Trying to understand overpayment for fixed term vs variable for saving on total interest paid

[RandomUser666]

We currently have an AIP with Avant.
I have a significant amount of Income from Restricted Stock Units in my job. The mortgage we will be taking out is very modest for our total income and would still be affordable if my RSUs became worthless. If all I had was my base Salary the mortgage would still be affordable.
So as long as my income stays the same we would like to overpay to save us some money on total interest amount paid and to try pay back the mortgage for peace of mind.
We will not be neglecting other things like maxing out tax relief on pension contributions, building up emergency fund or saving for family related expenses.

What I am confused about is overpaying during fixed term vs variable rate time or reducing payments vs reducing term.
The avant website says
"If you are on a fixed rate and decide to repay your mortgage in full, make an overpayment above the 10% allowance, change to another product or switch to another lender, you may have to pay an early redemption fee.
With Avant Money the maximum early redemption fee will be 2% of your outstanding mortgage. This will reduce to a maximum of 1.5% from year 11 onwards."

So lets say during fixed term we overpaid by 10% every year. How can that lead to us to saving amount on total interest paid and/or reducing our mortgage term?

What is the difference in over-paying during variable term for these same aspects?

 

[Otacon]

When you overpay it comes directly off the principle.

Say you have 100k balance remaining in January, and are on 4% interest rate.
You would be paying slightly less than 4k in interest that year.

If you made an overpayment of 10k in January, your balance would be 90k
And you would be paying slightly less than 3.6k in interest that year.

(Plus every subsequent year, the balance would be lower relative to where it would have been had you not overpaid, so in every subsequent year the interest will also be lower than had you not made an overpayment).

What is the difference in over-paying during variable term for these same aspects?
Over-paying during variable term has the exact same effect, you just aren't subject to any rules about how much you can overpay, and there are no break fees.

 

[RandomUser666]

When you overpay it comes directly off the principle.

Say you have 100k balance remaining in January, and are on 4% interest rate.
You would be paying slightly less than 4k in interest that year.

If you made an overpayment of 10k in January, your balance would be 90k
And you would be paying slightly less than 3.6k in interest that year.

(Plus every subsequent year, the balance would be lower relative to where it would have been had you not overpaid, so in every subsequent year the interest will also be lower than had you not made an overpayment).

What is the difference in over-paying during variable term for these same aspects?
Over-paying during variable term has the exact same effect, you just aren't subject to any rules about how much you can overpay, and there are no break fees.

This is very helpful, thank you.

So lets say if I had 100k left on my principle and my monthly payment is 1000. 333(4000 / 12 months) of that is interest.
Now since I have reduced the principle my interest for the month would be 300(3600 / 12 months). So this means by overpaying I am reducing the principle which means my payments will be less because of interest on the capital.
Then once I am come out of fixed term, I could shorten the term due to the lower principle.

I was slightly confused about whether it would be better to overpay during fixed period or just do a lump sum of the same value once I hit variable length.
But it sounds like its always better to overpay as early as possible, assuming there are no extra fees for the overpayment. And if there is extra fees, it depends on how much they are.

 

[RedOnion]

I was slightly confused about whether it would be better to overpay during fixed period or just do a lump sum of the same value once I hit variable length.
But it sounds like its always better to overpay as early as possible, assuming there are no extra fees for the overpayment. And if there is extra fees, it depends on how much they are.

You are ALWAYS better off paying early. Even if there is a break fee, it will always be less that the interest amount you save.

Also, with Avant, you have the option of shortening the term when you make an overpayment even during a fixed rate.

 

[skrooge]

Interest is calculated daily. So the sooner you reduce the balance the better.

Don't get too bogged down with fixed versus variable. Only difference is there might be an extra cost (break fee) associated with overpaying a fixed. But you can't be sure what if any that might be beforehand.

The general advice given on AAM is not to contractually reduce the term rather to voluntarily overpay an amount. That way if circumstances change you retain the flexibility to stop the extra payments. The effect is the same i.e., same cost in terms of total interest paid and the term is reduced.