Paying a chunk off a mortgage

john_s

john_s

john_s

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I've been asked about repaying a chunk of mortgage - why ask me, I don't know... I'm a software developer, not an IFA. I am curious as to what the answer is though, so thought I'd ask here.

Say a mortgage currently has £100K outstanding on it and repayments are ~£500/month.

If you repay £80K, would the monthly repayment reduce correspondingly by 80% - ie to £100/month - or is it not as straightforward as that?
 
AFAIK, they don't drop the monthly payment, you just pay it off earlier, i.e. if you pay an extra 2 years worth, your terms end 2 years earlier, with the same monthly repayment.
 
You need to check whether they could pay that much off in one go - a lot of mortgages have limits of how much you can overpay in a given year (ie 10% of the mortgage value).
 
Mr Jones said:
AFAIK, they don't drop the monthly payment, you just pay it off earlier, i.e. if you pay an extra 2 years worth, your terms end 2 years earlier, with the same monthly repayment.
Click to expand...

this

alx said:
You need to check whether they could pay that much off in one go - a lot of mortgages have limits of how much you can overpay in a given year (ie 10% of the mortgage value).
Click to expand...

and this.

Monthly repayments will stay the same and there is usually an overpayment limit of 10% before you incur a penalty fee
 
As above it depends on the mortgage company.

On the face of it paying off 80% of a mortgage in one hit would seem to be a very good idea in almost any circumstances though as long as there isn't a massive penalty written into the small print.
 
Usually up to you to decide what to do.

Keep the payments high so it's paid off way quicker - Or reduce the payments but keep the original term the same.

Speak to each individual lender as they will have different views - also check there is no penalties for large lump sum payments.
 
Use this Link

As said above the payments will stay the same (if you choose) but the term is reduced. The calculator above will show you how much interest will be saved and how many years it will knock off. It may surprise you.
 
dazz25 said:
Use this Link

As said above the payments will stay the same (if you choose) but the term is reduced. The calculator above will show you how much interest will be saved and how many years it will knock off. It may surprise you.
Click to expand...

Great calculator, food for thought indeed. My savings are giving me bugger all in return
 
Mr Jones said:
AFAIK, they don't drop the monthly payment, you just pay it off earlier, i.e. if you pay an extra 2 years worth, your terms end 2 years earlier, with the same monthly repayment.
Click to expand...

You can choose I was over paying by 50% for 5 years then paid 30k lump sum and then reduced payments to £80 per month to free up as much monthly spend so I can do lots of stuff with the kids while they are young. We now have >90% paid off so what's the rush rather enjoy the time with the kids.

Tldr

Pay off , reduced term or lower monthly payments.
 
I would check with your mortgage lender. I can only pay off 10% of the balance each year without being penalised. I can choose to take that off the life of the mortgage or off my monthly payment.
 
(I'm using 'you' in the generic sense here)
If the term stays the same and the payments go down you end up paying more in the long term. It's like the difference between paying £5 / mo off the credit card instead of paying £50 / mo - if you pay less per month you will pay off less interest and generate more interest.

So in terms of the overall cost, you are best reducing the term - or keeping the term the same and consistently overpaying every month to keep the payment the same - which gives you some flexibility for 'tough' months - Assuming no overpayment penalty (if there isn't an overpayment penalty, you might be on a bad SMR (or whatever) and could possibly save money by remortgaging)

IANAMA :p
 
Yeah we've been making fairly regular overpayments on our mortgage on a monthly basis - we can pay up to £500 overpayment each month, and we've chosen to reduce the length of the mortgage term rather than reduce the payments.

However, we were given both options - so I can see how for some people it'd make more sense to reduce the monthly fee rather than shorten the term, but for us this has worked the best.

Most mortgages do seem to have some kind of large penalty clause for paying off a big chuck in one go, mainly because they are a financial product and they're sold with the expectation that they'll get 2x or 3x (or whatever) the total loaned value back in interest payments. The last thing a mortgage company wants is for people to pay back the loan early!
 
Zogger said:
(I'm using 'you' in the generic sense here)
If the term stays the same and the payments go down you end up paying more in the long term. It's like the difference between paying £5 / mo off the credit card instead of paying £50 / mo - if you pay less per month you will pay off less interest and generate more interest.
Click to expand...

It's still worth doing whatever your plans to do with the loan.

So a normal 25 year loan, 25 year term, £500 payments, £50k total interest.

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The same as above but adding in a £80k overpayment on day 1. Keeping the term the same so the monthly payments are ~£100. Total interest charged is £10k.

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The same overpayment, but keeping the monthly payments the same, with a total of 44 payments.

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While overpaying a lump on a mortgage is generally a good thing, you need to have common sense. E.g. taking money out of an investment paying 5% to overpay a mortgage at 2.49% is not a good thing. Similarly, it's probably not wise to use all of your savings to overpay, as you might lose your job, need emergency funds etc and money tied up in a house is fairly illiquid.
 
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