Paying off chunk of mortgage

mrcheez

I want to pay off a chunk of my mortgage, do I make sure to ask the bank to "deduct it from the principal" (so that they don't use the payment toward the remaining interest) ?

Anything else I need to be aware of?

AlmightyCushion

If you put extra money towards you money it will always go towards the principle. You have two options. You can choose to keep the length of the mortgage as it is, this will reduce your monthly payments for the life of the mortgage. You could also ask the bank to keep your monthly payment the same as it is now, this will reduce the length of the mortgage and save you a lot of interest.

topper_harley2

Which option is preferable? Would both not save you interest?

AlmightyCushion

topper_harley2 wrote: »

Which option is preferable? Would both not save you interest?

Yes, both options will save you interest. Interest is calculated every day on the remaining balance of the mortgage. If you pay a lump sum of 100,000, for example, off your mortgage then that's 100,000 that you are no longer paying interest on.

Your monthly mortgage payment is made up of that months total interest and an amount that goes off the remaining balance. With each monthly payment you are paying slightly less interest (because the remaining balance owed is lower than the previous month so the interest is lower too) and slightly more towards the remaining balance. So, if you increase your monthly payments you will save on interest over the life of the mortgage.

For example. Say you have 20 years left on your mortgage and pay 800 a month towards your mortgage. If you decided to double the amount you pay on your mortgage to 1,600 a month then that would reduce your term to only 8 years. This is because less of your mortgage payments are going towards interest. The above figures aren't accurate they're just made up to illustrate the point.

TL;DR Paying a lump sum off your mortgage will save you a lot of interest. Keeping your monthly mortgage payment the same after paying the lump sum will save you even more on interest.

topper_harley2

Thanks for that. Sounds like the term reduction would be most beneficial.

If you keep the monthly repayments the same while overpaying regularly, you are reducing the term. Does this *officially* reduce the term (in that you must continue to pay the extra 800 per month always), or can you stop the overpayment and revert to paying the basic 800?

ixus

Karl jeacles mortgage calculator a great tool for messing around with figures. Can adjust rates and terms fluidly. It also calculates the interest you will pay over the term.

AlmightyCushion

topper_harley2 wrote: »

Thanks for that. Sounds like the term reduction would be most beneficial.

If you keep the monthly repayments the same while overpaying regularly, you are reducing the term. Does this *officially* reduce the term (in that you must continue to pay the extra 800 per month always), or can you stop the overpayment and revert to paying the basic 800?

No, over paying every month won't mean that your monthly payment gets increased. It could mean the opposite though. If your bank keeps your term the same then every over payment will reduce the balance of the mortgage and thus reduce your monthly payment.

mrcheez

Cheers for the tips (I had opened another thread on this as I wasn't getting any responses here, so learned lots from that thread too)

mrcheez

One more question... I'm currently on a 4.3% variable interest rate which is a rip-off.

Best the current provider can do is drop it to a 3.1% fixed rate for three years (which I might go for), but if I want to change to a different mortgage provider is that as straightforward as switching your Energy supplier, or does it involve getting a lawyer onboard etc?

Green Mile

I’ve heard that banks have some rules around paying lump sums off of mortgages.

I don’t know the full facts but I’ve been told that you can’t just pay a lump sum at any time you want. You can only clear a lump sum portion in the final month of the year so you have to have the lump sum amount on standby until it suits the bank.

I’m not sure how true this is or if it’s just with some banks.

I can understand that banks wouldn’t want mortgages holders just paying the agreed monthly repayment plus random €800’s or €46.33’s each month whenever it suits. Apparently the minimum lump sum repayment is €10,000 in one go?

