Repayment Vs Interest Only - Overpayments

cloud_dog

For the purpose of discussion we'll pretend that all mortgage produts / lenders interest rates are the same and that there is only a standard mortgage BRT or SVR, doesn't really matter.

I have a mortgage with Nationwide and like many lenders they allow overpayments (up to £500pm). Obviously the benefits of overpayments is that they reduce the interrest you pay on the mortgage (thereby reducing the life of the mortgage term), and generally you can draw on the overpayment amounts instead of further advances or for payment holidays. With Nationwide all overpayments reduce the mortgage principle on the day received.

Lets assume I have a £100k mortgage amd the interest only option would cost £400pm, repayment option would cost £600pm and I am willing (will) pay £800pm.

MY question:

Is it better to opt for the interest only version or repayment?

I am assuming, although correct me if my thinking is wildly off the mark, that repaying £800pm will repay the mortgage in the same (or very similar) timespan irrespective of the option taken (IO or repayment).

The reason I ask the question is that I see the ability to build up an overpayment pot of money to be bery beneficial in the long term, i.e. if you have a less money to service your mortgage / bills (for example redundancy) or simply you have large bills to foot (wedding, etc), and taking the interest only option will build a bigger pot more quickly whilst, in effect, reducing the o/s principle amount in line with the repayment option.

View / comments please.

cloud_dog

silvercar

I am assuming, although correct me if my thinking is wildly off the mark, that repaying £800pm will repay the mortgage in the same (or very similar) timespan irrespective of the option taken (IO or repayment).

Identical timespan 14 years 6 months (4.8% interest on £100k) instead of 25 years if you made no overpayment.

In theory if you called the mortgage an interest only one the pot of overpayments would be larger than if you called it a repayment one. (As the notional repayments would be higher with a repayment and therefore the pot smaller). But at the end of the day, if you take payment breaks or withdraw some of the pot you are going to have to repay it at sometime even if its at the end of the mortgage.