Mortgage overpayment

ecdi

I can make an overpayment of 10% of the balance without fees each year.
My bank is giving me option of taking off term or reducing monthly repayment.
Which option saves me most money?
Thanks

Henry Ford III

I think your lender would be better placed to give you an accurate answer than a bunch of well meaning but uninformed people on the internet.

deisedevil

Just a heads up.

Some lenders will leave you over pay 10% of the balance each year of fixed rate and some 10% over the course of the whole fixed rate period.

Francie Barrett

ecdi wrote: »

I can make an overpayment of 10% of the balance without fees each year.
My bank is giving me option of taking off term or reducing monthly repayment.
Which option saves me most money?
Thanks

Reducing the term should save you more money as you'll be paying interest over a shorter term.

Calahonda52

Henry Ford III wrote: »

I think your lender would be better placed to give you an accurate answer than a bunch of well meaning but uninformed people on the internet.

IIRc the lender is not obliged to tell you because its your choice, they are not selling a product.
As one of these uninformed people on the internet, with 40 years in finance, lets look at it.

the longer the term, given the time value of money, even in low interest rate environments, future payments have a lower present value than current payments.
Interest rates will rise in the medium term so future payments will go up, so reducing the term leaves you less exposed to a longer tail of higher payments

The yield curve is here
https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html

you can just add your current all in interest rate to the yield curve for AAA bonds to see where you will be at in 10 20 years as cost of borrowing for banks is near enough zero.
This yield curve could go skew ways from geopolitical risk so for me, reduce the term.

ecdi

Henry Ford III wrote: »

I think your lender would be better placed to give you an accurate answer than a bunch of well meaning but uninformed people on the internet.

This isn't very helpful?

ecdi

Calahonda52 wrote: »

IIRc the lender is not obliged to tell you because its your choice, they are not selling a product.
As one of these uninformed people on the internet, with 40 years in finance, lets look at it.

the longer the term, given the time value of money, even in low interest rate environments, future payments have a lower present value than current payments.
Interest rates will rise in the medium term so future payments will go up, so reducing the term leaves you less exposed to a longer tail of higher payments

The yield curve is here
https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_area_yield_curves/html/index.en.html

you can just add your current all in interest rate to the yield curve for AAA bonds to see where you will be at in 10 20 years as cost of borrowing for banks is near enough zero.
This yield curve could go skew ways from geopolitical risk so for me, reduce the term.

Now this is helpful. Thank you

Geuze

ecdi wrote: »

I can make an overpayment of 10% of the balance without fees each year.
My bank is giving me option of taking off term or reducing monthly repayment.
Which option saves me most money?
Thanks

Leaving the repayment the same, and reducing the term, saves the most interest.

ecdi

Geuze wrote: »

Leaving the repayment the same, and reducing the term, saves the most interest.

How does it work. How would €5,000 payment v €10,000 look?
Balance is €207,600
30 years left

Treppen

Just a thought...
Could there be any advantage for the OP to save up their yearly lump sums say for 5-10 years.
Then use it to improve LTV while switching for a better mortgage rate in the near future.

ecdi

Treppen wrote: »

Just a thought...
Could there be any advantage for the OP to save up their yearly lump sums say for 5-10 years.
Then use it to improve LTV while switching for a better mortgage rate in the near future.

I think this is what I'm actually doing, I switch every 3/4 years

Treppen

ecdi wrote: »

I think this is what I'm actually doing, I switch every 3/4 years

Out of interest how much does it cost to switch.

ecdi

Treppen wrote: »

Out of interest how much does it cost to switch.

Cost me €2500 new provider covered it

athlone573

The simple answer (better to shorten the term) is the best.

This assumes that you're paying down using "spare" money, in other words that the interest rate you're paying exceeds the benefit you'd get by using the funds elsewhere (for example, to reduce a car loan) .

If it was a cheap tracker mortgage this might not be the case,it might be the cheapest loan you'll ever get.

