Reply With QuoteThe overall debt is the same on the day you pay off some of the mortgage, but you are reducing the non interest only part with every payment, whereas if you pay off the non interest only part this will not reduce any further until it is paid off.
Evening all.
Have just got off the phone to my mortgage lender. I have a mortgage that is part interest only and part repayment. Both parts are on the same APR.
I want to make some regular monthly overpayments and contacted the landed to ask how to do tis. He gave me the info but said that unless I said otherwise the funds would go towards the repayment part and not interest only part of the mortgage. My response was that I didn't think it made any difference as the APR is identical but this seemed to confuse him and he seemed to think paying off the interest only part first might be better.
What do you think? Surely as the APR is the same it makes no difference what part I pay off first - all that would happen is the repayment part gets paid off quicker and then I start to go into the interest only part. The overall debt is the same surely?
The overall debt is the same on the day you pay off some of the mortgage, but you are reducing the non interest only part with every payment, whereas if you pay off the non interest only part this will not reduce any further until it is paid off.
It's just a matter of time...
Terms may differ by lender. But I would have thought that:
i) Overpaying the repayment mortgage would not reduce the standard monthly payments (the term until future payoff of loan would simply fall).
ii) Overpaying the interest-only mortgage would reduce the standard monthly payments as the capital (and hence interest element) falls.
So:
- if you don't increase your overpayments to allow for the standard payment under ii) falling, then you will pay off the mortgage faster if you overpay the repayment mortgage (ii);
- if you do increase your overpayments so that you are paying the same total amount in future as at the beginning, then it makes no difference which mortgage you apply the overpayments to.
Simple, but I've managed to make it sound complicated as usual! :)
Lenders will normally let your choose whether to reduce your term or pay less each month, the better option in terms of saving money is to reduce your term and if you intend on overpaying every month it's the only option really anyway.
You will benefit more by over paying the repayment element, google mortgage overpayment calculator and you can see for yourself with your own numbers
Personally I'd want to pay off the interest only part, as by definition, that part of the loan will never get repaid unless 'other' funds are directed towards it at some point.
But by contrast, a repayment mortgage is calculated to pay itself off over an agreed period of time, so is 'self sufficient'.
So I'd direct any spare funds to the former, as that needs to be addressed proactively.
But from a purely 'best return' on your overpayments perspective, I think it's exactly the same either way as you suggest, as the interest levels are the same.
Paying off the interest only bit would be an obvious choice for me. :)
When you look long into an abyss, the abyss looks long into you.........
Can't see that it matters in the initial stages. Later on convert the interest only part to normal repayment. (assuming you can't do that now due to some sort of fixed term thing?)
Need a bit more detail to give a complete answer. Was the "interest only" part originally supported by an endowment?
No endowment etc. I bought the property 6 years ago as I really wanted to own a property in London before I was 30. It was hideously expensive to service the debt at that time and I got an interest only mortgage planning to convert it into repayment by my 40th birthday knowing I would always be able to get a 25 year loan that took me up to retirement age. Anyway after a few years I converted part of the loan to repayment and now I am 34 I can afford to pay more- I can afford to pay the full repayment part and then some but with a new wife, probably little'un on the way some time soon and a hobby that involves spending thousands of pounds on watches rather than convert the whole loan to repayment I would like the flexibility to pay off what I want as and when.
I think I would pay off the interest only part first given the choice.
The interest only payment would decrease year by year and the repayment would stay the same reducing you annual commitment. In theory each year you can increment the interest only payment reducing the interest even further with any spare cash. This would allow flexibility should you wish to reduce your total outlay below your current payment should the need arise.
I think you need another conversation with the lender, preferably with an employee who HAS a mortgage and one who understands both basic and complex maths.
What you want is an illustration of the impact of making any overpayment, because different lenders approach it in different ways- especially with a repayment mortgage.
I'm going to make up some figures here just for example, let's say the loan is £100k, 50% int only, 50% repayment. Let's assume the same interest rate (APR is irrelevant, the pay rate is the only thing that matters now you've "bought" the mortgage as APR takes into account things like legal fees on buying).
So firstly, let's assume that pay rate is competitive, as if not, you may save money by switching the whole loan to a different deal- with or without the same lender.
Assuming a 25 year term, at a rate of 5%, the int only portion will cost 5% of 50k p/a, = £2500 year, £208 PCM. if you overpay this portion, provided you have daily interest calculations, as the loan is smaller, the amount you pay each month falls, pay off a grand, the monthly cost is now £204 (5% of 49k/ 12 months) the only way to ever zero that cost is to pay off The remaining 49k. the advantage of overpaying that element is if you had an extra grand a month to overpay (for example), as you have less interest to pay, next month you could pay off £1004, the month after £1008, etc etc, until your final payment is 100% of the remaining outstanding capital, and the loan is repaid.
With a repayment element, some lenders use crazy maths to work out what happens. some don't let your monthly payments fall, they instead, reduce the term of the loan. some keep the term the same, and your monthly payments do fall, others give you the choice, and some let you use it as an offset, even if the loan is not an "official" offset.
if your lender has a branch you may find speaking to a human bean helps, and ignore what they say - th 100% can give you illustrations as to what the impact of making an overpayment- on either element- is, they just don't usually want to spend the time doing so, but they all have the software and modelling capability, just rarely the nous how to use it.
