I'm overpaying... best to reduce the term or monthy payments?

Posted on 14 May 2008

Hello

We have just started making overpayments on our mortgage beginning with £10,000 off, continuing with £200-£500 a month hopefully. Is it better to reduce the term or reduce the mortgage payment amount but continue paying the same? They have automatically reduced our payments so I'll just top up back to what it was. Is it better to ask for reduced term? Are there any consequences to your credit rating if you have zero mortgage or debts?

Thanks for your help.

Hi Sarah,

Both of your options result in the same thing.  Without realising it, keeping up your monthly payments to the original level will reduce the term automatically. However, the lender will have to manually re-calculate it at the end of their calculation period, and the other disadvantage is that they often get the admin wrong and count your overpayment as an early interest payment for the next month, you really need to call them every month and explicitly state 'this is a capital reduction overpayment!'.  Some lenders' systems can be set up to automatically reduce the monthly commitment, or take the same higher payment and reduce the term, so if you are going to overpay it to the normal monthly amount anyway you might as well call them and ask if they can set up your mortgage to keep the direct debits payments up.  Regardless though, you are reducing the term already.

Having a zero mortgage balance is fine, but your credit score fares best if you have some sort of debt running, like a card or loan. You might wish to leave a minimal debt with your lender though, because you will find it much easier to borrow extra money off them in the future, should you need it, if you are an 'existing' customer.

Regards, Katie.

 

Category: Offset mortgages, Overpayments, Payment Holdays, underpayments, Borrowback

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