PokeHerKing

As long as its coming directly off the principle it should reduce both the payment and term.

athlone573

PokeHerKing wrote: »

As long as its coming directly off the principle it should reduce both the payment and term.

Lenders generally give the option of keeping the payment the same (and reducing the term), or keeping the term the same and reducing the payment.


Naturally the principal outstanding will reduce, the overpayment doesn't just disappear in a puff of smoke.

ecdi

PokeHerKing wrote: »

As long as its coming directly off the principle it should reduce both the payment and term.

In what case would it not come off the principal?

PokeHerKing

ecdi wrote: »

In what case would it not come off the principal?

In the same way your monthly repayments are not coming directly off the principle. They're mostly paying the interest.

If you're overpaying a mortgage male sure you're overpaying the principle only. This will naturally reduce you're repayment amd your term.

dubrov

ecdi wrote:

I can make an overpayment of 10% of the balance without fees each year. My bank is giving me option of taking off term or reducing monthly repayment. Which option saves me most money? Thanks

Neither. It's the actual timing of your payments that save you on interest.. The bank may give you a mortgage of 40 years at 100 Euro per month but if you pay 200 Euro you'll have it paid off much sooner than the term agreed with the bank.

In general, it's always better to reduce the payments as if you run into financial difficulty you can stop overpaying and return to paying the bare minimum.

If you had instead reduced the term, you wouldn't have the option to reduce payment. The bank would also be unlikely to allow you to extend the term again

ecdi

PokeHerKing wrote: »

In the same way your monthly repayments are not coming directly off the principle. They're mostly paying the interest.

If you're overpaying a mortgage male sure you're overpaying the principle only. This will naturally reduce you're repayment amd your term.

Is there a chance when paying say €10,000 off, that bank would not take it off the principal if not specifically instructed to do so?

How would this effect monthly repayment, or do you only see the difference when mortgage is full repaid?

athlone573

Please read my last post again.

Loan statements may be confusingly presented but you should only ever be charged interest on how much you owe (the reducing balance) at each point in time.

Dexpat

I started paying extra by transferring any spare cash in my current account online into the variable mortage account each month. AIB automatically reduced the monthly payments and kept the term the same. The mortgage payments each month are now €750 which is half what they used to be.

However I still usuallly transfer up to an extra €1500 a month off the mortgage so the fromal payments keep coming down. In reality the mortgage will be paid off well before the official term.The term is now only a theoretical date.

This approach gives a lot of flexibility. If a few big bills come in then I can reduce what I pay. So I suppose it depends on the type of mortgage as to what approach is the best to take. I don't have any other loans and don't anticipate I'll need one in the medium term at least.

In theory reducing the term may be better but as has been said by others reducing payments can be very flexible.

PokeHerKing

athlone573 wrote: »

Lenders generally give the option of keeping the payment the same (and reducing the term), or keeping the term the same and reducing the payment.


Naturally the principal outstanding will reduce, the overpayment doesn't just disappear in a puff of smoke.

I'm unsure if we're just using different terminology but if you're over paying the principle amount that you've borrowed then both your repayment and term should reduce. As both are determined by the outstanding principle.

dubrov

PokeHerKing wrote: »

I'm unsure if we're just using different terminology but if you're over paying the principle amount that you've borrowed then both your repayment and term should reduce. As both are determined by the outstanding principle.

If you reduce the principle, either the term or repayment reduces or a bit of both. Banks generally offer the first two options as it is simpler

athlone573

PokeHerKing wrote: »

I'm unsure if we're just using different terminology but if you're over paying the principle amount that you've borrowed then both your repayment and term should reduce. As both are determined by the outstanding principle.

Let me use a simplified example.

You have 10 years left on your mortgage at 1000 euros a month. You then pay 20% of the balance you owe as a lump sum.

You can then choose to pay off the rest over 8 years at 1000 a month.
Or 10 years at 800 a month.
Or 9 years at 900 a month, as you suggest.

Now the numbers aren't exact because of compounding, but that's the idea.

Do you agree?

Edit:as dubrov said with much less words!