Remortgage to one that is a repayment mortgage, allows early repayment/overpayment and calculates interest daily rather than annually (that way, every overpayment takes effect straight away).
Look at current account mortgages or offset mortgages (essentially the same thing).
I had a One Account mortgage/current account. It worked by having my entire salary paid in and being offset against the mortgage.
It allows you to take out the difference between what your current balance is and what you would owe if you had just been repaying normally.
It needs discipline and careful management but is the quickest way to pay off your mortgage.
Cheers,
Many thanks for the advice, I opted to have the overpayments come off the interest only part. Re remortgaging to a full repayment mortgage - no point to do that as I am 34 and therefore have 6 years where I can still get a full 25 year mortgage. I would rather play interest rates at this stage - if IsA rates are higher than the mortgage rate then money goes into Isa, if Isa rates are lower (like now) then better to repay the mortgage. Also I like the flexibility to not have to make a payment one month if the need arises, the aim is to have whatever mortgage balance I have at the age of 40 (whether this property or another one) and then have a full repayment schedule in place, until then I prefer the flexibility knowing that I am reducing the balance before my 'proper' mortgage that I will take when I am 40. Anything I pay off now simply reduces the amount I need to remortgage to for my 40th
and me to.Originally Posted by Chris_in_the_UK
and as also said by a couple above us as well.
if you make overpayments into the savings part the value of those savings could go down so your overpayments here might not get you anything.
there is a chanmce that overpaying into the savings part could get you mroe money but its a gamble.
reducing the interest only part reduces the amount you have to repay with the savings part.
I plan to do all this at some point when the nursey fees etc etc go down.
while the stock market is struggling its a good time to get mroe units into your ISA.
this was probably most true 3 or 4 years ago though tbh and not as much so now.
Very interesting discussion overall. We overpay by a set amount each month, but I think we've missed a trick by not adding in the amount that we have saved by overpaying into the next monthly payment (in the example before the £1004).
On this type of topic, one thing I've often wondered about is whether its better to pay whatever you can off the mortgage or to put it into some kind of vehicle like an ISA. I think I need to sit down and do the maths. For what its worth, I treat the mortgage as 'one-way' - in that once I've paid the money into it, it isn't coming back out (even if its easy to access like an off-set).
Are there simple methodologies or techniques that people use to pay down as fast as possible (without having no life whatsoever) as being mortgage-free is a key goal.
Cheers
No amount of savings / interest bearing savings account will come close to what you pay in interest on a mortgage.
If you have £10k in savings and you have a mortgage, you will benefit more by paying that ten off your mortgage as it will reduce the amount of interest you have paid by more than the interest your savings account would have earned.
Get the mortgage paid off as early as you can, then save whatever savings you want to make. Once that mortgage is paid off, all your money can be savings and then you can worry about where to put it for the best interest rates.
I'm paying 1.5% on my mortgage at the moment, and am putting savings elsewhere for the time being. As soon as that rate shifts, I will try to negotiate with my lender about how much of a limp (accidental but apt typo) sum I can dump into my mortgage.No amount of savings / interest bearing savings account will come close to what you pay in interest on a mortgage.
I currently have a savings account earning 5%, so better to keep it there than in the mortgage.
Do you have a link for this or is it a account where you need £10,000 to open itI'm paying 1.5% on my mortgage at the moment, and am putting savings elsewhere for the time being. As soon as that rate shifts, I will try to negotiate with my lender about how much of a limp (accidental but apt typo) sum I can dump into my mortgage.No amount of savings / interest bearing savings account will come close to what you pay in interest on a mortgage.
I currently have a savings account earning 5%, so better to keep it there than in the mortgage.
Depends what rate you're paying. At the moment mine is 1.5% so no intention of paying any off yet.No amount of savings / interest bearing savings account will come close to what you pay in interest on a mortgage.
Don't forget the mortgage is coming out of taxed income, the savings account is generating taxable income. Eg for 1000 of additional mortgage payment will have cost you say 1400 of gross income - the 5% on 1000 (p.a.) will be 50 which you then pay tax on so 30 left after tax ?I'm paying 1.5% on my mortgage at the moment, and am putting savings elsewhere for the time being. As soon as that rate shifts, I will try to negotiate with my lender about how much of a limp (accidental but apt typo) sum I can dump into my mortgage.No amount of savings / interest bearing savings account will come close to what you pay in interest on a mortgage.
I currently have a savings account earning 5%, so better to keep it there than in the mortgage.
It's an HSBC regular saver. I think I got a special rate for being a Premium account holder (which I got for my massive massive mortgage, not coz I'm rich).Do you have a link for this or is it a account where you need £10,000 to open it
http://www.hsbc.co.uk/1/2/savings-accou ... s-accounts
6% for regular people, 8% for special people. So my 5% above must be a mistake.
I don't understand the point. Are you saying that the pre-tax cost of paying £1000 onto the mortgage somehow makes it more worthwhile?
Sorry, was a bit wrong - what I meant to say was it isn't quite as obvious as comparing 5% and 1.5% because will pay income tax at your highest rate on the 5% so at 40% 5%=3% effective so not quite as good as may first seem.
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