Switching from interest only to repayment

catriona69

Does anyone know whether it is possible to switch from an interest only to a repayment mortgage during the initial fixed rate term? (preferably without paying a penalty).

The mortgage is with Alliance & Leicester if this makes any difference.

dimbo61

Contact the lender and ask !
I am sure they would be more than happy for you to be paying more each month via a repayment mortgage as they would be getting the loan repaid and less chance of negative equity so give them a call.!

catriona69

That's what I thought. Cheers - I'll give 'em a ring when I get home.

Another question has sprung to mind as well... a fairly common condition with A&L mortgages is that you can make a penalty-free overpayment of £499 each month. Has anyone asked whether this can be increased? If not, I might also them that when I call as it seems silly to have to hoard money in savings accounts that are paying measly interest when it could be bringing the mortgage down.

dimbo61

It A & L say NO that £499 extra a month is the max overpayment they will allow and you have a good savings pot you could ask them to shortern the mortgage term at the same time as changing from IO to repayment

catriona69

Good point. However, we don't have that large a savings pot after paying 10% off the capital sum last month!

I think switching to repayment with the term we've already got will be plenty and it's unlikely we'd ever have that plus more than £499 to pay in each month. I just thought increasing overpayments may be another option if switching between interest only and repayment wasn't as possibility.

Cheers for the advice and I'll report back once I've spoken to A&L.

catriona69

Quick update: I got all my mortgage info out and after a thorough search I found a list of services they offer and what they charge for them.

You can change your payment from interest only to repayment (or vice versa) for £50 so that's what we've done. A&L are sending us a form to complete and it will kick in in March.

ricsherman

question - was the £499 overpayment an overpayment on the interest only or £499 over whatever the capital repayment would be? And when they said you could change, did they clarify this?
Because I'm looking to go from IO to repayment when my fixed rate runs out this year because the drop in interest rates will mean i'll now be able to overpay.

feisty1

when you overpay anything above the monthly interest owed, the
remainder comes off the capital sum..........once u default to svr you can pay what u like..........

catriona69

ricsherman wrote: »

question - was the £499 overpayment an overpayment on the interest only or £499 over whatever the capital repayment would be? And when they said you could change, did they clarify this?
Because I'm looking to go from IO to repayment when my fixed rate runs out this year because the drop in interest rates will mean i'll now be able to overpay.

There is actually no difference between being on an IO and a repayment once your fixed deal ends as you can repay what you want.

At the moment we're still in our 2 year deal so we are limited to £499 each month that we can overpay. Therefore, by switching to a repayment mortgage we can pay off more during this period. However, having thought about it, you have to pay a £50 charge to change from IO to repayment so it's not actually worth it. Instead, we're going to do what we planned to previously which is to repay £499 per month and save the rest in an ISA to pay off one big lump sum when our fixed deal ends. I suppose it's only worth paying the £50 charge to switch if you have quite a long time still to run on your fixed deal.

Once your fixed deal has ended you can overpay your mortgage by however much you want so there is no difference between being on IO or repayment. In fact, I'd say being on IO has it's advantages in that if you suddenly needed money for something else, the amount of money that you have to commit to your mortgage each month is lower. Paying the £50 switching charge would gain you nothing.

Hope that helps... I've been think about it a lot for the last day!

Oh and to clarify... an interest only mortgage means you're paying off the monthly interest each month so that the capital sum stays the same. The £499 overpayment is ALL capital so you're reducing your mortgage by £499 each month (and therefore your interest will go down each month).

What do you mean by "when they said you could change, did they clarify this?". If you have an A&L mortgage, it's in your T&Cs that you can switch from IO to repayment for a £50 charge. You have to fill in a form and send it off to them and then they switch you from the next month and charge you £50 admin fee (or this can be added to your mortgage although this defeats the purpose of switching to repayment in my view).

Stroof

How does switching from IO to Repayment affect your total monthly payments ? Does it get flattened out over the remaining term, or is there a premium to pay ?

Presumably it is a lot easier switching to repayment if you do so early in the life of your 25-30 year term. If you were in the last 5-10 years it could be a different story, I guess you could extend the term though provided A&L (Banco Santander aaaaaagh !) were happy to do so. In which case it would be more than a £50 admin charge to switch.

catriona69

Stroof wrote: »

How does switching from IO to Repayment affect your total monthly payments ? Does it get flattened out over the remaining term, or is there a premium to pay ?

Presumably it is a lot easier switching to repayment if you do so early in the life of your 25-30 year term. If you were in the last 5-10 years it could be a different story, I guess you could extend the term though provided A&L (Banco Santander aaaaaagh !) were happy to do so. In which case it would be more than a £50 admin charge to switch.

Yeah, it's the mortgage divided by the number of years left on the mortgage so you'd need to do it early on or change the term - I think you can do this for a small charge too. If you were outside your fixed deal you could pay of a lump sum (if you're on interest only you should be saving money to pay off the mortgage somewhere else anyway) to bring the capital down so the repayment amounts were affordable.