Would be interesting to read what people have experienced and if there are indeed bank rules around the lump sum payments?

mick121

Payed money off my Aib mortgage just over 10,000 no problem. Went to branch and explained to mortgage advisor that wanted it off the principal,repayments to stay the same and loan term to be reduced and wrote it down,signed. Money lodged and letter sent internal mail that day to mortgage hq.about a week later got letter from mortgage section telling me money off principal,repayment staying the same and term reduced by x amount of months. Happy camper

Effects

Green Mile wrote: »

I can understand that banks wouldn’t want mortgages holders just paying the agreed monthly repayment plus random €800’s or €46.33’s each month whenever it suits. Apparently the minimum lump sum repayment is €10,000 in one go?

Would be interesting to read what people have experienced and if there are indeed bank rules around the lump sum payments?

I'm with EBS, I just ask them to pay the extra off my principle when I lodge more than my monthly payment. They print off a letter and I sign it.

AlmightyCushion

mrcheez wrote: »

One more question... I'm currently on a 4.3% variable interest rate which is a rip-off.

Best the current provider can do is drop it to a 3.1% fixed rate for three years (which I might go for), but if I want to change to a different mortgage provider is that as straightforward as switching your Energy supplier, or does it involve getting a lawyer onboard etc?

I don't know anything about switching. It will be more complicated than switching electricity provider though. Keep in mind that with a fixed rate, overpaying is different to a variable rate mortgage. Some banks may not allow it, others may charge a fee for it.

Green Mile wrote: »

I’ve heard that banks have some rules around paying lump sums off of mortgages.

I don’t know the full facts but I’ve been told that you can’t just pay a lump sum at any time you want. You can only clear a lump sum portion in the final month of the year so you have to have the lump sum amount on standby until it suits the bank.

I’m not sure how true this is or if it’s just with some banks.

I can understand that banks wouldn’t want mortgages holders just paying the agreed monthly repayment plus random €800’s or €46.33’s each month whenever it suits. Apparently the minimum lump sum repayment is €10,000 in one go?

Would be interesting to read what people have experienced and if there are indeed bank rules around the lump sum payments?

It depends on the bank. Each bank will have different rules about it. Why wouldn't banks want people paying random amounts off their mortgage? Apart from the bank receiving less money in interest, what are the downsides? Saying that, I do remember seeing somewhere before that one bank had issues accepting regular over payments because of how their system was set up. Others might be cumbersome and require forms to be filled out every time you want to over pay. In some case it's just as simple as transferring the money into the mortgage account.

mrcheez

AlmightyCushion wrote: »

I don't know anything about switching. It will be more complicated than switching electricity provider though. Keep in mind that with a fixed rate, overpaying is different to a variable rate mortgage. Some banks may not allow it, others may charge a fee for it.

Yep I checked with my bank (BOI) and they said there are no penalties for overpaying mortgage while I'm on variable rate, but there is a penalty once I go to "fixed rate".

Found the following bit of info which details steps involved in switching: http://www.consumerhelp.ie/switching-mortgage#4

Seems like quite a headache and could take a few months so I think I'll just go for the 3 year fixed at 3.1% as it seems roughly around what others are charging on their variables (for now).

So plan is, pay off a chunk of the mortgage (maybe 30-40K) then switch to 3 year fixed at 3.1%.

Whether I shorten the term or lessen monthly payments (and putting difference into ETF investments/Pension) is my next consideration.

ixus

Say you shorten the term by 5yrs or whatever you can do. Work out the interest saved i.e. interest you would pay on a 20 v 25yr mortgage. Then, figure out what you would have in 20yrs by putting into a pension.

CruelCoin

Your other thread got closed, and in it you asked me if i put my lump sum against the term or to lower monthly repayments.

I put it against the term of the loan.

mirrormatrix

mrcheez wrote: »

Yep I checked with my bank (BOI) and they said there are no penalties for overpaying mortgage while I'm on variable rate, but there is a penalty once I go to "fixed rate".

Found the following bit of info which details steps involved in switching: http://www.consumerhelp.ie/switching-mortgage#4

Seems like quite a headache and could take a few months so I think I'll just go for the 3 year fixed at 3.1% as it seems roughly around what others are charging on their variables (for now).

