Does term length matter if I overpay on mortgage? Liam Croke lets you know

Q: Liam, I'm looking at mortgage providers and one bank said to go for a 30-year term. I’m borrowing €300,000 and they said I can pay it off early if I make regular overpayments or if I come into cash. I asked would this mean I pay more interest as I heard you pay interest first. They said I wouldn’t be disadvantaged by having a 30-year term and paying it off sooner, say, in 25 years. Is this true? Many thanks, Ciara

A. First off, you're right, the way your monthly repayment is constructed, the interest is front loaded where you will pay the majority in the first 12 to 14 years.

Yes, you can accelerate the repayment of your mortgage but when you do this is very important. If you leave making monthly overpayments or lump sum lodgements towards the end of the term you are being disadvantaged, but not if you make those overpayments/ lump sum lodgements early in the mortgage.

If you start off with a 30 year term but want it repaid in 25 years, you’d need to make an overpayment at the very beginning of €170. If you do, it will take five years off and you’ll save €28,115 in interest payments.

But if you leave making that overpayment for five years, it will need to be €215 and your interest savings reduce to €24,484. Wait for 10 years and you need to make an overpayment of €315 in order to reduce the term by five years and your interest savings only become €15,567.

So, no disadvantage if you start right away but as you can clearly see, the longer you delay making overpayments, the more it will cost you and the less interest you’ll save. The same applies if you make lump sum lodgements.

It’s easy for them to say you won’t be disadvantaged because they want to get your mortgage, but when you run the numbers, the factual evidence will really tell you whether you’re going to be disadvantaged or not.