Repayment Mortgage v interest only with overpayments

rjenk74

Hi all

Is there a difference between having a repayment mortgage or having an interest only mortgage but overpaying every month by exactly the amount as though it were a repayment one, if that makes sense

It seems logical that it should be the same but I am sure I read somewhere that the interest only one with overpayment is actually more beneficial?

Just talking facts and figures as opposed to other issues like the temptation not to pay the overpayment.

regards and thanks for reading.
Rich

rjenk74

anyone any ideas

regards

Joe_Bloggs

The interest only situation may give you more flexibility as to when to make overpayments that effectively match a conventional repayment schedule. This approach would make sense if income was irregularly spaced throughout the year.
J_B.

_bankrupted

Are you talking mathematically?

If so the answer is yes, they are identical. BUT........ like all things you have to compare like with like. Not too long ago most mortgages were calculated annually, so at the start of the year the interest for the entire year was calculated and applied to the loan. If you made an overpayment then that had no effect on reducing your interest payments until the calcluation was re-applied at the end of the year. So in effect if you made a capital repayment mid year, the bank effectively was holding that payment and then applying it to the loan at the end of the year.

So you need to compare a repayment mortgage with an interest one where the interest calculation is the same. A lot of mortgages now calculate interest daily. That means the interest charged is calcualted daily on the outstanding balance at the end of the day. For this type of mortgage an interest only mortgage is the same with respect to your question

_Andy_

You also need to factor in whether the lender would allow you on IO with no repayment vehicle - pretty unlikely unless you have a huge deposit.