Overpaying Repayment v. Overpaying Int. Only

kriss_boy

Our mortgage was originally interest only, which on 80K equated to around £450 a month.

Since the rate has dropped the interest fell to only approx £100 a month so we began overpaying it.

Is us overpaying an interest only mortgage exactly the same as doing a repayment mortgage?

I was under the impression that us giving that extra £400 per month went directly towards the outstanding 80K. So after 1 year, we will have paid 12 x £100 in interest but reduced our mortgage by 12 x £400.

Is it that simple? Thats what Lloyds TSB said but it seemed a little too good to be true.

We plan on upping the overpayings to nearer £800... so after 12 months if the rate stays as low we will have paid off £10K which again, seems too good to be true.

pablo1827

Its true Kriss-boy.Whatever you pay over and above your mortgage interest payment, will come off your outstanding 80k .Doing the same thing myself.

kriss_boy

So why is there such a stigma attached to interest only?

When I tell people its interest only but Im over paying it they all say "oh you really should change it to repayment"... as though Im making a bit mistake.

At least this way we have absolute flexibility and if myself of my partner lost one of our jobs (touch wood we dont) then we could revert back to interest only until we found something else.

A repayment would be needlessly risky on that basis.

chambta

I do exactly the same Kriss_boy for the same reasons. I'm in control of it and like to keep it that way.

Cannon_Fodder

I suspect the anti-IO feeling comes from concerns over the long-term method of paying off the mortgage.

When the rates revert upwards again, leaving no over-paying leeway, how do you plan to repay the mortgage?

In 1 year you might clear 10% or more, but what of the other 90%?

Past savings methods, like endowments, are poorly thought of. Having Stocks ISAs or Cash ISAs are an option, but Stocks may perform badly in the year you need the money, and Cash interest rates are not great at the moment.

Repayment has become re-fashionable as a result.

Probably worth checking your small print, to ensure the overpayments are immediately applied to the balance, i.e. your interest payment should be dropping a touch each month. Daily interest, rather than monthly, calculations also help save a few pennies.

nomey

Cannon_Fodder wrote: »

I suspect the anti-IO feeling comes from concerns over the long-term method of paying off the mortgage.

When the rates revert upwards again, leaving no over-paying leeway, how do you plan to repay the mortgage?

In 1 year you might clear 10% or more, but what of the other 90%?

Past savings methods, like endowments, are poorly thought of. Having Stocks ISAs or Cash ISAs are an option, but Stocks may perform badly in the year you need the money, and Cash interest rates are not great at the moment.

Repayment has become re-fashionable as a result.

Probably worth checking your small print, to ensure the overpayments are immediately applied to the balance, i.e. your interest payment should be dropping a touch each month. Daily interest, rather than monthly, calculations also help save a few pennies.

I had been thinking about this issue recently as well.

If interest rates were to raise substantially again which meant the OP was unable to make overpayments then would the cost of a repayment mortgage also be unaffordable?

Would they not benefit as reverting back to just paying the interest would mean they could afford the mortgage rather than defaulting on the payments?

Thanks

Cannon_Fodder

nomey wrote: »

I had been thinking about this issue recently as well.

If interest rates were to raise substantially again which meant the OP was unable to make overpayments then would the cost of a repayment mortgage also be unaffordable?

Would they not benefit as reverting back to just paying the interest would mean they could afford the mortgage rather than defaulting on the payments?

Thanks

IO might be a sensible short-term option in the event of job loss, for example.

But a mortgage is about more than just being able to afford the interest.

At the end of the mortgage term either you have gradually eroded the capital owed, through re/over-payment, or you have a lump sum to hand...but if repayment is unaffordable, then an alternative savings/endowment is probably not being maintained, either.

If someone can barely afford the Interest Only, only having the ability to overpay when interest rates hit a 300-year low, then committing to that mortgage in the first place was the problem, not the technical difference between overpaying and repayment.

Repayment can help engender financial discipline. After all, the mortgagee has to find that money someday, somehow.

Do people commonly get to the 20th year of a 25 year mortgage, and only then stop to ask themselves where they plan to find £100,000, or whatever amount?

I don't call that "keeping control".

The ideal would be to afford the Repayment at "normal" IRs, then todays interest rates would help to overpay on the repayment...and really knock some wedge off the outstanding capital.

kriss_boy

Cannon_Fodder wrote: »

When the rates revert upwards again, leaving no over-paying leeway, how do you plan to repay the mortgage?

This is where Im confused though... because when it does revert upwards I could continue to overpay but just to a lesser degree.

Are you suggesting interest only costs more to repay? My mortgage advisor pointed out that the difference between interest only and a repayment mortgage was only £30 a month. This after 1 year he said I would have only paid off a measly £360.

His advice therefore was to go interest only with the aim of getting a better job in the future.

Ignoring the drop in IR, the interest when I first got the mortgage was £420 per month. A repayment mortgage was about £450.

So...is there any incentive at all to revert to a repayment? Is the interest calculated in a different way or will it remain as is? If it remains as is then I dont see the point in ever opting for repayment when I know I can afford to overpay it anyway....

Cannon_Fodder

With IO you will pay £80k worth of interest for the 25 years of the mortgage.

With repayment, your new capital amount each month results in a lower Interest portion of your payment, resulting in an extra little chunk off the capital, and so on, its a cumulative effect.

£30 extra for repayment sounds a bit low. Was it some sort of "low-start" basis, over the first few years?

If you use the link, http://www.bbc.co.uk/homes/property/mortgagecalculator.shtml and punch in £80k, 25 years, original interest rate, then it will tell you the IO and Repayment figures. 6.75% gives £450 IO, £559.24 repayment, for example.

Also try http://www.showyourhouse.co.uk/Site/AmortizationSchedule.aspx , punch in your figures and see how there is a gradual shift from mostly interest to mostly capital repayment on a repayment mortgage.

At year ten you only owe £62k, in year 20 its £28k...


If we have two years of low rates, and it goes back to the rate you started, you may lose the discipline of voluntary overpaying. Then the captial remaining will remain at the figure at that time, for the remaining life of the mortgage.

Using 6.75%, you will pay £450 x 12 x 25 = £135,000, just in interest, plus the original £80k capital = £215,000 in total, through the life of an IO mortgage.

With repayment, £559.24 x 12 x 25 = £167,773.75, both interest and repayment, means job done.

Save yourself £47,226...

Of course, there is an "opportunity cost", you've not had the £109.24 extra each month, to live on. That would be £32,772 you could save and invest over the life of the mortgage, but that requires discipline and a product that beats your mortgage rate.

(by all means get a mortgage product that is flexible, with payment holidays, conversion to IO, etc to allow for job loss)

nomey

Cannon_Fodder wrote: »

With IO you will pay £80k worth of interest for the 25 years of the mortgage.

With repayment, your new capital amount each month results in a lower Interest portion of your payment, resulting in an extra little chunk off the capital, and so on, its a cumulative effect.

Is it not possible to get an interest only mortgage and the overpayments come off the capital with the interest recalculated monthly?

Cozworth806

nomey wrote: »

Is it not possible to get an interest only mortgage and the overpayments come off the capital with the interest recalculated monthly?

C&G charge for every recalculation so if you overpay then it is better to leave it until the yearly review.

I have a 10year fixed rate on IO but making overpayments. Have started low while finding feet regarding costs for house, but should pick up.