Mortgage overpayment decision

slioch

I am in a position where for a few months at least, I can make overpayments on my mortgage. Obviously, I know this is a good thing in the long run, but I want to make sure I get the best out of making these additional payments.

I have a fixed rate mortgage with 2 components - an interest only component and capital repayment. The interest only component will be complete in 13 years, and the capital repayment one in 17 years.

There is an endowment policy in place to cover the interest only component. I am aware of the issues with endowments, but so far, it's on track, but I know that there is still a possibility of a shortfall.

Essentially, my questions are:

• Which component is the most sensible to make the overpayments towards? Would it be sensible to put it towards the capital that the endowment may/may not cover, and pay less interest on that capital, or is it best to reduce the capital of the capital repayment component?
• Does making an overpayment reduce the interest month by month AND reduce the term of the mortgage, or is it one or another?
• When the fixed deal ends in 2 years time, and I am looking to switch, I presumably can re-negotiate the length of time of the mortgage, so how does this figure with making overpayments now, with a view to reducing the term of the mortgage.

cheers for any help!

Yorkie1

I am not an expert but would think along these lines:

1. Are there two different interest rates or not? If not, I personally would prefer the safety of knowing I'm taking steps to pay off the interest-only component in case the endowment falls short.

2. My understanding of overpayments (on a repayment mortgage) is that you either choose to reduce the term of the mortgage by keeping current monthly repayments the same, or you reduce monthly repayments and keep the term the same.

3. If you obtain a new mortgage product then I would assume that the new product will completely repay the old one so its outstanding term becomes irrelevant. The relevant issue is that what you owe has been reduced and thus any new mortgage will be for a lower amount of money and, therefore, can either be over a shorter period or with lower repayments.

I think!

slioch

Thanks for getting back to me Yorkie1

1. One (fixed) interest rate covering both components. I was thinking along the same lines that it may be sensible to reduce that capital, just in case, and hope that the endowment covers the original value, so there will be a surplus at the end. I guess i will still need to let the interest only component run it's full term, as the endowment is timed to mature at a certain time, so in that case, i would just be paying less interest on the capital month to month. When I spoke to the mortgage company, and they just assumed i'd want to put it against the capital repayment component, and seemed surprised when i asked about whether i should put it against the interest only component. It was suggested i take financial advice. Slightly frustrating in that you call a financial institution, and they aren't allowed to give you any advice! Hmmm, so still not sure what the best thing to do is.

2. I am leaning towards reducing the length of term, rather than the monthly payments, given that I can afford to overpay for a while, I can, you would assume, afford to pay the same amount of interest I was paying! So, that one seems clear cut.

3. I realised it was a bit of a daft question once i submitted it, but thanks anyway!

cheers

fanturo

go for obtaining a new mortgage

sophievenusdoom

slioch wrote: »

Thanks for getting back to me Yorkie1

It was suggested i take financial advice. Slightly frustrating in that you call a financial institution, and they aren't allowed to give you any advice! cheers

Being that I work for a financial institution, there are only certain trained individuals that can give advice. However, we do have them working for the company. I am sure you wouldn't like to receive financial advice from someone who was not trained?

slioch

fanturo - the redemption penalty for changing a new mortgage would equate to about 6 months of overpayments! I did look into this a while back, but the best deals I could find would, over 2 years for example, only generate saving of the same value as the redemption penalty, so wasn't worth doing.

sophievenusdoom - I understand what you are saying, but at the same time, the question I am asking is generic, in that I don't have any complicating or specific factors. I am reluctant to pay a financial advisor to just tell me one or the other. Seems a bit OTT. Suppose I may end up having to do that anyway.

Peelerfart

slioch wrote: »

sophievenusdoom - I understand what you are saying, but at the same time, the question I am asking is generic, in that I don't have any complicating or specific factors. I am reluctant to pay a financial advisor to just tell me one or the other. Seems a bit OTT. Suppose I may end up having to do that anyway.

Not necessarily, if as you have stated you have no "complicating or specific factors" then there is no reason, in my opinion, that a reasonably intelligent person could not make there own minds up what they want, mortgage wise, and organise it accordingly.

I think sophievenusdoom's company is perhaps a little quiet and is looking to drum up business.

Spam anybody ?

slioch

I can completely understand why you cannot expect to phone up to make a payment on the phone, and expect a fully trained financial advisor to be on the other end of the phone, as it's probably not the best use of "resources" (hate that term, but you know what I mean). However, I would expect to be able to get an answer to a straightforward question regarding the best outcome of making a payment to an account that they have the details of, and I would presume (maybe wrongly), the details of the long term outcome of making that payment. I maybe didn't ask the right questions on the phone...

TrickyDicky101

Since the interest rate is the same between the interest-only and repayment portions, the only sensible decision (assuming you are able to pay off elements without incurring ERCs) given that you have decided to overpay is to make overpayments against the interest-only balance. In either situation (pay off against capital repayment or interest-only), assuming your normal monthly repayments remain the same, the total interest you are charged each month will be the same. However, given that the terms are different you *should* pay off against the loan with the shorter term. Then, if the endowment fails to completely repay the interest-only balance you will have a smaller (and thus cheaper) deficit to finance. If the endowment exceeds the outstanding balance, you can use this to overpay on the capital repayment.

Joe_Bloggs

MSE Martin has written a mortgage overpayment guide. There is a lot to consider and tools to work through the numbers.
J_B.

slioch

TrickyDicky101 - thanks for that. it is along the lines of what i was thinking. Paying the capital off of the interest only part of the mortgage seems sensible to me, it was just the reaction of the person at the lender that made me think i should find out before commiting to it. It is the shorted term, and it has risk in that the endowment may well not cover the capital. However, my understanding is that if the endowment meets or exceeds the target, we will get the difference between the capital owed, and the matured endowment. The less capital to be paid off, potentially the greater lump sum.

However, I am guessing that paying off the capital of the interest only component will not reduce the length of term, and the endowment will mature at a fixed date, ad it will probably not be advisable to end it early, unless of course it's losing cash hand over foot at the time?

Joe_Bloggs - thanks for that. I had read it, but it didn't answer some of my specific questions.