Mortgage Clinic: Should we reduce our term or to continue overpaying?

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The Independent Online

'We are fortunate enough to be able to afford overpayments of £500 a month, the maximum permitted. The amount outstanding is now £48,000, with 15 years to run. Is it better for us to reduce our term or to continue overpaying?' JL, by email

Any borrower who is able to make overpayments that chip away at a home loan is on to a winner. It's a virtuous circle: pay off more than you have to each month, and the overall amount owed on the original, underlying "capital" value of your loan falls.

Thanks to regular updates of your debt, your outstanding debt is then "revalued" at the new, lower level; keep up your regular monthly mortgage repayments on both capital and interest and, in turn, you'll own your home more swiftly.

And in this moribund market for mortgages, the less you owe, the better for bagging a cheaper remortgage deal, too.

Your loan-to-value (LTV) – the ratio of how much you owe compared to how much your home is worth – now needs to be less than 80 per cent to qualify for the best deals available.

"At an interest rate of 6 per cent, an additional £500 per month paid off your home loan will repay your mortgage nine years, nine months early, saving you almost £17,000 in interest," says Richard Morea at mortgage broker London & Country.

This is attractive enough, say brokers, and so your mooted alternative – shortening the life of the loan from 15 years to 10, say, by hiking the monthly repayment – is unnecessary because the end financial result is very similar.

"There is no need to remortgage to a shorter term because the end effect is just the same," says Melanie Bien of broker Savills Private Finance. "As you currently do, you'll simply pay less interest over the term."

She points out another disadvantage to compacting your mortgage's life: you might struggle if your financial circumstances take a turn for the worse. "It's important to only overpay by as much as you can comfortably afford, as you can't get this money back." So if you were to run into financial difficulty, she says, your new higher monthly mortgage repayments could prove tricky to meet, and throw your finances off-course unnecessarily.

Morea also confirms the dangers of shortening your mortgage term if the current home loan is on a variable interest rate.

"It would be prudent not to commit to the maximum you can afford, as interest rates could rise and leave you out of pocket," he says.

And that's not all: there would also be a small administration fee to pay for changing the terms of your home loan contract, says Ray Boulger of broker John Charcol.

"This may be only £70, but it's still a fee that you wouldn't have to pay if you simply carried on overpaying."

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