Which account should I overpay?

Da_Matser · 15 July 2017 at 7:51PM

My endowment policy is maturing next month and so I have a lump sum to use against my mortgage.
I have two mortgage accounts:

A - Combination Mortgage (part capital repayment, part interest only)
B - Capital Repayment Mortgage

The current term remaining is 20 years on everything.

I have used an online overpayment calculator and can see the biggest saving in interest would be to pay off against the interest only element of account A. However, I can see that the disadvantage here is that I would need to pay off the remaining capital at the end of the term.
So looking at Capital Repayment portions, calculations on the capital repayment element of account A versus paying off the same amount on account B show different savings. Admittedly, the capital amounts and monthly payments are different in the first place and freezing those monthly payments reduce the terms by different amounts. However, the one that reduces the term by the least amount shows the highest saving!

I would have thought it didn't really matter as long as the Building Society had the money, but I just cannot see the rationale behind these calculations. Is it just a case of sending them the money or do I need to direct this in some way?

Please help.

glosoli · 15 July 2017 at 9:25PM

Really without knowing the figures involved including interest rates applicable to everything no-one but will be able to provide any meaningful information.

Da_Matser · 15 July 2017 at 10:29PM

Thanks glosoli

Interest rate is 2.25% on everything

A - Combination Mortgage (£26,794 capital repayment, £35,000 interest only)
B - Capital Repayment Mortgage (£29,178)

I can make a lump sum payment of £32,000

If I use an example lump sum of £25,000 against each of the three elements on the Nationwide Mortgage Overpayment Calculator the savings vary.

glosoli · 15 July 2017 at 10:42PM

Others are better than maths than me thats for sure but given the interest only balance would remain static naturally that's the part which you will pay more interest on into the longer term. Is this endowment the repayment vehicle for the interest only part, or do you have another policy/investment in place?

Don't know what others think but personally I would pay down the interest only element to £3,000, and then increasing the repayments on that part so that the balance is cleared off at the same time as the other two mortgages.

AnotherJoe · 15 July 2017 at 10:48PM

Paying off the interest only would provide the biggest saving because that's the only element where the interest paid doesn't decrease each year.

However I don't understand your comment that if you do that, there's a disadvantage you need to pay off the remaining capital at the end of the term. Can you explain ?

Da_Matser · 15 July 2017 at 11:22PM

@glosoli The endowment policy was intended to pay the interest only portion, which was originally set at about £46,000. £9k was moved across onto capital repayment some time ago due to the poor performance of endowment policies.

@AnotherJoe I seem to have confused myself by inventing a disadvantage! Sorry

Both of your replies are leading me to believe that paying off the interest only element is best; but surely wherever it is allocated, it will reduce the capital by the same £32k and it would make no real difference in the long term, as long as my overall monthly payment is the same? I have an 'O' level in maths, run my own business and use maths every day, but I just can't seem to get my head around this.

getmore4less · 15 July 2017 at 11:30PM

if the rates are the same it makes no difference the savings are the same.

what matters is what you pay every month after you have paid off a chunk.

All that matters is the interest rate and the payment, you can ignore term and repayment/interest only they just set the minimum payment.

AnotherJoe · 16 July 2017 at 8:29AM

Da_Matser wrote: »

@glosoli The endowment policy was intended to pay the interest only portion, which was originally set at about £46,000. £9k was moved across onto capital repayment some time ago due to the poor performance of endowment policies.

@AnotherJoe I seem to have confused myself by inventing a disadvantage! Sorry

Both of your replies are leading me to believe that paying off the interest only element is best; but surely wherever it is allocated, it will reduce the capital by the same £32k and it would make no real difference in the long term, as long as my overall monthly payment is the same? I have an 'O' level in maths, run my own business and use maths every day, but I just can't seem to get my head around this.

Hmmmm this is like one if those logic puzzles

. I think the difference comes depending what you pay.

Yes if you reduce £32k capital then it doesn't matter where it's reduced from you are still saving the interest payments on £32k so that's the same result. However if you stick with the mandated payments and don't overpay, then the interest only mortgage will have the higher overall costs since you are always paying the maximum interest.

So I think that's why there is a difference showing under various scenarios. In your case I'd still pay off the interest only, even if just because you know the amounts owing will reduce over time which they won't with interest oniy unless you overpay.

getmore4less · 16 July 2017 at 9:34AM

The cost is the same

pay off the repayment as that reduces the min payment which gives more flexiblity going forward.

geting an I/O mortgage these days will be difficult yo can always change to repayment/overpay but not the other way.

Interest rate is 2.25% on everything
A - Combination Mortgage (£26,794 capital repayment, £35,000 interest only)
B - Capital Repayment Mortgage (£29,178)

20years

£26,794 @ 2.5% £142pm
£35,000 @ 2.5% £73pm
£29,178 @ 2.5% £155pm
Total £370pm

20y repayment on all of it
£90,972 @ 2.5% £482pm

pay off £32k i/o and put the 3k on repayment
£58,972 @ 2.5% £313pm

or pay of the repayment bits

£23,972 @ 2.5% £127pm
£35,000 @ 2.5% £73pm
TOTAL £200pm

you can pay
£200pm and be left with £35k in 20y
£313pm and be left with £0 in 20 years
£370pm and pay it off in 16y 2m (current payment)
£482pm and pay it off in 11y 10m(payment needed now to clear in 20y)

what you pay determines how long it takes not which bit of the mortgage you pay off.

Da_Matser · 16 July 2017 at 11:39AM

However if you stick with the mandated payments and don't overpay, then the interest only mortgage will have the higher overall costs since you are always paying the maximum interest.

@AnotherJoe Thanks! Yes, as I was always going to use this endowment policy to pay off a lump sum, I wasn't looking at the flip side properly. If I didn't pay a lump sum, then of course, the interest payments would be considerably larger over the next 20 years compared to the repayment part, which is being chipped away in any case. So this gave the perception that using my lump sum to pay off the interest only account was going to give more bang for my buck. The online calculators do not take into consideration that I would then use the monthly savings of paying off the capital repayment parts against the interest only account.

you can pay
£200pm and be left with £35k in 20y
£313pm and be left with £0 in 20 years
£370pm and pay it off in 16y 2m (current payment)
£482pm and pay it off in 11y 10m(payment needed now to clear in 20y)

what you pay determines how long it takes not which bit of the mortgage you pay off.

@getmore4less Thank you also! The interest rate is actually 2.25% but I understand the maths - I needed this lesson :T

I was going to pay the interest only account until I read your post this morning. Thank you for your wisdom here advising me that an interest only mortgage is a valuable commodity these days, with all the flexibility it comes with together with a safety net. You've probably worked out I got this 25 years ago (when endowment mortgages were all the rage and I thought 25 years would never come! :sigh: )

The added bonus of paying off the capital repayment side is that I can close Account B (no fees, I've checked) and just concentrate on one mortgage account.

I think Nationwide reduce monthly payments rather than term by default, so I will leave it like that (for flexibility) and aim for about £500pm for the foreseeable.

Thanks again both.

Thrugelmir · 16 July 2017 at 12:02PM

You could always clear Mortgage Account B entirely.

Use the remaining few £k to reduce the balance on Mortgage A . Then switch the entire mortgage to a repayment basis.

Which account should I overpay?

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