What happens when you reduce your mortgage term?
The contractual payment goes up and the mortgage ends sooner. Because the balance falls faster, less interest builds up on it, so the total paid falls even though each payment is larger. It is a change to your contract, agreed with your lender, and the higher payment becomes the one you are required to make.
A worked example
Five years into a £200,000, 25-year mortgage at 5%, the balance is about £177,160 and the payment about £1,169 a month. Twenty years remain.
- Leave the term as it is: about £103,440 of interest still to pay over the twenty years.
- Cut it to fifteen years: the payment rises to about £1,401, which is £232 a month more, and the interest still to pay falls to about £75,020.
That is roughly £28,400 less interest in exchange for £232 a month more, over a term five years shorter.
How it differs from overpaying
Overpaying by the same £232 a month would end the mortgage on the same date with the same interest, provided the overpayments are applied to the term. The difference is that a reduced term makes the higher figure contractual. Overpaying or a shorter term sets the two out side by side.
What changing the term involves
- An affordability check on the new, higher payment is usual.
- A fee for varying the mortgage, which some lenders charge.
- A new payment date or schedule, set out in writing before it starts.
When the term goes the other way
Extending a term does the reverse: a lower monthly payment, and more interest in total, because the balance is owed for longer. On the example above, adding five years to the remaining twenty would lower the payment and raise the interest still to pay.
Questions people ask
Does reducing my mortgage term save interest?
Yes, if the higher payments are made: the balance falls faster, so less interest accrues on it. The earlier in the mortgage the term is reduced, the larger the saving.
Is reducing the term the same as taking out a new mortgage?
No. A term change is a variation to your existing mortgage, agreed with your current lender. Ask them what it involves, whether a fee applies and how the new payment is assessed.