So plan is, pay off a chunk of the mortgage (maybe 30-40K) then switch to 3 year fixed at 3.1%.

Whether I shorten the term or lessen monthly payments (and putting difference into ETF investments/Pension) is my next consideration.

Switching is easy enough. You have to pay solicitors fees and stuff, but many banks will offer 1.5-2.5k when you switch to them in order to cover the solicitors fees.

I looked into it a couple of years ago, because with my bank the variable rate was nearly 5 %. However, when I shopped around I found that most of the other banks with lower interest rates didn't seem much better. Ended up going with a 1 year fixed at about 3.7 %.

A good information resource for this sort of stuff is askaboutmoney.com, where they go into great depth about all of this.

mrcheez

mirrormatrix wrote: »

A good information resource for this sort of stuff is askaboutmoney.com

Yep will check it out. To be honest I'm happy enough to go for 3.1% fixed for 3 years as it means I can get it changed instantly rather than having to get solicitors etc involved.

Simply put, I've no time to do that.

daheff

OP what you could do is pay off a chunk against the mortgage -get lower repayments.


Save the difference between the lower repayment and the old one. Once you have another chunk saved make another repayment -leaving you a smaller repayment again. Repeat until you pay back the rest of the loan.


If you are able to afford the current repayments then this might be a better plan than reducing the term, as you can keep eating away at the principal.


but do your sums first to see what works best for you.

And remember -once you give the money to the bank it doesnt comeback to you so easily. Make sure you keep a rainy day fund aside.

mrcheez

daheff wrote: »

Make sure you keep a rainy day fund aside.

Of course.. I'm only going to be offloading about 30% of my cash toward the mortgage.. the rest is going into a pension/investments.

lau1247

Can someone help me out in terms of overpayment.. I know the pros and cons of reducing term (overpay capital and keeping same monthly repayment) and reducing monthly payment..

I'm trying to wrap my head around to see which one works out cheaper and I'm not getting far (Or just can't seem to visualise it)


Reduce term:
Interest is based on remaining capital so overpayment to reduce capital will lead to reduce interest. If interest is calculated every month for example, the interest is constantly being reduced. As interest is reduced, more of the saving is allocated to pay off even more capital thus in the end your term will reduce. This is all grand and easily understandable.


Reduce monthly payment:
How is the interest calculated?? Does overpayment lead to monthly repayment reduction over the same term but it is not reducing capital (until your monthly payment is reduced to zero) so interest is still calculated based on the full capital at all time (again until your monthly payment is reduced to zero). Which only at that point where the monthly payment has reached zero will the capital start to reduce and as such reduce interest. Is this how it work for reducing monthly payment?

AlmightyCushion

Interest is calculated the same way whether you pay your monthly payment and never overpay, overpay and reduce the term or overpay and reduce your monthly payment. Interest is calculated daily based on the remaining capital. Nothing changes that. Every cent you over pay goes towards the capital, regardless of if you reduce the monthly payment or reduce the term. Interest is usually calculated daily based on the capital so every cent you over pay will also reduce the total amount of interest because there is less capital left to charge interest on. The sooner you make an over payment the more interest you save.

For example, if you have a 30 years left on your mortgage @ 4% and you over pay 1000 today then you are no longer paying 4% interest on that 1000 for the 30 years. It saves you 40 a year on interest (that's not actually accurate but it'd just for illustrative purposes). If you overpay 1000 when you have 10 years left on your mortgage, you will still save money on interest but nowhere near as much because you're only saving 10 years of interest on that 1000 euro.

