simple advice interest and repayment!

kronas

hello all we have an interest and repayment mortgage, im wanting to pay more off per month so it brings the capital down but i have been contradicted that there is no point in doing but the repayment is only £100 per month so if you can afford a bit extra surely its worth it in the long run ?

or am i missing something ?

dimbo61

Overpaying is always worth it.
1 it reduces your debt and the interest you pay on the outstanding debt
2 you build up overpayments which you could use for a payment holiday
3 you clear your mortgage early which gives you more choice IE go part time, retire early etc
4 the more you have paid off this property the bigger the deposit you can put down on the next and with luck the better LTV to get the best deals

jamesd

In the long run it's likely to make you poorer than you could be because in the long run the UK stock market delivered 10.5% plus inflation on average for each five year period between 1978 and 2003. If you're thinking long term you should be thinking investing unless you really can't stand the ups and downs in value that come with it.

2011_will_be_debt_free

my morgage is a higher interest rate than my savings account (just now) so I would think that it would be worth overpaying instead of saving if your in that position but if your within the first three years of your morgage you shoud read over your agreement as some you can only overpay by a certain percentage before being penalised in this time if you go over, after that first 3 years(or 2 or 5 depending on what youve picked..) of a fixed rate I would think that it was up to you how much you could overpay per year and if your not sure, save the money ask for a written amount of how much you can overpay by and then pay that into your morgage account within that year?

I'm not in a position to do this right now but I want to clear my debts off this year and so want to work on clearing my morgage off as much as possible after that - problem is my fixed rate runs out in Aug and I'm out of work just as interest rates are to go up!! Hmm, it's worrying but hopefully I will be in work by then...

Feel free to let us know what you decide.

Trying_to_be_good

There are a couple of other reasons why it may not be beneficial to overpay:

Check if your mortgage interest is calculated annually or more frequently. If it's annual, time any prepayment for just before the recalculation.

Check if there are penalties or overtaking, too - many lenders allow a certain amount of prepayments, e.g. £500 per month or 10% per year, before making any extra charges.

Good luck with overpaying - lots of us here are hooked on it!

Gorgeous_George

The key information that is required is the interest rate and we don't know what that is yet. How can anybody suggest that overpaying is a good idea without this info?

My mortgage is 1.24%. Should I overpay too? I don't think so.

kronas, what is your mortgage interest rate?

GG

magpiecottage

jamesd wrote: »

In the long run it's likely to make you poorer than you could be because in the long run the UK stock market delivered 10.5% plus inflation on average for each five year period between 1978 and 2003. If you're thinking long term you should be thinking investing unless you really can't stand the ups and downs in value that come with it.

That was the logic behind endowment mortgages!

It is true that you MAY gain but remember the return after tax on your investment has to be more than the interest you pay if you are to profit from it.

In the end, there is no safer investment than a repaid debt.

ViolaLass

OP, who said it wasn't worth it and what was their reasoning?

Thrugelmir

Trying_to_be_good wrote: »

Check if your mortgage interest is calculated annually or more frequently. If it's annual, time any prepayment for just before the recalculation.

Majority of lenders now calculate interest on a monthly basis.

So the saving from overpayments is derived from the compounding of saving in interest over an extended period.

On a 25 year repayment mortgage. After 20 years you'll still owe 30% of the the original capital balance. Thats why making overpayments however small make an impact.

Gorgeous_George

Overpaying one pound today seems to be better than overpaying one pound in 10/15/20 years' time but it costs more. Today, it may reprsesent 1/2000th of your take home pay. In 2030 it might be just 1/4000th - or even less.

In my 20's I could rarely afford a decent holiday. Now, I'm in a good position mortgage-wise and enjoy three or four holidays per year. However, I am approaching 50 and would have preferred to holiday when I was younger.

There are a lot of mortgage free corpses in the graveyard.

GG

jamesd

magpiecottage wrote: »

That was the logic behind endowment mortgages!

Close, but not quite. What I mentioned was investing 100% of the money to use it for repayment. What an endowment mortgage did was:

1. Deduct insurance premiums from the monthly amount, reducing the amount actually being invested.
2. Further reduce the amount paid so that you needed to hit the investment target to clear the mortgage, with little safety margin if you didn't.
3. Used expensive and non-transparent investments, usually with profits funds with no really reliable way to monitor or adjust over time to hit the target.

Investing all of the money and using more modern low cost investments is a much better proposition. You're not relying on investment growth to cover for bare minimum payments and can monitor and adjust easily.

Even with those disadvantages endowments usually did hit their targets.

magpiecottage wrote: »

The return after tax on your investment has to be more than the interest you pay if you are to profit from it.

Right. That's been true in the past but there's no guarantee about the future.

magpiecottage wrote: »

In the end, there is no safer investment than a repaid debt.

Right. Those who put safety as their top priority, with little desire to be better off, should use repayment and overpayment.