Q Our current mortgage deal is due to expire in September. We have 17 years left on the term and a £160,000 amount outstanding. At present, our monthly payment amounts to £1,050 a month. However, for the past 12 months we have been overpaying by approximately £800 to £1,000 a month. We are looking at paying off our mortgage as soon as possible, so my question for our next mortgage is, should we continue with a term of 17 years and continue to make overpayments, or should we decrease our term by a number of years and increase our monthly payments and then make any additional overpayments if we are in a position to do so? I am not sure which one would be the most beneficial approach in terms of paying off the capital quicker and reducing the interest that is added monthly.
MF
A Both overpaying and shortening the mortgage term are equally beneficial and do exactly the same thing. They both reduce the overall amount of interest paid on the mortgage and shorten its term. Using the overpayments calculator provided by London & Country Mortgages, in your case, continuing to make monthly overpayments of £1,000 and assuming an interest rate of 2.5%, would mean that you would pay £21,038 less in interest and reduce the mortgage term by nine years and seven months.
The advantage of making regular overpayments rather than increasing your monthly mortgage repayments by shortening its term is flexibility. With overpayments you can stop, restart or reduce them if you find you need to. However, if you switch to a mortgage deal where overpayments are not allowed – for the initial period of a fixed-rate mortgage, for example – you would be better off reducing the mortgage term. Again, assuming an interest rate of 2.5%, shortening the mortgage term to eight years would mean a monthly mortgage repayment of £1,841 and provide a £200 buffer against future increases in the interest rate, and so an increase in the monthly repayment.
Want expert help finding your new mortgage? Use our new online tool to search 1000s of deals from more than 80 lenders with the Guardian Mortgage Service, powered by L&C.
