Overpaying our mortgage

WLad

Hi, we're moving our mortgage to AIB and they say we can "overpay" by 5000 per year. We are thankfully in a position to do this so I'd like to. However the rate we are moving to is a fixed rate for 5 years and their website says that if we overpay the term stays the same and instead our monthly repayments reduce to reflect the extra we paid.

I cannot wrap my head around whether this is a good thing or not. I'd like to pay off early if I could but this doesn't seem like it will help me get there. Is overpaying by this amount for 5 years and then remortgaging for a lower amount the same thing as just overpaying to reduce the term?

Thanks in advance for helping me understand the logic here.

Q&A

Firstly you can overpay by as much as you like. There is no rule to say you couldn't just pay off the whole thing straight away if you wanted/could. Yes, there may be a break fee but that's determined by market rates not the bank. So don't think of the €5k as a hard limit.

If you pay off say €5k now that's €5k that's not attracting interest. All going well Whether you repay over the same timeframe as original mortgage (albeit with a lower monthly repayment) versus the same monthly repayment over a shorter period doesn't matter. The cost should be the same.

The benefit of keeping the term the same means the lower monthly repayments give you additional capacity should you find yourself in a less fortunate position. Basically if you keep overpaying it's at your discretion each month. If you find your finances deteriorate it's a lot easier to stop the discretionary overpayments then to ask a bank to extend the mortgage term.

antoinolachtnai

You are on the right path, the bank are just trying to keep the whole thing as simple as they can. If they give too many options it confuses things. The key thing is that the more of the principal you pay down early the less interest you will pay overall, no matter what way the bank structures it.

if you think that you will be in a position to knock off more then €5000/year in extra payments, you might be better with a 3-year fix. But it sounds like it will be fine.

rockdrummer4

https://www.boards.ie/discussion/comment/121516926#Comment_121516926

Or the banks could be not telling the whole truth (would they do thaT?), as the more you pay off the less interest they will get.

I paid off lump sums of 30k - 50k over a few years to pay off my mortgage, i was on fixed so had to pay a fee to break this, but was only about €80, would have saved close to 80,000 in interest as knocked nearly 20 yrs off term...

antoinolachtnai

https://www.boards.ie/discussion/comment/121517092#Comment_121517092

You think the banks are doing this?

How do they hide this manouver on the yearly statement?

Q&A

https://www.boards.ie/discussion/comment/121517092#Comment_121517092

I don't know what you think they are hiding but I can well imagine if a lender sat a room full of mortgage holders down and started explaining the mechanics of loan amortisation and the formulas underpinning how it works, you would loose the room faster than you can say "NPER". While the maths is not rocket science, I would think it's a step out of the comfort zone for most.

Lenders know their audience and for everyone that is interested in understand how it all works there are many more that have no interest. Hence we end up with the lowest common denominator.

AndyBoBandy

I had a variable mortgage with Bank of Ireland, and we made regular overpayments (the term was 20 years and we cleared it in 9 years).

All I did was added the mortgage account as a payee in my online banking (also BoI) and simply made a transfer of the overpayment amount every month into the mortgage account, and a few days later the mortgage balance would update to reflect the new outstanding amount.

the monthly payments remained the same when I was making these overpayments, but over the course of the 9 years I got 2 interest rate reductions, and when they recalculated they left the term as is, and just reduced the monthly payments (started off at €1,025, then down to €838, and finally down to €714), and all we did at that point was increased the amount of the overpayments by the amount the payments were reduced each month. This gave us some flexibility to not commit to higher payments should something happen. That payment of €714pm was for the last 5 years of the mortgage, and we knew if anything happened, we could recalculate at anytime and get that monthly payment down very low, while maintaining the original 20 year term.

https://www.boards.ie/discussion/comment/121517221#Comment_121517221

I dont know why you think banks would need to go into that much detail..?

The OP said "we're moving our mortgage to AIB and they say we can "overpay" by 5000 per year" This is s blatant LIE!

They can pay off as much as they want.

Have we learnt nothing about how dodgy banks can be... Its not that long ago people? Seriously

bennyx_o

The OP said "we're moving our mortgage to AIB and they say we can "overpay" by 5000 per year" This is s blatant LIE!

Given the OP said they're moving on to a fixed rate, it's entirely possible they're only allowed overpay by €5,000 a year without incurring a break fee.

They can pay off as much as they want.

Correct, but if they are on a fixed rate the bank are entitled to charge a break fee.

OP, you are of course entitled to overpay your mortgage, where the conditions come in is when you are on a fixed rate.