Should I reduce interest only or repayment with lump sum?

EricTheKing7

I have an A&L 5-year fixed mortgage and can overpay by 10% in january without penalty. My balance then will be approx £55,000 (22K interest only, 33K repayment). Is it better to pay of 5K of the interest only part or the repayment part, or doesn't it matter? 5 years come to an end in may 2014.

EricTheKing7

I should have also said I want to reduce the length of the mortgage, keeping my present monthly payment the same.

Yorkie1

Are both parts on the same interest rate?

EricTheKing7

Hi Yorkie1. Yes, they are both at 3.99% (tied in to a fixed until June 2014). I have a poorly performing Standard Life Endowment Policy to cover the interest only part. It was meant to cover £40k by 2020, on target for approx £30k. I had previously reduced the I/O to £22k and hope to have a little savings left over when it matures. (I may well cash it in when my fix end in 2014 and get rid of the interest only part all together).

shop-to-drop

I would say pay it off the interest only part. However i don't think it matters much which part you overpay really. Although if you reduce the repayment part they may try to reduce your monthly payment that may also be the case with the interest only though LOL. Anyway don't think it matters but I'd plump for the IO part.

EricTheKing7

Will probably pay off part of the IO then - it's a constant worry for my OH anyway. If I can reduce it to £16K in January then the Endowment will already cover it (subject to the usual fluctuations). I will keep the Endowment going until the end of the fix in June 2014 and then consider cashing it in to hopefully pay off the £16k IO bit AND whatever is left (hopefully £5k+) I can make a further overpayment on my outstanding balance - perhaps I should be posting on the MFW forum!