Q&A

ecdi wrote: »

I can make an overpayment of 10% of the balance without fees each year.
My bank is giving me option of taking off term or reducing monthly repayment.
Which option saves me most money?
Thanks

To be clear both options take it off the principle. Reducing the term or reducing your repayment should produce the same end result in terms of savings.

As has been said elsewhere the main benefit of leaving the term the same is it gives you flexibility if you get into financial difficulties later on.

As much as it feels good to save up and knock a large chunk off your mortgage it's generally the best option to to chip away at it with any spare cash as it arises.

MAULBROOK

ecdi wrote: »

Cost me €2500 new provider covered it

could you pm the name of the bank please

TP_CM

I would double check the 10% rule, I haven't heard of a yearly cap, it's normally a fixed term cap. So unless you're rolling from 1 fixed year to the next.

Here's the simple calculator which will answer your question:

https://www.ccpc.ie/consumers/money-tools/extra-mortgage-payments-calculator/

Treppen wrote: »

Out of interest how much does it cost to switch.

Anyone seen permanent tsb offer of 2% cashback? Very tempted to go on that in the new year. 6000 cashback for 300k mortgage. No brainer in my opinion. I'm currently trying to clear my 30 year mortgage in 7 years. Almost 2 years in and on track so far.

Edit: Ah, just seen it was answered already.

Francie Barrett wrote: »

Reducing the term should save you more money as you'll be paying interest over a shorter term.

athlone573

Cashback deals are often financed by higher rates over the life of the mortgage (banks know that people often don't bother switching after any fixed/introductory rate is up).

Q&A

TP_CM wrote: »

I would double check the 10% rule, I haven't heard of a yearly cap, it's normally a fixed term cap. So unless you're rolling from 1 fixed year to the next.

Ulster, Avant and finance Ireland all offer 10% overpayment on outstanding balance per year.

Also worth pointing out that break fees change daily in line with market rates so it's not always the case that there will be a break free for overpayments beyond 10%

ecdi

ecdi wrote: »

In what case would it not come off the principal?

A slightly more bloated response from me, if you're interested. The only time principal vs. interest matters is if you have an interest-only mortgage. Don't worry about it.

These figures are fairly loose, but imagine you pay €1,000 a month.

People often panic when they first start getting charged interest on their mortgage, if they've paid €3,000 in a quarter and get charged €1,500 interest, they might think there's been a mistake or that they're being charged too much, and generally it's an unpleasant surprise to see you're only really getting the loan balance down by half the amount you're paying in.

In anticipation of this, banks often use a visual tool to show customers that because the interest is charged per quarter based on the balance on the loan, the amount of interest charged (e.g. €1.5k) when the loan balance is high (e.g. 200k), is much higher than the amount of interest that will be charged in the later years of the loan when the outstanding balance is small (e.g. €160 interest when the balance is €20k). So while it seems at first that the overall balance is going down slowly, this will speed up as interest charges get lower. Your repayment amount (theoretically) stays the same, so in our example, you're reducing the overall balance by €1,500 a quarter (€500 a month) in the first year, but that same €1,000 repayment will reduce the balance by €2,840 a quarter (€945 a month) in later years. The phrase often used is that 'for the first few years you're mostly paying interest'. But this is a bit misleading.

In reality, you're never specifically paying principal or interest, it's all just one outstanding loan balance. Your outstanding loan balance (e.g. €200k) gets charged interest (e.g. €1.5k), and that interest is then added back onto the outstanding loan balance (€201.5k) - there's no separate 'interest' portion of the loan. Most people like to mentally assign their payments to interest first and then consider how much they've paid off in excess of the interest, and call that the principal, but it's not actually different money to the bank, it's all the one.

PokeHerKing

athlone573 wrote: »

Let me use a simplified example.

You have 10 years left on your mortgage at 1000 euros a month. You then pay 20% of the balance you owe as a lump sum.

You can then choose to pay off the rest over 8 years at 1000 a month.
Or 10 years at 800 a month.
Or 9 years at 900 a month, as you suggest.

