Interest Only: Save then repay or start chipping away??!!

normal7073

We have 10 years to go on a 15 yr mortgage, with the remainder fixed on 5.18%. Initially, this was a £200,000 interest only mortgage but, as finances have improved, we have part Repayment such that £100,000 will be left to pay in 10 years time instead of the full amount. Recently, with further improved finances due to children leaving university, we are in a position where we could put another £500 a month into the repayments (which our building society allows). We have already saved around £20,000 of the £100,000 we are going to eventually need to pay but what I need to know is this:
Is it better to save £500 a month into our internet account (rates are low everywhere) and then try to pay off the mortgage remainder in one hit ( at £500 a month for the next 10 yrs we'll have £60,000 to add to our £20,000 so we'll nearly be there!!) OR should we start to put the £500 as an additional mortgage repayment to start chipping away, as it were???!!!!

opinions4u

Assuming you have a contingency fund in savings of 3-6 months net pay, and don't have any other credit charging a higher rate than the mortgage, given that the mortgage rate is higher than savings rates you should certainly reduce the mortgage debt.

noh

The £20000 you have saved should also be used to pay down the mortgage capital now rather than waiting to the end provided you have sufficient other savings and no other higher rate debts as detailed by opinions4U.

normal7073

Thank You for your helpful replies. You both are recommending that I start chipping away at the mortgage by making additional payments. As a matter of interest (no pun intended), have you any idea how much I would save by doing it this way rather than saving up a lump sum and paying it all off? In my naivety I still think it is money disappearing with nothing to show by making additional mortgage payments rather than saving my cash, seeing it all there and then paying it all off in one hit!!

Rainmaker_uk

normal7073 wrote: »

Thank You for your helpful replies. You both are recommending that I start chipping away at the mortgage by making additional payments. As a matter of interest (no pun intended), have you any idea how much I would save by doing it this way rather than saving up a lump sum and paying it all off? In my naivety I still think it is money disappearing with nothing to show by making additional mortgage payments rather than saving my cash, seeing it all there and then paying it all off in one hit!!

Hi - this overpayment calculator from Egg should help:

http://new.egg.com/visitor/0,2388,3_54988--View_1028,00.html

noh

normal7073 wrote: »

Thank You for your helpful replies. You both are recommending that I start chipping away at the mortgage by making additional payments. As a matter of interest (no pun intended), have you any idea how much I would save by doing it this way rather than saving up a lump sum and paying it all off? In my naivety I still think it is money disappearing with nothing to show by making additional mortgage payments rather than saving my cash, seeing it all there and then paying it all off in one hit!!

I do know what you mean. That is one reason I changed my mortgage to an interest only offset with First Direct.
That way I could still have access to the money if needed.

Saving it all up and paying it all in one lump sum is only beneficial if your savings rate is higher than your mortgage rate.

If your savings rate is say approximately 2% lower than your mortgage rate it is costing you £400 a year to keep the £20000 you already have in savings rather than using it immediately to pay a lump sum off your mortgage.
Thats £4000 over 10 years.

dimbo61

Overpay the £500 a month and it will clear the £80K over the next 10 years as you wont get 5.18% after tax from any savings account.
Keep the £20K in savings Cash ISA,s as emergency funds

pauljrog

Hi

I have a question regarding overpayments.

If I had a mortgage for 30 years which is part interest and part capital, for example -

Interest £30000
Capital £30000

If I made an overpayment of £1000 for 30 years would that pay off the interest only part so at the end of the mortgage I own the property outright??

Thanks

Paul,

TrickyDicky

pauljrog wrote: »

Hi

I have a question regarding overpayments.

If I had a mortgage for 30 years which is part interest and part capital, for example -

Interest £30000
Capital £30000

If I made an overpayment of £1000 for 30 years would that pay off the interest only part so at the end of the mortgage I own the property outright??

Thanks

Paul,

Overpayments always pay off the capital, because interest is calculated daily so your monthly payment just pays off that month's interest (plus some capital if it is a repayment mortgage). Interest is not calculated at the beginning of the term.

tracyviner

Hi

I have a fixed rate mortgage and fixed rate homeowner loan coming to an end next month. The current interest rates make it very tempting to stay with a variable rate for now but as they are interest only payment currently should I take the risk or transfer to a repayment mortgage or are there any other options? The online rates for this lender are higher than my original fixed rate and I cannot afford to pay more than I was each month. It may be difficult to change provider as there is a 2nd homeowner loan with this lender with a fixed rate that does not expire for another 3 years.

Any suggestions, please.

Thanks

Tracy