Overpay mortgage - reduce term or payments

Naos

When overpaying a mortgage, should you look to reduce term or reduce payment amount?

I just called UB and they advised any monthly overpayment would go against the principle but that the monthly payment owed would not be recalculated as the overpayment is less than 1000e.

They've confirmed the whole overpayment will go against the principle and that it will result in the overall term being reduced as we're paying quicker.

Does this all sound correct? I can get the payment recalculated if I wanted (say after a year) if I want.

Any other questions I should be asking them?

jimmycrackcorm

Yes. It makes sense. I assume you are on a fixed rate but can make up to 10% overpayments. Payments are fixed as part of your agreement so it reduces the term naturally as you are paying off the principle quicker.

I'm not sure what the point of overpaying is just to reduce the monthly payment unless you're making a significant overpayment like they suggest?

Moonbeam

yes,that is correct.
I would save up and pay lump sums off the principal but keep your payments the same.

awec

Reduce the payments, not the term. This gives you more flexibility in future if you need it, but saves you the same money.

So long as you reduce the repayments, but continue to overpay, you will be reducing the term naturally, but with the flexibility to lower your payments at any time in future if you want to. If you reduce the term, you cannot ever reduce your payments in future without the bank having to agree to extend your term.

tommythecat

Interestingly I am overpaying on a fixed mortgage with KBC and they are recalculating the repayment each month. I figured my overpayments would just reduce the term. I'm happier with this away as per awecs post above.

Tar.Aldarion

Will they reduce the amount you can overpay subsequently, if it is a fixed percentage?

cruizer101

I'm with Ulster Bank and have been overpaying on mortgage.
Firstly with UB you can overpay up to 10% of the remaining balance per year, so on 300k mortgage you could overpay by 30k per year, so more or less there isn't a real limit for most people.
When you overpay on a fixed my understanding is neither term nor monthly payment is reduced, payment goes off principal so in effect the term is reduced as you will pay off early but the contracted term isn't reduced (at least it doesn't show as reduced in my mortgage manager).
What happens when you finish fixed I'm not 100% sure but I think you'll basically be taking a new mortgage now with a reduced term (i.e. 30 year mortgage 4 years fixed so new one will be 26 year) so at that point you would look at reducing payments as the principle remaining will be less than if you hadn't overpaid.

rameire

when on Ulsterbank.ie
check out 'manage my mortgage'.
you can view your mortgage and do many things that will mean not having to talk to people.

you will need your mortgage number
date of birth and Surname.

tommythecat

Tar.Aldarion wrote: »

Will they reduce the amount you can overpay subsequently, if it is a fixed percentage?

No with KBC you can overpay 10% of the original mortgage total over the term of the loan.

Irish_rat

I'm thinking about this myself. I'm with AIB on variable but the plan is to overpay lump sum and then fix to the green rate for 5 years.

I'm going to reduce the monthly repayments as my mortgage is nearly 30% of monthly outgoings. By my calculations I'll be 140 euro a month better off if I go down this route.

Probably reducing the term is better if you can afford it. But you'll save either way IMO.

big syke

tommythecat wrote: »

No with KBC you can overpay 10% of the original mortgage total over the term of the loan.

It's actually 10% of the balance of the mortgage while in the fixed period. If you fix for 3 years and balance is 100,000 it's 10 percent or 10k overpayment limit over the three years.

tommythecat

big syke wrote: »

It's actually 10% of the balance of the mortgage while in the fixed period. If you fix for 3 years and balance is 100,000 it's 10 percent or 10k overpayment limit over the three years.

That's what I said. The term of the loan ie the fixed period.

big syke

The term of the loan and fixed period can be different. I have a 30 year loan but am fixed for 3 years. so the 10% is over 3 years not 30

fatbhoy

Naos wrote: »

When overpaying a mortgage, should you look to reduce term or reduce payment amount?

I just called UB and they advised any monthly overpayment would go against the principle but that the monthly payment owed would not be recalculated as the overpayment is less than 1000e.

They've confirmed the whole overpayment will go against the principle and that it will result in the overall term being reduced as we're paying quicker.

Does this all sound correct? I can get the payment recalculated if I wanted (say after a year) if I want.

Any other questions I should be asking them?

That doesn't sound entirely right to me. Whenever I overpay, I am obliged to write a note to them stating that it is to be used to reduce the term, not the payment amount. However, when the are processing the note and overpayment, they recalculate the payments, which results in a slightly different monthly amount.

Personally, I think it's better to reduce the term.

cruizer101

I think because it is on fixed mortgage the payments stay fixed for that period even with overpaying.

Personally, I think it's better to reduce the term.
You are better not to reduce the term as if in the future you want to reduce you repayments (job loss, extra kid, etc.) you have the flexibility to do that and if you just keep up your payments you will in effect reduce the term anyway. But if you officially reduce term you are locked in to that term and repayment amount.
Not reducing term gives more flexibility down the line.

Naos

Thanks for the input everyone!

Will be going ahead with overpaying and terms will remain the same.