lump sum payment - HELP!!!

wenwake

I have a small inheritance which will gain very little interest and so want to use it to pay off a bit of my mortgage. I have 2 parts though, one repayment and one interest only - my mortgage company have asked which part I would like the money to go towards. Help!!! Which would be the best to pay off quicker and why? Is there a difference in the long term?

Thanks in advance!

silvercar

Have either got early repayment penalties?

The quickest way to clear the mortgage would be to repay the interest only (as the mortgage will never decrease on this part without lump sum payments).

If you can afford it, keeping the mortgage payments at the same level you do now, but with the inheritance reducing the outstanding mortgage, will clear your mortgage even sooner. Again check that overpayments are allowed without penalty.

Always assuming you aren't planning on needing the money for anything else.

debtdesperado

Um... I would say the opposite to Silvercar (!)

I would say pay it off the repayment part, but check that the overpayment that you are going to make will come off the capital (ie the original sum you borrowed) and not off the interest (ie the amount that you pay the bank to be able to borrow the capital).

Making a payment off the capital amount will have the effect of reducing the overall interest payable (because the interest is calculated on the amount of capital that is outstanding at any time). Depending on the terms of your mortgage, this should mean that the monthly payments on both parts of your mortgage will drop slightly, depending on the amount of the overpayment.

If you pay off a bit of the interest, you haven't reduced the capital, and therefore if the interest rate changes on your mortgage (eg if a fixed term ends), you may have lost any benefit.

I think I'm correct, but then again I don't have a split mortgage like this, so any lurkers, please let me know if this is wrong!

muddled

I have the same question as Wenwake. We too have interest and repayment parts to our mortgage. The endowment policy for the interest only part of our mortgage has matured and we want to use this to pay off some our mortgage. We have had no contact at all from the building society only from Axa, who are currently arranging payment of the matured policy to us.

It would really help us and assume Wenwake too, if others could give their views/advice on both Silvercar and Debtdespardo's contribution.

Thanks in advance

Digsy00

debtdesperado wrote: »

Um... I would say the opposite to Silvercar (!)

I would say pay it off the repayment part, but check that the overpayment that you are going to make will come off the capital (ie the original sum you borrowed) and not off the interest (ie the amount that you pay the bank to be able to borrow the capital).

Making a payment off the capital amount will have the effect of reducing the overall interest payable (because the interest is calculated on the amount of capital that is outstanding at any time). Depending on the terms of your mortgage, this should mean that the monthly payments on both parts of your mortgage will drop slightly, depending on the amount of the overpayment.

If you pay off a bit of the interest, you haven't reduced the capital, and therefore if the interest rate changes on your mortgage (eg if a fixed term ends), you may have lost any benefit.

I think I'm correct, but then again I don't have a split mortgage like this, so any lurkers, please let me know if this is wrong!

Sorry but you are wrong....

By paying off the interest only bit they will in effect pay off the capital owing thereby reducing the mortgage amount.

Example
150k mortgage, split into 100k repayment and 50k interest only.
If they repay the 50k interest only part with a lump sum, the mortgage is now only 100k, so the repayment element remains.

The principal of paying off the higher interest rate remains. so whichever bit has the higher interest rate is worth paying off first. Otherwise, pay off the bit that has lower costs to repay or fees.

Cheers
Digsy

silvercar

When I said "pay off the interest part" I mean pay capital of the part of the mortgage that is interest only, not pay interest in advance!

It really should be as broad as its long in the longterm. In the short term your monthly payments will be lower if you reduce the capital on the repayment part. Ideally you should maintain your current payment level and so reduce your mortgage term.

My guideline would be:
1. check if any part has redemption penalty.
2. then check the interest rates on each part.
3. other things being equal, to reduce monthly payments, pay off the repayment part, to lower the mortgage term / reduce the amount outstanding at the end of the mortgage pay off the interest only part.
4. Remember that you will still need to find the money to clear the interest only part of the mortgage at the end of the term.
5. If you think you may need the money in the future, bank it instead. Once repaid it may not be possible to recoup the funds.