Reduce term or monthly amount

Status
Not open for further replies.
B

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
 
barrenwuffett said:
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
Click to expand...

One advantage of reducing the monthly payments is that you feel the benefit straight away, each month.

Another is that if your circumstances should change (e.g. loss of employment), the blow will be softened somewhat if your mortgage repayments are lower. If you were to become unemployed, it would be of little comfort to you that your term had reduced by a couple of years if your repayments were still high.

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.
 
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.
 
If there's a question about overpayment on fixed rate, the answer should be in the first post here:

Key Post - Understanding Fixed Rates breakage costs

Moderator's note: for anybody who is thinking of switching their mortgage (or re-fixing with their current lender), consider posting your mortgage details in the switcher thread (in the format shown in the first post). Someone will calculate an estimate of the break fee (if any) and of the...
www.askaboutmoney.com
 
NoRegretsCoyote said:
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.
Click to expand...

Most banks allow at least 10% on fixed rates but different banks calculate that 10% differently so you need to check that with your lender.
It may be worthwhile slitting your mortgage into partial fixed/partial variable to allow you to overpay to the max. But yes, do the sums to ensure it isn't a false economy.
 
lledlledlled said:
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.
Click to expand...
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.
 
RedOnion said:
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.
Click to expand...

Would it be negligible if it was smaller monthly overpayments as opposed to a lump sum overpayment?
 
RedOnion said:
No.

In above scenario, the lump sum has happened in both options.

So overpayment of <300 per month saves 15k interest.
Click to expand...

Apologies for not quite following...
What is the difference in savings in the following scenarios (not the difference between between overpaying and not overpaying):

Scenario A
Overpaying by €300 per month, choosing to reduce the term

Scenario B
Overpaying by €300 per month, choosing to reduce the repayments
 
lledlledlled said:
Scenario A
Overpaying by €300 per month, choosing to reduce the term

Scenario B
Overpaying by €300 per month, choosing to reduce the repayments
Click to expand...
Sorry, I missed that you're talking about a different scenario to the OP (the OP is paying off a lump sum).

Using 200k, 3% over 20 years.
No lump sum.
Overpay 300 per month.

Option 1: reducing repayment amount, but overpayment of 300 on top of annuity: cost of credit 54,665
Mortgage repaid after 232 months.

Option 2: keeping repayment of 1,109 and overpayment of 300 per month: cost of credit 47,319
Mortgage repaid after 175 months.

Interest savings: 7,345
 
Status
Not open for further replies.
Back
Top