Difference between capital repayments & overpayments

123456

Thank you everyone in this forum for the wealth of information. I am confused about something though and would appreciate clarification.

My interest-only mortgage was originally scheduled to be paid off in 2013 (with an endowment which has a shortfall so I am not relying on it -compensation claimed successfully). I have reduced the mortgage amount outstanding from £41,000 to £11,000 by making regular capital repayments (I can pay min £500, no max). Each time I do this, the monthly repayment is reduced. I then plough this saving back into savings for the next capital repayment. I had intended to keep doing this till the mortgage is paid, hopefully in 2008.

However, most people on this forum seem to be overpaying each month, rather than saving in a separate account and then making lump sum capital repayments. So my question is: does making overpayments have any advantage over capital repayments (or vice-versa)?

I think I understand the concept of offset mortgages but I don't want to complicate things or re-mortgage, so I'd like to ignore that option.

Thanks in anticipation of any replies.

Joe_Bloggs

So much is down to the individual terms and conditions of the mortgage. I have a repayment mortgage in which I pay all of the interest on the capital oustanding for that month and then a capital repayment to make sure that there will be no capital left at the term of the mortgage. The last two payments are lumped together and remain constant throughout the term of the mortgage*. Extra capital payments or overpayments to the repayment schedule can reduce the term of the mortgage. These payments,in my case, are limited to a maximum of £500.

Were there a minimum of £500 then I would have to save up to make overpayments too. The only slight drawback is that tax is paid on the interest on savings as they build up to the minimum £500.
J_B.

*This assumes interest rates remain the same.

123456

This question has been viewed 120 times but had only 1 person reply. Is it because no-one knows the answer? Am I the only person who makes capital repayments?

Will.Power_2

There are so many considerations about how best to do this, and without re-mortgaging or changing the 'product' with your current lender, you may not get the most benefit. It depends on the terms & conditions you have.
Talk to your lender's "existing customer" department, and find out what they can do to provide a 'product' that really meets your need. They may have just what you want.
I'm just 're-mortgaging' with my current now so that I can make regular or irregular over-payments in addition to my normal capital and interest payments, without changing the normal payment. This will reduce the interest I pay and reduce the term. I can also make larger payments with or without amending the monthly payment. I'll be putting most of my savings in, as it's equivilant to getting 5+% interest after tax, and if I need the money I can ask for it back.
Don't be afraid of remortgaging; there are some good deals around, but with only £11,000 left (well done!), you may not qualify. (You could always borrow the minimum but leave the rest in to bring the interest down.)
Just switching the mortgage to capital and repayment over a shorter term, if you're confident you can always make that higher payment might help.

Joe_Bloggs

@123456
I don't get what you don't get. Is just the use of repayment versus payment ?

For a repayment mortgage there is a set capital repayment schedule. Those who overpay make capital payments in addition to scheduled capital repayments, according to terms and conditions of the mortgage.

Those who are on Interest only mortgages can make capital payments, if they are allowed in the terms and conditions, at any time. There is no set capital repayment schedule apart from full capital repayment at full term (end point) of the mortgage.
J_B.

Xbigman

I think this is simply a question of terminology. Payments refered to as 'capitol payments' tend to be large-ish lump sums that cause the mortgage company to recalculate the end date or monthly payment. Usually these are saved up or paid from eg an annual bonus. This is also common when payments are limited, eg I pay 10% every Jan.
Many people chose to send smaller payments every month. This can be advantageous if on daily interest calculation but doesn't immediately effect the payment amount or end date because its not worth the mort company recalculating this every month. However it will have a cumulative effect and the mortgage will be recalculated yearly to take into account the overpayments causing a month on month small interest reduction. This only saves money if you mortgage rate is lower than the rate you could get on savings whilst building up a lump sum.
Regards



X

Debt_Free_Chick

123456 wrote:

So my question is: does making overpayments have any advantage over capital repayments (or vice-versa)?

Yes - you pay less interest, each month. Interest is charged on the amount outstanding. The less this is, the lower the interest. So if you paid something off the amount outstanding each month, then you'd pay less interest.

Have you considered whether it might be better converting to a simple repayment mortgage for the amount currently outstanding and pocketing the endowment when it matures?