Now the numbers aren't exact because of compounding, but that's the idea.

Do you agree?

Edit:as dubrov said with much less words!

Yes agreed. I think the confusion is coming from you saying to reduce the term. I currently overpay my mortgage by about 130% so my 35 year mortgage will be paid off in 12 years if I continue with my current over payments.

However if I physically reduced my loan term to 12 years then my repayment would be my current repayment and my current optional overpayment but it would no longer be optional.

So I would never do that but I now know you don't mean that when you say reduce the term.

athlone573

PokeHerKing wrote: »

Yes agreed. I think the confusion is coming from you saying to reduce the term. I currently overpay my mortgage by about 130% so my 35 year mortgage will be paid off in 12 years if I continue with my current over payments.

However if I physically reduced my loan term to 12 years then my repayment would be my current repayment and my current optional overpayment but it would no longer be optional.

So I would never do that but I now know you don't mean that when you say reduce the term.

Yes as you say, if you keep the repayment at the original lower level it leaves you the flexibility in case your circumstances change.

ecdi

Great stuff, thanks

From all the comments my take is that when making an over payment it's best to recalculate (lower) the monthly repayments. The lump some payment (eg €5k) will be coming off the balance owed so when switching mortgage provider this payment will come off the loan required.

This is what happened for me

Loan owed €207,599
Term left. 30 years
Interest rate 2.6%
Monthly repayment. €825

Overpayment €5k
New Monthly repayment. €805

The Phantom Jipper

Interesting discussion, and it raised a question for me. Is it possible to alternate between reducing your payment and shortening the term?

For instance the first few years, if you're happy to overpay to reduce your payment from €1000 per month to €900, could you then change so that all future payments shorten the term length?

Davexirl

I overpay my mortgage monthly and I never reduce the term as that gives me flexability, say in the future if I can't afford the overpayments. If I can continue overpaying I will pay my mortgage off earlier then the original term.

The overpayment calculators are great way to see how much money you can save on interest and how many years the overpayment could potentially knock off your mortgage term.

A €250 monthly overpayment knocks 10 years off my term and approx €30k in interest saved.

tscul32

Currently at the "trying to clear the mortgage" stage. Just put a lump sum off and contacted the provider cos their website says there's a form to fill in to say whether you want the term reduced or payments reduced (variable rate). There are 10 years left but we're planning on being done by the end of the year.
After talking to them don't think I'll bother doing the form, just let the over payments (lump plus monthly tx straight into the account) build up as a credit balance and then when we've almost enough we'll sort it out and clear it. No matter what we do the credit will always be taken into account for interest calculation.
The only thing I'm not 100% clear on is the advantage of reducing the term. When we started first we overpaid monthly but never adjusted the term, preferring to have that flexibility, as we were young and hoped to have kids and knew our financials would change over time.
Is there any particular good reason to ever officially reduce term? Doesn't apply to us at this stage anyway but I've never understood what advantage it would be, other than to be able to say, "only 5 years left".

athlone573

tscul32 wrote: »

Currently at the "trying to clear the mortgage" stage. Just put a lump sum off and contacted the provider cos their website says there's a form to fill in to say whether you want the term reduced or payments reduced (variable rate). There are 10 years left but we're planning on being done by the end of the year.
After talking to them don't think I'll bother doing the form, just let the over payments (lump plus monthly tx straight into the account) build up as a credit balance and then when we've almost enough we'll sort it out and clear it. No matter what we do the credit will always be taken into account for interest calculation.
The only thing I'm not 100% clear on is the advantage of reducing the term. When we started first we overpaid monthly but never adjusted the term, preferring to have that flexibility, as we were young and hoped to have kids and knew our financials would change over time.
Is there any particular good reason to ever officially reduce term? Doesn't apply to us at this stage anyway but I've never understood what advantage it would be, other than to be able to say, "only 5 years left".

No good reason - it is administratively easier while removing flexibility.

