Best approach to reduce mortgage length?

An Cigire

I’m trying to research which makes the most financial sense. I’m trying to reduce down my mortgage length.

Which would work out as a better saving when you account for interest.. which is currently 3% on mortgage.

A. Save for a decent lump sum payment off my capital in 24 months when my fixed term ends and wouldn’t be penalised as I would be variable.

or

B. Increase monthly payments (currently 10% of my monthly mortgage allowed) and save slightly less for the lump to pay in 24months?

I’m presuming options B is better as at least i’m paying something extra off the mortgage in the 24months prior to hopefully putting in a lump sum when my fixed term ends?

Just curious to know peoples opinion/experience on this.

Cheers

The Cig

Henry Ford III

Option B, assuming the capital is reduced immediately. It isn't always so check before you commit.

An Cigire

Henry Ford III wrote: »

Option B, assuming the capital is reduced immediately. It isn't always so check before you commit.

BOI said the extra would come off both interest and capital. I had hoped it just come off the capital.

amcalester

An Cigire wrote: »

BOI said the extra would come off both interest and capital. I had hoped it just come off the capital.

No, BOI said it would reduce the interest.

Interest is calculated on the remaining balance, it’s not lumped on to the principal at drawdown so by paying off some of the capital the amount of interest you pay is also reduced.

An Cigire

amcalester wrote: »

No, BOI said it would reduce the interest.

Interest is calculated on the remaining balance, it’s not lumped on to the principal at drawdown so by paying off some of the capital the amount of interest you pay is also reduced.

Cheers for explaining it I was kind of confused by it.

Yourmama

Boi, and I'm pretty sure any other bank as well, calculates interest on outstanding amount every single day and adds it to your debt every 3 months, so the option B is better because you are immediately reducing the interest amount.
Also don't be tempted to reduce your mortgage term right away. Keep it as long as possible and overpay when your fix ends. If you fix again, create standing order to saving account and save towards next lump sum.
You never know what will happen in 10 years time. There is a chance you will get in financial trouble and then you will be happy to have low monthly payment.

davidmarsh

Yea as others have said, interest is calculated on outstanding balance.

Another way of saying the same thing: in any given month a percentage of your repayment goes on interest. Every cent you pay above your standard monthly repayment comes straight off the balance.

And next month, your standard repayment will have a bigger (if only slightly) impact on the balance again.

Overpay as regularly as you can would be my advice.

An Cigire

Great advice from you all much appreciated.

Option B it will Be (Pun Intended) :P

Cheers

micks_address

Sorry to drop in the thread. Is there an easy way to calculate how overpayment will effect mortgage? Is contacting the bank best way to find out?

luckyboy

micks_address wrote: »

Sorry to drop in the thread. Is there an easy way to calculate how overpayment will effect mortgage? Is contacting the bank best way to find out?

https://www.drcalculator.com/mortgage/old/ie/

This website will work out the effects of any overpayments for you ...

An Cigire

micks_address wrote: »

Sorry to drop in the thread. Is there an easy way to calculate how overpayment will effect mortgage? Is contacting the bank best way to find out?

That’s the Boi one

https://personalbanking.bankofireland.com/borrow/mortgages/calculators/overpayments-calculator/

micks_address

luckyboy wrote: »

https://www.drcalculator.com/mortgage/old/ie/

This website will work out the effects of any overpayments for you ...

Thanks,
It looks like I can transfer money into my mortgage account via online banking and the effect is relatively automatic? I don't need to contact the bank?

I'm on variable rate. I'm was considering putting 100 euro a week into savings but thinking maybe splitting it 50 in savings and 50 toward mortgage.

micks_address

micks_address wrote: »

Thanks,
It looks like I can transfer money into my mortgage account via online banking and the effect is relatively automatic? I don't need to contact the bank?

I'm on variable rate. I'm was considering putting 100 euro a week into savings but thinking maybe splitting it 50 in savings and 50 toward mortgage.

Looks like even with that relatively small amount would take 4 years off our term

davidmarsh

Another way I look at it: say your mortgage is 200k and your rate of interest is 3%.

You can expect to pay close to 6000 in interest over a 12 month period (albeit on a reducing basis). So if your repayment is 1000 a month, about 500 goes on interest each month and 500 comes off the balance, in general/bottom line terms.

So... if you pay an extra 500 a month (a 50% increase on your standard repayment) it actually doubles the effect on the bottom line. Do that for a couple of years and you'd save 10-12 grand in interest alone. Obviously as the mortgage balance reduces you'd naturally be paying less interest, but it can have a huge effect over a longer term. I worked out my own one for the craic one day and if I increased my repayment to 1500 a month, I'd knock out the mortgage in 6 years and more importantly (imo) I'd save about 50k in interest.