Interest only mortgage - overpayment query

thriftyminx13

hello everyone,

i have an interest only mortgage for 95% LTV 124k on a base rate tracker on a property bought 3 years ago. i decided to go interest only as i was 26 years old when i bought it and hope to be able to afford repayments with promotion at work etc. prior to all the cuts in base rate i was paying around £575 a month. at present I pay around £373 per month although with the 1% cut (if this is passed on) i expect to pay around £300.

i am hoping in a few years that the property market will have returned and that I will eventually make a few thousand and use this as deposit (if the market ever returns) for a property closer to work.

do you recommend that i overpay every month on my interest only mortgage or just carry on with my lower payments and save the excess? i have some savings for contigency reasons. any advice would be great. thank you.

uzubairu

I think you can forget about the property market returning to it's overpriced status of the last few years. House prices are still falling.

I'd definitely save the excess (£275) and see if I could repay some of the capital.

Can you repay some of the capital or move to a repayment mortgage?

financialbliss

Hi ThriftyMinx,

With a 95% loan to value (LTV), I guess your purchase was around 130,500 give or take a few pounds? Ie, 124/130.5 give a LTV of 95%.

You’ll probably be aware that the property prices are sliding – some say by double digit values. Let’s be generous and say you’ve only lost 5% of your property value. 5% of 130,500 is 6,525. Take that off the purchase price of 130,500 and you have a property value of 123,975 – less than the 124k mortgage you have.

You could be in negative equity already.

As your LTV is increasing due to your property falling in price, but your debt isn't reducing, you’re very unlikely to get a good mortgage deal when you come to remortgage. From the mortgages part of this site:

“For those with an LTV (Loan to Value ratio) of over 90%, meaning your mortgage debt is at least 90% of the house’s value, getting a new mortgage has become very difficult. For those with an 80% to 90% LTV you should get a new deal, but it won’t be too cheap.”

Have you got a repayment plan in place?
What about maintaining your £575 a month payment?
Could you afford to swap part of or all of the mortgage from interest only to repayment?

I agree with uzubairu – house prices are still falling. I’d certainly try to reduce your debt, either directly to the mortgage or saving then paying off chunks later.

Financial Bliss.

thriftyminx13

I initially paid 124k for the house three years ago and was on a 100% fixed interest only mortgage. this ran out in june 2008 and i managed to get the house valued at 132k giving me my 5% LTV on a base rate tracker. this is ongoing and i don't need to renegotiate and there are no penalties for overpaying etc or selling early (if the market recovers).

so you recommend taking the £275 and using it to pay off capital rather than overpay on the interest only part? is that right? many thanks.

Rikki

thriftyminx13 wrote: »

so you recommend taking the £275 and using it to pay off capital rather than overpay on the interest only part? is that right? many thanks.

Overpayments reduce the capital on an interest only mortgage. Interest is calculated on the capital outstanding.

If this was my situation I would pay towards the capital owing. This in turn would improve the LTV when I needed to think about changing mortgage deals etc.

For my interest only part of my mortgage to make any overpayments I have to send a cheque to the mortgage company with instructions. Call yours and ask how you can make these overpayments.

Another method is making an on-line bill payment using the mortgage account number. (ask)

Question: Do you you have life insurance or a method of paying off your mortgage if you die? Worth having unless you don't mind the house being sold in any unfortunate event.

thriftyminx13

yes I do have life insurance, got it as soon as I took out the mortgage.

i have made isolated overpayments on the interest only part of the mortgage via online banking but i think to set up repayments on the capital i'd have to go through customer service. is there no benefit to overpaying the interest only part? sorry for naivety and thanks for reply.

CLAPTON

I thought you said you had an interest only mortgage ... if so what do you mean 'repayments on the capital' and 'overpaying the interest part'?

All overpayments go to paying off the capital otherwise it would make no sense to overpay.

thriftyminx13

sorry i got myself confused by one of the posts! thanks very much for all the advice. my dad said just to save the excess but i had seen some other posts on the forum recommending paying off mortgage. so that's what i'm going to do. thanks again all. i appreciate all the help!