex about what to do with your windfall.

    FWIW you should look at tax issues with savings account interest but with rates so low the tax due is likely to be negligible and its worth having the flexibility of access to the money if you need it (I would not get drawn into “tax efficient” savings with lock-ups like ISAs)

    By the way I think the premium bond idea is a good one ! The regular small prizes are adjusted to be competitive with savings accounts, its government guaranteed and you might get super lucky.

    We’re on nationwide BMR and overpayments incur no fee and either no limit or very high one. We left our direct debit at pre rate-crash levels so over pay every month, and I recently overpaid a lump sum (£5K) and was assured before doing it there was no fee.

    breatheeasy
    Member

    Kryton – is this for a mortgage you have already? If so then I don’t think you’ll be able to reduce the monthly payments, just the term time to repayment. Only thing you could do that on would be an offset as far as I know.

    I’d always got with reducing the length of mortage. Ours allowed regular overpayments and we could always get back the overpayments if needs be (or take a payment holiday if you were really struggling etc. etc.)

    johndoh
    Member

    Another offset lover here – love how I can ‘pay’ less each month when I overpay which means I can overpay even more the next month.

    Until my wife abuses the credit card….

    Nationwide asked whether we wanted to reduce overall term or monthly repayment. Given we are overpaying on each monthly repayment I thought it was obvious, but with them you can do either.

    Premier Icon Kryton57
    Subscriber

    Breatheasy – my mortgage allows (with a £30 admin fee) for me to pay a lump sum in January of each year to reduce the term.

    It also allows (in addition or instead of) a £500 or more overpayment which reduces interest as of the very next day made a frequently as I like.

    Jambalaya is spot on I think as I’ll go through the year saving then (and if) I get to £1000, I’ll take £500 and overpay. In Jan I’ll then pay half saved the previous year to reduce the term, leaving the rest to add to the regular savings for Holiday and unforseen events etc. – And repeat annually…

    Jambalya, already got some direct debiting in premium bonds, 12% return this year 🙂

    I think that sounds sensible. Hope fully in 15 years my monthly payment will be smaller / an a few years will have come off.

    Edit: This makes more sense when you know 20% of salary is held back until January and then 0 – 20% is release in my Jan payslip depending on perfomance.

    daveb
    Member

    For me it wuld be to reduce the term, with most mortgages you can take the money back out at a later date if required (although a fee may be payable). I try to pay extra each month but if I had a spare lump of cash then would also pay that. The offset mortgage with First Direct is really good although I couldnt get that for my last mortgage as I didnt have 3 years accounts in place (I only started my business a couple of months before it)

    fizzicist
    Member

    Overpay and batter the mortgage value down. If you lose your job or have to take a pay cut, you will then be able to negotiate payment holidays or reduce your payment and extend the term.

    No point in having savings as the cost of the interest on your mortgage will always outweigh the interest on your savings.

    hh45
    Member

    Most advisers say you should have 6 months’ wages in an accessible savings account for a rainy day. The best way to do this without getting whacked by v low savings rates is the offset mortgage. Best financial product I ever bought.

    Really though the best thing is to pay it off as soon as possible and then you can keep your hard earned wages for spending on things you like and not loan interest (that really is dead money). Or saving for a pension or holiday home or whatever.

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