Reduce Term vs Overpay

mactheknife19

Can someone give me some simple advice on which is the best option between reducing the term vs overpay. I could probably afford to pay maybe 200 per month extra on my mortgage. Based on the info from the bank that would know about 4 yrs of the term. I like the idea of that, as I suppose paying off the mortgage is most people objective. If I was to overpay that 200 per month, what exactly happens to the 200. Is it paid of the capital each month, thus on a monthly basis achieving something similar to the reduced term. So is the main benefit from of the overpay the increased flexibility.

Wile E. Coyote

If you're in a position to pay an additional €200 per month then that's what I would do rather than reducing your term. The saving on interest should be the same in the long term and it gives you some flexibility if you ran into an unexpected expense down the line.

Chris_5339762

I'd keep the term the same and reduce the monthly payment that they charge you. (Of course, in reality, keep paying the same amount to reduce the monthly payment further).

Whilst you'll pay a little extra in interest (I think), your monthly payment falls so you're cushioned against any increase in interest rates.

brianomc

I've been using extra payments to bring down the monthly payment amount.

The main reason was I wanted to bring the amount down in case I lost my job or changed to a new job that started with a lower salary, I wanted to have the amount I needed to find each month as low as possible.

But at the same time I plan to keep overpaying as often as possible and as my monthly payment reduces my ability to overpay increases. So I will have it paid off before the end.

Nervous Wreck

Wile E. Coyote wrote: »

If you're in a position to pay an additional €200 per month then that's what I would do rather than reducing your term. The saving on interest should be the same in the long term and it gives you some flexibility if you ran into an unexpected expense down the line.

This is great advice. When you overpay, it reduces the amount of interest you pay but not the balance owing on the mortgage (until you direct the bank to use the overpayment amount to do so). This means (simple example) if you overpay by €200 every month and then 5 months later, you find yourself unable to pay your next payment, your payment won't be missed because the bank will take it out of the €1000 that you've built up.

Other options like reducing the term/reducing the amount also have their merits but this way saves you the interest while, as the above poster said, gives you flexibility down the line.

brianomc

I don't think all banks offer that, there was a similar thread recently about it. If I pay 200 extra per month with AIB it reduces the mortgage balance by 200 each time and future mortgage payments also reduced. I can't get that 200 back or use it later if I'm struggling to meet a payment.

brianomc

http://touch.boards.ie/thread/2057495676/1

That's the one