Advice needed on Interest Only Mortgage and Overpayment

Wikikenkey

We own a 4 bedroom property purchased at £179,000 (9 years ago) with a mortgage of £150,000. The current market value if we sold today would be about £250,000. We have a balance of about £128,000 left on our mortgage with about 13 years to run.

Hubby was out of work for a year duriing which time we had to change our mortgage from repayment to interest only at about £332 a month (rate of 3.16% with Paratus). We also had to cut our household budget right down!!!:( I don't know how we managed on my salary alone.

Hubby is now in employment with an average salary of £700 a month. We have decided to put his income in savings each month till we can build up a substantial amount to overpay our mortgage. How many times can we do this over a period of time and will it be of any benefit?

We also have a £6500 debt on an MBNA card with a 5.9% interest for the life of the card. Would you suggest that we clear this first with about 8/9 months worth of hubby's pay and then carry on building up saving for overpayments on the mortgage?

Do you have any other sensible suggestions? We really do not want to go back onto repayment just yet because of the economic climate and fears about the job security, having gone through a redundancy before, but this might be the better option?

What would be your kind views?

Thrugelmir

What rate of interest are you paying on the mortgage?

Wikikenkey

Thrugelmir wrote: »

What rate of interest are you paying on the mortgage?

Thrugelmir, sorry I edited my post just as you were replying. Interest rate of 3.16% with Paratus. Thanks

ViolaLass

Clear the card first as it has a higher interest rate. Then talk to your bank and see whether there are any penalties for overpaying. If not, overpay as often and as much as you want, it will all help. If there are penalties then the advice depends on what they are.

Thrugelmir

Clear the credit card first. Then start overpaying the mortgage.

Always tackle highest rate of interest first.

opinions4u

First thing I would do is to get a savings buffer behind you. 3-6 months of joint net pay. Then you have more flexibility when the next crisis hits. Perhaps cash ISAs are the best place for this.

Then I would chip away at whatever's on the highest rate. So the MBNA card for now.

Then, subject to there being no penalty clauses, throw everything at the mortgage to bring that debt down.

Wikikenkey

Thank you all for your advice.

I vaguely remember Paratus saying there would be no penalties for overpayment but I will doublecheck the details.

Once we have saved a good amount, what would be best? Reducing the term of the mortgage or the balance. I made a mistake earlier, we have a term of 16 years left and not 13.

Thanks all:)

Thrugelmir

Make monthly overpayments by standing order. The sooner the overpayments are credited the more the benefit in interest saving.

ViolaLass

Wikikenkey wrote: »

Thank you all for your advice.

I vaguely remember Paratus saying there would be no penalties for overpayment but I will doublecheck the details.

Once we have saved a good amount, what would be best? Reducing the term of the mortgage or the balance. I made a mistake earlier, we have a term of 16 years left and not 13.

Thanks all:)

Reducing the balance rather than the term will give you the most flexibility. You will need to remember, however, that that will cause your automatic monthly payment to go down. You might want to pocket the extra or you could use it to overpay even more. I would recommend the latter as you won't miss the money.

Wikikenkey

Just had a sudden thought, guys.

In making this overpayment would I need to switch back to a repayment mortgage or can I keep it as interest only?

What is the difference in overpaying on an interest-only mortgage and overpaying on a repayment?

originalmiscellany

If there are no charges involved in overpaying, then keep it as it is.

Interest only means you only pay the interest per month and never eat into the capital; By overpaying, you're clearing the capital which is effectively what a repayment mortgage does -the only thing you get is more freedom in how much you overpay.