I am currently able to make overpayments on the mortgage on my house. It’s a straightforward repayment mortgage. I am currently allowing the overpayments to accumulate so reducing the term of the mortgage. I have the option of using the overpayments to reduce the monthly payment. I’ve had the mortgage for 18 months, so I’m very early in to it.
I’d appreciate advice on how to decide which method is actually better for me.
Oh, they’d love that, wouldn’t they? Pay down your principal – always, whenever you have a chance, pay down the principal. Reducing the monthly payment means keeping the term of the loan the same, thereby maintaining the total cost of the loan, and assuring the lender the greatest possible profit. The lender has a right to a profit, but I assure you that they can take care of themselves.
Paying off the principal, on the other hand, greatly reduces the interest you pay, thus reducing both the term and the cost of the loan.
Whether the lender makes more or less is immaterial. Make your decision based from your position.
From a purely dollars and cents standpoint, determine the difference in payments between your two choices, your aftertax yield on a save investment if you invest the difference and your note rate, adjusted for any income tax deduction. Choose the better “yield”.
Psychology however is often an important aspect in many mortgage payers minders. My personal choice would be to continue to pay more than required on the principal–it would be more satisfying to me. All money choices are not solely financial ones, nor should they be.