Overpayment vs. Reduced Term

[Matsugawa]

Hi

We've been overpaying our mortgage for about 2 years now and (with the tracker rates so low) our overpayment is now about one third of the monthly payment. We had specified a fixed sum payment every month, to be made up of the mortgage payment and an overpayment.

It used to be that the mortgage was about 90% of the fixed sum, and the overpayment was about 10%. Now it is about 66% mortgage / 33% overpayment.

After protracted discussion with Ulster Bank they tell us that, if we continue with our current level of overpayment the mortgage will be paid in full in 20 years.

We don't have this in writing however, as this is a 30 year mortgage originally.

so I have 2 questions:

1) Would it be better to set the term rather than make overpayments, if the end result is roughly the same? Overpayments come off the "capital amount" we're told, and are different to mortgage payments (???)

2) Is there any advantage in terms of TRS? We are in year 3 of our mortgage.

Thanks!

 

[PM1234]

After protracted discussion with Ulster Bank they tell us that, if we continue with our current level of overpayment the mortgage will be paid in full in 20 years.

We don't have this in writing however, as this is a 30 year mortgage originally.

Any projections can really only be made based on the current interest rate. Your lender can't guarantee the current rate and therefore won't be able to do much more than give projections based on the level of interest you are currently paying. As the interest rate is currently so low, it may be more beneficial to do your calculations based on an average interest rate over the last five/ten years for example.

As your TRS is calculated on the amount of interest you are paying, the lower the interest rate, the lower your TRS will be.

* Above is assuming you are currently on a tracker/variable rate.

 

[GeneralZod]

1) Would it be better to set the term rather than make overpayments, if the end result is roughly the same? Overpayments come off the "capital amount" we're told, and are different to mortgage payments (???)

2) Is there any advantage in terms of TRS? We are in year 3 of our mortgage.

If you go for a revised fixed term to have it paid off in then your repayments will fluctuate up and down with interest rate changes to keep it on course for repayment by the end of the term.

If you fix the repayment amount the term will fluctuate shorter or longer as interest rates fluctuate. If it goes above the original term you may have to make extra payments. As interest rates are still falling you'd initially get ahead of the curve.

TRS relief is not a reason not to make repayments. It just lowers the effective interest rate you're paying.

With mortgage rates so low you may be able to earn more by putting the money into a regular saver account.

 

[Matsugawa]

Thanks for the answers!