Interest only offset mortgage

Coops111

Hi folks,

I'm looking at taking out one of First Direct's offset mortages, which are interest only mortgages.

I had a chat with them last night, and they told me that because I have no repayment vehicle for the capital (such as an endowment policy for example), they would want to set it up as a capital repayment mortgage.

I don't really have a problem with this, as it means I don't have to worry about making sure I'm repaying enough capital myself, but I wanted to check that I understand this properly.

The interest only on a 110,000 offset mortage with a fixed rate of 3.59% would be £329 a month.

Am I right in thinking that the capital repayment would be 110,000 / 25 years (term of mortgage) / 12 months = £366.67 a month, giving a total of £695.67 pcm?

Am I also right in thinking that the capital repayments each month would remain fixed, whereas the interest payments would gradually decrease as I pay off the capital?

OR... is that way it works that I pay off less capital at the beginning of the term and more towards the end, meaning the total monthly repayments would remain roughly constant?

Many thanks.

LittleMissAspie

On a standard 25 year mortgage, you pay the same amount each month for 25 years. Your monthly payment is mostly interest at first, as you slowly make your way through the capital the interest comes down and you start paying off more of the capital.

With a FD offset mortgage you can change the amount you pay to be as high or low as you like, as long as you cover that £330-odd of interest each month. The more you pay, the more your interest will come down.

Edit: The monthly repayment should be around £560. If you can afford to pay £700 a month then do that, you will pay the mortgage off much earlier.

Coops111

Thanks. That was the impression I had before I phoned them. However they were basically saying that I would be obliged to make capital repayments each month as well as interest payments. This is obviously something I would have been foolish not to do anyway, but I was under the impression that I would be free to pay off as little or as much of the capital as I chose. From the sounds of things I would be free to make over-payments, but I'm not 100% clear on what the minimum capital monthly repayment would be. I guess this is something I need to discuss with FD.

Thanks for your reply.

LittleMissAspie

I can't remember exactly what they said to me when I set mine up, it was only about a year ago though. I set it up to pay more than the standard repayment and I can adjust the standing order from my online banking. Haven't tried reducing it though, maybe they would contact me if I made it too low for their liking? We have no "repayment vehicle" in place other than just making payments.

sham63

The First Direct website has a calculator which you can use to work out what your monthly payments will be for different mortgage types.

http://mortgages.firstdirect.com/calculators

Coops111

Thanks folks, very helpful.