Is repaying a mortgage early the same as getting a shorter mortgage?

Discussion in 'Mortgages and buying and selling homes' started by upavlo, 9 Oct 2018.

  1. upavlo

    upavlo New Member

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    Hi, let's assume I take out a variable interest rate mortgage for 30 years and pay more every month consistently to reduce the term to 15 years. In this case would my total repayments be exactly the same as if I have taken out a 15 year mortgage to begin with?

    The overpayment calculators suggest that my assumption is correct, however are there any sneaky way banks might calculate the interest savings on extra payments I made?

    Assuming the banks are fair with their overpayment interest calculations, why wouldn't everyone take out a mortgage for as long as they can and pay extra to repay within their intended timeframe? And this would give people a flexibility to pay an original/minimum amount, in case if one's financial situation changed without any penalty. Am I missing something here?
     
  2. RedOnion

    RedOnion Frequent Poster

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    It's exactly the same.

    The benefit of reducing the term is it forces you to repay early. But everybody has the discipline to actually make the early payment they had intended to.
     
  3. Páid

    Páid Frequent Poster

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  4. dub_nerd

    dub_nerd Frequent Poster

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    Last edited: 9 Oct 2018
    You're reading that wrong. It reduces your term to 9 years and 9 months, not by 9 years and 9 months. And that is what you'd expect. Overpaying your mortgage by double will reduce your term by more than half because you reduce the overall interest ("cost of credit" in the example above) by paying faster. And the higher the interest rate, the greater the effect of overpaying. The above example is based on €100k at 5 percent over thirty years. At 1 percent you'd have to nearly triple your repayments to reduce the term to 9 years and 9 months. But then the cost of credit would be much lower anyway.
     
    Last edited: 9 Oct 2018
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  5. vandriver

    vandriver Frequent Poster

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    You've read that wrong!Doubling your repayment more than halves your term
     
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  6. RedOnion

    RedOnion Frequent Poster

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    You're confusing the issue.
    Mortgage interest is calculated on the daily cleared balance each day. It's not predetermined upfront, such as with HP finance.
     
  7. Monbretia

    Monbretia Frequent Poster

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    It's exactly the same, there is no front loading of interest on a mortgage, as already stated by other posters it's calculated daily on outstanding balance on that day, only difference is you will need to take out mortgage protection for the term of the mortgage initially even if you intend paying it back quicker.

    So if you take a 30yr mortgage but pay the payments based on a 20yr term say then you will have to take out a 30yr policy initially which will cost more than a 20yr one (not that much for most people), however you can of course cancel it after the 20yrs if the mortgage is paid off by then.
     
  8. Páid

    Páid Frequent Poster

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    Thanks for pointing out my mistake(s) and clearing that up.
     
  9. Betelgeuse

    Betelgeuse Registered User

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    A follow on question if the OP doesn't mind;

    Am I correct in assuming that it is more beneficial to make an annual lumpsum overpayment than a regular monthly overpayment?

    E.g. say I take out a mortgage in January. In February I make a lumpsum overpayment of €12,000, instructing my bank to reduce the term. I do the same every February until the mortgage is cleared.

    Is this more beneficial than simply overpaying €1000 each month for the length of the term?
     
  10. Monbretia

    Monbretia Frequent Poster

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    Well yes it would because the full amount of 12k reduces the interest charged from February for the rest of the year whereas if you pay 1k each month then you are saving interest on 1k in February, 2k in March, 3k in April and so on.

    That's assuming of course you have a lump sum of 12k to pay off the month after you take out the mortgage, however if you saved the 12k over the course of the next year and paid it off the following February then it would not be as beneficial and you would have been as well to lodge the 1k each month for the first year.
     
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  11. TTI

    TTI Frequent Poster

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    It is more beneficial to reduce the balance at every opportunity - so you will pay less interest overpaying 1000 each month rather than 12000 once per year.
     
  12. Monbretia

    Monbretia Frequent Poster

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    Not if you pay the full 12k upfront initially, thereafter then you would be as well to keep paying the 1k per month rather than accumulating it elsewhere with the intention of paying off a full 12k again next year.
     
  13. Opus2018

    Opus2018 Registered User

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    Agree with previous posters - pay off as much as you can afford to as often as you can. You'll be pleasantly surprised by the savings in your interest bill!
     
  14. Betelgeuse

    Betelgeuse Registered User

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    Thanks for the replies. I think you're correct in saying the benefit only lies within the first 12 months in the scenario I described.

    What got me thinking about it was the following, which on reflection may be slightly different;

    Through work I have the option to take a salary advance, and repay it over 12 months, essentially an interest free loan.

    If I used this to facilitate supplementary mortgage payments I could make an upfront overpayment to the bank annually and then pay it off interest free monthly to work.
     
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  15. Thomas1

    Thomas1 Registered User

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    I had this in work too but it’s now subject to BIK thereby negating the interest saving were you to draw it down and put against your mortgage.