If you overpay and reduce the term, you are paying a higher amount per month so more of this is going towards the capital. Think of over paying and reducing the term as making regular over payments towards the capital. It'll save you a lot of money on interest over the life of the mortgage versus reducing the monthly payment.

lau1247

AlmightyCushion wrote: »

Interest is calculated the same way whether you pay your monthly payment and never overpay, overpay and reduce the term or overpay and reduce your monthly payment. Interest is calculated daily based on the remaining capital. Nothing changes that. Every cent you over pay goes towards the capital, regardless of if you reduce the monthly payment or reduce the term. Interest is usually calculated daily based on the capital so every cent you over pay will also reduce the total amount of interest because there is less capital left to charge interest on. The sooner you make an over payment the more interest you save.

I understand what you said in general and the reduced term example you gave but it only cover reduced term. I'm still failing to understand how reducing monthly basic payment would work when it comes to calculating interest and overpayment.

AlmightyCushion

lau1247 wrote: »

I understand what you said in general and the reduced term example you gave but it only cover reduced term. I'm still failing to understand how reducing monthly basic payment would work when it comes to calculating interest and overpayment.

The monthly payments get reduced as a result of the overpayment. For example, say you have 300,000 left on the mortgage with 20 years remaining and you pay off 100,000. Well, now you only have a 200,000 mortgage with 20 years remaining. This is why keeping the same term gives you a lower monthly payment.

For ever odd

Stop your repayments altogether.

Renegotiate your mortgage deal after a year or so... Play the game

JustAThought

For ever odd wrote: »

Stop your repayments altogether.

Renegotiate your mortgage deal after a year or so... Play the game

Eeem - no!!!!

OP - you say you are with BofI - they gave a great online calculator tool where you can mess about with hypothetical overpayment amounts & it will tell you exactly how much money it will save you & how many years/months this will take off your mortgage & how much it will save you.

You could put some of the money towards a second house deposit - its hard to save 4O or 50k - and work out the savings for the rest over 10 or 15 years . At the relative low costs of houses & the high demand in the remtal market a second house rented out could well be your best pension bet.

uli84

AlmightyCushion wrote: »

No, over paying every month won't mean that your monthly payment gets increased. It could mean the opposite though. If your bank keeps your term the same then every over payment will reduce the balance of the mortgage and thus reduce your monthly payment.

Is this the best option so?

Green Mile

I think both options (reduced term or reduced monthly payments) have the same or close to the same result at the end of the day. It should be factored into account though that money changes value. €1000 today is a decent amount whereas €1000 in ten years will be worth a lot less.So why take a financial strain now when money has more value to you now than it would in the long term.

I think I’d personally prefer, if I was in a position, to pay any overpayment but to keep the term the same and pay back a lower principle amount each month. Within 10 years or so, your repayment would be so small not only because of the overpayments but also due to depreciation of the currencies. This would enable anyone to have more money to increase your overpayment, live a better life or build up a pension fund.
We all end up in the grave anyway.

mrcheez

JustAThought wrote: »

You could put some of the money towards a second house deposit - its hard to save 4O or 50k - and work out the savings for the rest over 10 or 15 years . At the relative low costs of houses & the high demand in the remtal market a second house rented out could well be your best pension bet.

I was going to go that route, but the current nightmare housing market has turned me off that option.

JustAThought

mrcheez wrote: »

I was going to go that route, but the current nightmare housing market has turned me off that option.

Nightmare for landlords yes but never cheaper to BUY - your biggest risk is getting a self entitled skobie in who refuses to pay. However given the rewards, a lifelong rental income paying double your mortgage is not the worst pension decision you will ever make.

mrcheez

JustAThought wrote: »

Nightmare for landlords yes but never cheaper to BUY - your biggest risk is getting a self entitled skobie in who refuses to pay. However given the rewards, a lifelong rental income paying double your mortgage is not the worst pension decision you will ever make.

I don't think it's the CHEAPEST time to buy (it was when I bought my place in 2013 and it's since gone up €100K), but it's a maybe.

Not sure if I could handle the stress of another purchase.. not to mention being a landlord... ick