Overpayments on Interest only mortgage

Novosaver10

Hi; I'M currently taking advantage of the low interest rate by overpaying on an interest only mortgage. After 3 years of a fixed 6%, we are now into our 2nd year of a +2% base tracker. But in all honesty apart from the advantage of 'getting ahead of the payments, with the chance of 'payment holidays', I am a little confused of what if any other advantages we have?! :embarasse
Of course we would love to re-mortgage and start paying off with a proper mortgage!, but cannot seem to encourage anyone ! We are more than comfortable at the moment and overpaying by £200
We have a mortgage of £148000, we started with a 10% deposit (Flat purchased at £165k, and fingers crossed locally the value is holding + about a few grand!!). So we are still ok in that respect.
Anyway back to the question; By making the overpayments are we actually eating into some total amount of interest that we are heading for at the end of the 20 year mortgage or is the payment re-valued every month. Because that total interest repayment must fluctuate ,,,??!! I am confused, there must be an obvious answer that I'm missing.... PLEASE!! Many thanks to anyone who can put me straight

runninglea

Interest only means just that - so your interest only payment should be £308 per month. By paying the extra £200 should take payment upto £508 per month.


Without making the overpayments your mortgage remains the same at 148K.

The £200/month overpayment will reduce this 148K so £2,400 per year. The remiander will continue to pay the interest

Novosaver10

That was a quick reply!! So the Overpayment IS actually going into paying off the £148k ? Yeah I understood the Interest only mortgage side of things, it was just where this overpayment was going that was puzzling me. If that is right, that its starting to 'eat' away at the £148k, then I'm well chuffed! Thanks for the good news!

cskay

Once you make overpayment you reduce your overall mortgage and hence the interest you pay monthly, so you are right your interest payment should fluctuate. Some banks recalculate your interest payments from the day you overpaid others on the monthly basis.
BTW if your mortgage interest is really low and you are able to get better returns on your savings elsewhere, then its better to save and then make a lump sum payment later.

Mrs_Z

Hi, as I understand it, when you make over payments, you should specify them as 'capital repayments' to the lender. So instead of paying interest on £148k, you'd be paying interest on £147,800 which will be less. Check your mortgage terms though, as some lenders specify the minimum overpayment you can make (ie. sometimes it's £500). So by making over payments, you will be reducing the amount owing and as a consequence, your interest payment should also reduce.

Novosaver10

cskay wrote: »

Once you make overpayment you reduce your overall mortgage and hence the interest you pay monthly, so you are right your interest payment should fluctuate. Some banks recalculate your interest payments from the day you overpaid others on the monthly basis.
BTW if your mortgage interest is really low and you are able to get better returns on your savings elsewhere, then its better to save and then make a lump sum payment later.

Thanks; I hear you on that ... but dont start me on savings else where, Im just getting my head around this calculation!:j..One step at the time! I know I need to get all my finances sorted (loans,etc) but this is a start, Thanks again, being interest only I honestly thought I couldnt 'eat into' that £148k until we sold or re-mortgaged

redpete

If it's like ours the lender will leave the regular monthly payment the same even though the actual interest charged will be (slightly) lower because you are paying off some of the capital. So in the example you would be paying off slightly more than the £200 a month; this wouldn't make much difference to start with but over time with the wonders of compounding it can make a helpful difference.

dimbo61

I know you mortgage rate is only 2.5% at the moment but if you can then overpay as this helps in 3 ways!
1 you reduce the debt on the flat if only by a little each month and build up the equity 90% LTV.
2 you are in effect saving 2.5% TAX free which is better than many savings accounts.
3 as you have overpaid you are building up an overpayment account which MAY !!! allow you to have a " mortgage holiday" in a few years time.
But its does not make good sence if you are paying 12/15/19% APR on credit cards or loans.

cskay

In effect you are getting 2.5% savings interest on your overpayments that too without any tax implications. Even that's very good in today's low interest environment. And because you can take payment holidays so in one respect even your overpayments are not tied in and you can use them in emergency. So you deserve to be happy. :-)

Edit:
Sorry to repeat you dimbo61, you summed it well, I was late in clicking the submit button.

Novosaver10

Mrs_Z wrote: »

Hi, as I understand it, when you make over payments, you should specify them as 'capital repayments' to the lender. So instead of paying interest on £148k, you'd be paying interest on £147,800 which will be less. Check your mortgage terms though, as some lenders specify the minimum overpayment you can make (ie. sometimes it's £500). So by making over payments, you will be reducing the amount owing and as a consequence, your interest payment should also reduce.

Thanks, Yes we can overpay at I believe up to 100% of the initial monthly sum; so we are nearly there now. Happy Days!

Novosaver10

dimbo61 wrote: »

I know you mortgage rate is only 2.5% at the moment but if you can then overpay as this helps in 3 ways!
1 you reduce the debt on the flat if only by a little each month and build up the equity 90% LTV.
2 you are in effect saving 2.5% TAX free which is better than many savings accounts.
3 as you have overpaid you are building up an overpayment account which MAY !!! allow you to have a " mortgage holiday" in a few years time.
But its does not make good sence if you are paying 12/15/19% APR on credit cards or loans.

Thanks; Im really grateful for all the quick replies. 1; Sorted! 2; OK! 3: Yes; we are alowed "Mortgage Holiday" already, but of course the news of us actually repaying the Capital has been even more sweeter. My Credit cards are fine, but excisting other loans are not welcoming adjustments or overpayments, which is a shame and ridiculous. Anyway you've all given me something to mull over, Im sure if I just sat down and took advantage of my rare days off, we could do even better! Cheers!