Henry Ford III

ecdi wrote: »

Now this is helpful. Thank you

It's entirely accurate. No need for attempted smartness.

ecdi

Henry Ford III wrote: »

It's entirely accurate. No need for attempted smartness.

No need to be so sensitive. Genuine comment!

Wheety

I would always recommend to reduce the payment and leave the term.

We're overpaying at the moment. Mortgage is around €800 but we pay €1100. Each month the mortgage amount goes down slightly and our payment stays the same. Which means more is going off it every month. So the reduction in capital is accelerating.

I think (after changing rate a couple of times) that our mortgage was around €815 a month. This has now dropped to just over €800, but as said above we're still paying €1100. We could stop this overpayment whenever we like and have an extra €300 a month if we needed to.

The term naturally reduces anyway and the mortgage will have been paid off years early.

You don't have the same flexibility if you reduce the term.

Wheety

tscul32 wrote: »

but I've never understood what advantage it would be, other than to be able to say, "only 5 years left".

This is what I think is the only 'advantage'. But it's only a technicality on your statement really.

We have 24 years left according to our statement but because of the overpayments it'll really be 17 or 18 years but I don't need that in writing to know it.

insular1

Wheety wrote: »

We're overpaying at the moment. Mortgage is around €800 but we pay €1100.

Can I ask how did you set this up? Have a mortgage last couple of years and have been saving extra each month to pay off after the fixed period but I know we're allowed to overpay by 10% of the outstanding so would be handy to just be paying it straight off each month. Is it as simple as lodging extra money to the mortgage account number or do I need to notify the bank and arrange an overpayment with them?

ecdi

insular1 wrote: »

Can I ask how did you set this up? Have a mortgage last couple of years and have been saving extra each month to pay off after the fixed period but I know we're allowed to overpay by 10% of the outstanding so would be handy to just be paying it straight off each month. Is it as simple as lodging extra money to the mortgage account number or do I need to notify the bank and arrange an overpayment with them?

I'm in exact same boat.

I rang bank and paid with debit card. Was way more straight forward than I thought it would be

Wheety

We're with KBC and they have a form you just fill in and email to them.

3 options on the form.

1. You say how much extra you want to pay. So if you said 200 and the rate changed the overpayment would still be +200 on the new amount.

2. You state how much you want to pay every month. So you tell them 1000 and if the rate changes the overpayment could be more or less what it was. Payment could even increase beyond what you're paying so need to keep an eye on any rate changes.

Obviously a lot more straight forward with a fixed rate, which is what we have and option 2.

3rd option is for your term to reduce. But I think that's more for lumpsums

tscul32

insular1 wrote: »

Can I ask how did you set this up? Have a mortgage last couple of years and have been saving extra each month to pay off after the fixed period but I know we're allowed to overpay by 10% of the outstanding so would be handy to just be paying it straight off each month. Is it as simple as lodging extra money to the mortgage account number or do I need to notify the bank and arrange an overpayment with them?

Your mortgage statement which you probably get once a year (we do anyway) has a bic and iban on it. This is all you need to transfer money into the account. We recently went into the credit union and asked them to transfer a lump sum to our mortgage account, just passed over the bic/iban.
With ptsb (variable rate) it just sits as a credit (while reducing interest) unless we instruct the bank to either reduce payments or term. We're just going to leave it for now.

rtron

Davexirl wrote: »

I overpay my mortgage monthly and I never reduce the term as that gives me flexability, say in the future if I can't afford the overpayments. If I can continue overpaying I will pay my mortgage off earlier then the original term.

The overpayment calculators are great way to see how much money you can save on interest and how many years the overpayment could potentially knock off your mortgage term.

A €250 monthly overpayment knocks 10 years off my term and approx €30k in interest saved.

I'm looking to do something similar - when you make the overpayment is it coming off the Principle?
I'm looking at the BOI calculator and it doesn't specify.

My plan is to try and pay 2% off the current value in 2-3 months and then pay the same amount in the following 4 months so by then it should 2.1% (not exact but if you catch my drift).