SVR part interest part capital???

richiegas

Just came off 3yr fixed term mortgage. Now we are on SVR 3.040% above Barclays Bank Base Rate to give 3.540% at the moment, 27 years left on mortgage.

The mortgage is split

£90k interest only
£70k capital

total £160k mortgage

currently we payment £609 per month, we can afford to overpay £300 per month we can pay it off the interest or capitial or a bit of both.

My questions are

1.should we overpay and if so off which part of the mortgage?
2. Or should we save this money?

Bit of a novice any advice would be greatly appreciated!

opinions4u

If you have a savings contingency fund (e.g. 3 to 6 months net pay) then I'd suggest overpaying.

Assuming the interest is calculated daily, it doesn't matter whether you pay it off the £70k or the £90k. The benefit of reduced capital will save the same amount in interest going forwards.

But I'd build up that contingency fund first - perhaps use easy access cash ISAs to do this, or easy access accounts such as www.theaa.com.

richiegas

Thanks for the advice but could you explain what is ment by

"The benefit of reduced capital will save the same amount in interest going forwards"

My other half was speaking to a mortgage advisor from Yorkshire bank and she said pay off the interst, what is the benefit of this?

Thanks in advance

Richiegas

redpete

On the interest only portion your monthly payment will pay all the interest on that portion for the month and no more.

For the capital repayment part your monthly payment will pay all the interest on that portion due for the month and some of the capital.

So each month you are paying all the interest already, any overpayment will reduce the capital by that amount.

Say you overpay by £100. The next month the amount you are paying interest on will be £100 less regardless of whether you overpaid it on the £70k or the £90k bit. It makes no difference to you which pot you have reduced, the overall amount you owe will be £100 less and you will pay interest on £100 less.

The only difference might be if interest is calculated differently on each pot - e.g. calculated daily on one pot but monthly on the other.

As to whether you should overpay at the moment - yes if you don't need the money to build up an emergency fund, or if the overpayment can be grabbed back later if you do need it, and if you can't earn more than 3.54% by putting the money into a savings account.

Thrugelmir

richiegas wrote: »

Thanks for the advice but could you explain what is ment by

"The benefit of reduced capital will save the same amount in interest going forwards"

My other half was speaking to a mortgage advisor from Yorkshire bank and she said pay off the interst, what is the benefit of this?

Thanks in advance

Richiegas

Over 27 years. For every £1 you paid off your mortgage now. Would save you something in the region of £1.55p over the remaining the term of the mortgage.

So by paying less interest you then could then repay more capital. In effect creating a snowball effect.

Your mortgage is £160k. If it was entirely on repayment. Over 27 years at current interest rates you will pay £89,000 of interest. Or need to earn around £127,000 gross just to service this.

Whilst having an interest only mortgage is very well. Ideally you need to address the issue of repayment. As every month its not been paid down increases the amount to find over the remaining term of the mortgage.

No benefit is paying down i/o first. But it will focus your mind on how much is left to find. The repayment element will clear itself.