Which part for lump sum..

PZH

In a similar vane to another thread ( But didn't want to hijack it ) - I have been thinking of paying off our mortgage for a while ( See here ), but things took a turn for the worst at work ( See here )

However, I enquired with A&L yesterday about paying a chunk off the mortgage. We have £20k in Interest Only and about £17k left on the repayment side. I asked about paying off the £20k totally and was told this would constitute a change to the contract and would cost me £50 to do it. ( NB: we have a flexible mortgage so this is not a charge for paying a lump sum )

I asked what would happen if I just paid a lump sum of £20k into my mortgage account ( i.e. not being specific about which part it paid off ) and was told that the repayment part would be fully paid up and the remainder of the cash would take some money off the IO part.

However, I also overpay the mortgage each month, so I asked what would happen to them and was told that, once the interest for the month had been paid, the IO part would continue to reduce with the remainder of the overpayments. ( Same principle as a repayment mortgage )

So, my question is, does it really make a difference which part of the mortgage the lump sum repays ??

EssexHebridean

I can't speak from any sort of experience in this matter, but my understanding is that in a situation where you have repayment and IO portions to a mortgage, as the repayment side is already eating away into the capital, any straight "payoff" is better coming off the IO portion. If the penaty is just the £50 you have mentioned, then it sounds very much as though it would be well worth it - how much interest are youb racking up a month (ie - what is your monthly payment to the IO part just to stand still, as it were?)

however....In the light of your final statement regarding what would happen to the IO part once the repament bit is paid off, I can't quite see what the mortgage company are playing at. I don't suppose, by any chance, the IO portion is on a higher interest rate is it? Or are they just assuming that you will continue to make the "standard" payment to the IO, thus leaving yourself still owing the capital at the close of the term?

Good luck with your employment position, by the way.

PZH

EssexHebridean wrote: »

..I don't suppose, by any chance, the IO portion is on a higher interest rate is it?

No - not that I am aware of.

EssexHebridean wrote: »

Or are they just assuming that you will continue to make the "standard" payment to the IO, thus leaving yourself still owing the capital at the close of the term?

This is a good point - I think I will talk to them again in the morning and double check the situation - but I did say that I was making overpayments and the response was that this would come off the IO part once the Repayment part was cleared.

I also think I will need to check about the term of the mortgage and if this will be affected ? I know that I will be paying off the mortgage early - but will they "adjust" the payments in light of the lump sum to stay in line with the original timefame ?

EssexHebridean wrote: »

Good luck with your employment position, by the way.

Thanks You

:T

CLAPTON

if the interest rate on both parts are the same and there are no charges then it doesn't make any difference where the money goes.

without knowing why the 50 is being charged its impossible to say ... is it because you are paying all the IO part..if so just pay most of it off and use the rest of the money off the repayment part.

PZH

CLAPTON wrote: »

if the interest rate on both parts are the same and there are no charges then it doesn't make any difference where the money goes.

Well that's what I think, but not sure if I'm missing something that's staring me straight in the face -

CLAPTON wrote: »

without knowing why the 50 is being charged its impossible to say ... is it because you are paying all the IO part..if so just pay most of it off and use the rest of the money off the repayment part.

I was told the £50 was for dealing with the paperwork to deal with the change in contract for the mortgage - the A&L man did say that they would have to send out new paperwork for me to sign and return in order to pay off the IO part.

I did ask about leaving a "token" amount on the IO part but was told this would still be a change and cost me £50.

Thats when I asked about just paying the money directly into the mortgage account and not stating which part it paid off - and there was no fee for this.

Hence the confusion - surely if the Repayment part is fully paid up, and the IO part is partially paid off with the remainder - isn't this just the same as paying some off the IO part in the first place

Just wondering now - if I did make the lump sum payment and some of it ate into the IO part - would I then start to be charge an "Admin" fee to continue to make the monthly overpayments as I do now ??

EssexHebridean wrote:

..I don't suppose, by any chance, the IO portion is on a higher interest rate is it?

I think I need to revisit this and double check if it is indeed the case..


My head hurts :rotfl:

PZH

Just thought I would give an update....

I spoke to the Branch Manager in York and he confirmed that the interest on both parts ( Repayment and Interest Only ) are the same rates.

He also confirmed that a lump sum on the IO part would result in a £50 administration charge. But, if I just made a lump sum payment against the mortgage account, in effect, it would be the same result.

This is because I make over-payments anyway - so once the interest has been paid, any remaining cash would be taken off the IO part and hence would continue to decrease on a monthly basis ( hence the similarity to a repayment mortgage without actually declaring it as such ) :T

He also confirmed that I still have the option to take a payment holiday, if needed, using the extra payments made to date ( Good fallback position if things do really go pear-shaped )