barrenwuffett
Registered User
- Messages
- 11
In a position to overpay on our mortgage. With a lump sum of 40k and a monthly overpayment of 500. Both of us in secure public sector jobs.
My understanding is we save more in interest by reducing the term of the loan rather than reducing the monthly repayment due.
Is there any advantage to reducing monthly repayment amount or is it always preferable to reduce the term of the loan?
Thanks
It could be a false economy if you have to switch to a (higher) variable rate to be able to overpay. Overpayments are not usually allowed on a fixed rate. We had a lump sum a few years back to pay off and switched to a (higher) variable rate for a week so we could pay it off, then back to fixed for a lower rate.
Otherwise BoI for sure and (I think) Ulster allow a 10% overpayment on a fixed rate.
Let's take a simple example.You mention that you'd save more interest by reducing the term. I'm not sure that is accurate. If it is, i would think the difference is negligible.
Let's take a simple example.
200k mortgage, 3% interest, with 20 years remaining.
Normal repayment amount: 1,109
Customer has 50k to repay early.
Option 1. Keep term at 20 years.
Monthly repayment drops to 831.
Total cost of credit: 49,655
Option 2. Keep repaying 1,109 per month
Term reduces to 14 years.
Total cost of credit: 33,883
Interest savings from reducing term: 15,771
It's certainly not negligible.
No.Would it be negligible if it was smaller monthly overpayments as opposed to a lump sum overpayment?
No.
In above scenario, the lump sum has happened in both options.
So overpayment of <300 per month saves 15k interest.
Sorry, I missed that you're talking about a different scenario to the OP (the OP is paying off a lump sum).Scenario A
Overpaying by €300 per month, choosing to reduce the term
Scenario B
Overpaying by €300 per month, choosing to reduce the repayments
No. It's too confusing.Do we need another thread on this which might be misleading or confusing?
Brendan
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