Key Post "Overpaying my mortgage - should I reduce the term or the monthly repayment?"

Brendan Burgess

Founder
Messages
44,840
This question comes up in a variety of ways and the threads often go off topic with irrelevant calculations.

The correct answer is that you want to reduce the repayments and leave the term the same.

The interest charged each year is exactly the same - we will return to this.

Reducing the repayment is simply reducing the payment you are contractually obliged to make under your mortgage contract.

But this does not stop you from paying more. Under Irish law, a variable rate borrower can pay back some or all of their mortgage at any time without penalty.

Case study
Let's say you have a mortgage of €100,000 with 20 years left at 3%. The repayment is €554.

You pay off a lump-sum of €20,000 - the lender gives you a choice
Reduce the repayment to €443 and keep the 20 year term
or
Keep the repayment at €554 and reduce the term to 15 years.

Keep the term at 20 years and reduce the contractual repayment to €443

But you can continue to pay €554 or more as you wish.

If, at some future stage, you get into financial difficulty and want to reduce your repayment to €443, you can do so without asking the bank's permission and without affecting your ICB record

If you have reduced the term to 15 years and kept the payment at €554, if you then reduce the repayment, you will be in arrears.
 
Last edited:

Brendan Burgess

Founder
Messages
44,840
In practice, how do I overpay my mortgage each month?

Different lenders have different systems.

Some lenders will allow you to simply transfer money to your mortgage account by bank transfer.

Apparently, the bank must write to you to acknowledge receipt of the money.

If your bank finds this confusing, it may be simpler just to save up the money in a deposit account and make one off capital repayments from time to time.
 
Last edited:

Brendan Burgess

Founder
Messages
44,840
Some of the confusing and misleading arguments which distract people

"You are always better to shorten the term. By paying €554 per month instead of €443, you will pay off your mortgage 5 years earlier and save yourself €20,000 interest".

That is a separate argument. You can still keep paying €554 per month, but just tell the bank that you are keeping the term the same. So there is no difference in the interest charged.

"Overpaying my mortgage by €100 a month is just not worth it as it will only reduce the interest by buttons"

You should look at the calculation only on an annual basis.
If you pay €1,000 off your mortgage at 3.5%, you will save €35 in interest.
If you pay €10,000 off your mortgage, you will save €350.

Don't forget that at 3.5%, the interest on €100,000 is only €3,500 a year.

Repaying an additional €100 won't make much of a difference,but paying €100 a month will.

The interest of 3.5% is the equivalent of getting a tax-free and risk-free return of 3.5% on an investment. It is better to pay down your mortgage than to put it on a taxable deposit which pays 0.5%.

And, your overpayments may well result in reducing the Loan to Value into a different LTV band which might get you a lower mortgage rate on the entire mortgage.
 
Last edited:

Brendan Burgess

Founder
Messages
44,840
Frequently Asked Questions

I have a fixed rate mortgage - can I pay a capital sum off it without penalty?

Each bank has its own policy on this.

I understand that BoI allows you to repay up to 10% of the mortgage each year without penalty.

Ulster Bank allows you to overpay up to 10% of the mortgage balance each year without penalty. That is a lot. The typical capital and interest repayments on a 20 year mortgage amount to about 6% of the balance. So you can double your mortgage payments without penalty or pay off fairly significant lump sum.

Even still, it might be worth checking what the early repayment penalty is. It might be a lot smaller than you think, and it could be zero.


If I need the money in 5 years, can I get the overpayments back?
Not usually.

However, I understand that ptsb treats overpayments as credits i.e. the opposite of arrears. While you can't get it back, you can stop paying your mortgage until you have used up the credits.

So if you might be replacing your car in the next year or two, you might be better off not overpaying your mortgage.

If I reduce the term, can I change my mind later and reduce the repayment?

You can ask, but you do not have a right to a reduced repayment. It's quite likely that the lender will ask you for a Standard Financial Statement and mark your mortgage as "rescheduled" which will affect your ability to get a new mortgage from another lender.

So as it's such a good investment, should I really scrimp and save to pay down my mortgage as quickly as possible?

No. You should get a balance in your financial affairs. Unless you have a very large mortgage or unless you are in deep negative equity, there is no rush to be mortgage-free.

Increasing your contribution to your pension fund may be better value than paying down your mortgage.



Should I overpay my mortgage or my Credit Union loan?
You always pay off whichever is the dearest. If you have normal mortgage, it means that you should pay off your credit union loan first.

(If you have a buy to let loan on which you are getting tax relief, then you need to do a calculation - but the principle is the same - pay off the loan with the highest interest rate after tax.)
 
Last edited:

ANCHOR MAN

Registered User
Messages
15
Does it make any difference what the interest rate is when you make a lump sum repayment or is that irrelevant?
 

Brendan Burgess

Founder
Messages
44,840
Good question. What do you have in mind?

If you are on a cheap tracker, you probably should not be overpaying your mortgage.
If you have a normal rate mortgage and other debt, you should repay the other, more expensive debt first.

But if you are overpaying your mortgage, the rate makes no difference to the decision whether to shorten the term or reduce the repayment.

Brendan
 

ANCHOR MAN

Registered User
Messages
15
Good question. What do you have in mind?

If you are on a cheap tracker, you probably should not be overpaying your mortgage.
If you have a normal rate mortgage and other debt, you should repay the other, more expensive debt first.

But if you are overpaying your mortgage, the rate makes no difference to the decision whether to shorten the term or reduce the repayment.

Brendan

I was thinking would it make any difference to pay a lump sum while the rate is 3.3% or would it be better to make it if the rate was 4% for example, with no other loans or debt to pay back. But it surely makes no difference, just wanted to double check. Thanks Brendan.
 

Brendan Burgess

Founder
Messages
44,840
The earlier you pay off a loan the better, irrespective of the rate - unless it's a cheap tracker.

Brendan
 
Top