Best way to pay something off our mortgage

vandanfc

Hi folks

Wonder if i can take advantage of your wealth of experience please.

Currently have a mortgage of £108000, made up of £28000 repayment and £80000 interest only - 10 years left to run.

Have looked around and read up on things, but have got myself totally confused.

Would ultimately like to save some money on the total repayment of the mortgage. Can only make overpayments in January, min £500 max 10%.

I have a pot of £8000 available.

So options:
I pay this off the repayment part and leave monthly payments as they are, this then should reduce the term/save money ??

I simply overpay a set amount every month (assuming I can, A & L don't seem to clear on this part) this should have the same effect ??

Rework amounts so repayment is more say 43000, and interest only is 65000 ??

Which will save me more ? I cannot seem to find anywhere that will tell me. They all show some monetary savings (of less than the £8000 payment) but no reduction in term length.

I am confused.

Please can someone help me get my head around this.

Many thanks in advance.

Vanda

lizzyb1812

Where to start?

Well - in part of your post you say you can only repay extra in January, then later you ask about regularly overpaying? Is this because the terms on each part of your mortgage are different?

If, as an example, you paid £8000 off the interest mortgage of £80000 and if your interest rate was 6%, you would save £8000 x 6% x 10 years = £4800 and you would have £72000 left to pay at the end of the 10 years. These are round/ballpark figures, not precise ones, but they will give you an idea I hope.

Do you have investments which will pay off the interest only mortgage of £80,000 in ten years? Will they definitely make the £80,000 you will need.

You made a comment about saving being less than the payment - but your term is only 10 years. If it was 20 years your savings would be roughly £9600 based on the example figures above. In either case you have to somehow pay back £108,000 plus the interest cost of borrowing that - paying off a chunk now reduces the interest cost as you would in future be paying interest on £100,000, not £108,000

Hope this gets you started

lizzyb

vandanfc

Firstly, thank you for taking the time to reply.

lizzyb1812 wrote:

Well - in part of your post you say you can only repay extra in January, then later you ask about regularly overpaying? Is this because the terms on each part of your mortgage are different?

I know for certain that I can do a 10% overpayment in every January, but I cannot get a clear answer as to whether I can overpay monthly also.

If, as an example, you paid £8000 off the interest mortgage of £80000 and if your interest rate was 6%, you would save £8000 x 6% x 10 years = £4800 and you would have £72000 left to pay at the end of the 10 years. These are round/ballpark figures, not precise ones, but they will give you an idea I hope.

So paying a lump sum off the interest only as opposed to the repayment part would be the best use of the money if I decided to make a lump sum overpayment ?

Do you have investments which will pay off the interest only mortgage of £80,000 in ten years? Will they definitely make the £80,000 you will need.

Have a variety of endowment, peps and isas. Don't know really what they will achieve.

You made a comment about saving being less than the payment - but your term is only 10 years. If it was 20 years your savings would be roughly £9600 based on the example figures above. In either case you have to somehow pay back £108,000 plus the interest cost of borrowing that - paying off a chunk now reduces the interest cost as you would in future be paying interest on £100,000, not £108,000

Hope this gets you started

lizzyb

It has indeed, many thanks. I think it's a bit clearer now !
Vanda

lizzyb1812

Hello again

As a priority I would make sure that the various investments you have will generate sufficient to pay off the interest only part of your mortgage.

If the interest rates on the repayment part and the interest only part are the same, you would save the same whatever you paid off - but by paying off some of the interest only mortgage you would cut the amount to be repaid in 10 years and the need for your investments to come up with the final repayment.

However, it is still the case that if you can earn interest after tax on savings at a higher rate than you mortgage interest rate, it is more efficient to save than pay off now. You will always have the savings to pay off a chunk at some future time if you decide to (assuming you can keep your hands off your savings!)

lizzyb

vandanfc

Okay, I get that. Thanks again lizzy.