mortgage overpayment - capital or term reduction?

blackshirtuk

loracan1 wrote: »

The interest is calculated on a regular basis be it daily, monthly or annually. I've always understood that overpayments on an IO mortgage will only ever repay the capital.

Totally agree the capital will be reduced not the term.

If you overpay on IO mortgage you are effectively creating a repayment mortgage.
Each month any overpayment will reduce the amount of interest charged, keep overpaying interest reduces further.

Now obviously if you get to the point where you have overpayed enough to clear the mortgage, then the term is finished!(shortened from original because you have paid it early)

sonastin

I've been giving it some thought - brain works pretty slow! - and I think my post works for interest only as well... but I don't know how lenders treat it with I/O

You pay more money on your mortage. The principal is reduced by the amount of the overpayment. Your monthly interest payment is based on calculating the interest on the principal over the term so if the principal is reduced the interest over the term is reduced and either your monthly payment goes down or your number of payments goes down (i.e. term is reduced).

So your lender could reduce your monthly payment, leaving you with more to put in as an over payment. Or (more likely I think but I've never had I/O so I don't know) your monthly interest payment stays the same but your term goes down.

Either way, the principal is reduced so you improve the negative equity situation with every overpayment...

twirlypinky

thanks for the replies, very helpful.

julianashcroft

I overpay my mortgage once a year at the maximum I can without penalty which is 10% of the outstanding. I'm on interest only and after each payment I get a letter showing the capital owing has reduced to such and such an amount. The amount I end up paying monthly is also reduced as the interest on the capital is less as the capital has reduced.