Interest Only -> Repayment Query

choccadoobie

Hi there all, this is my first post, but I have used these boards previously and I am hoping for some advice please.

I currently have two mortgages, one on a buy to let property and one on my home. Both are currently on interest only and have been for approx. 4 years each.

I am aware that I should have had a repayment plan alongside these mortgages, but my finances at the time due to other commitments would not allow me to do so.

I now have the ability to make repayments on both mortgages where previously I didn't. Therefore I have not been making any savings / endowments alongside these mortgages over the last 4 years.

Therefore my question is can I be up front with the two mortgage providers (Santander and BOI) and just say I would like to start repayment mortgage from now and I don’t have a savings plan in place?

Both are on 25yr mortgages in theory, but without any savings given I have had the mortgages for 4 years could I just ask to start at a 21yr payment level?

Not explained very well, but hopefully makes sense, any advice greatly welcomed. Thanks!

Thrupnybit

I've not had problems switching from an interest only to a repayment mortgage (due to underperforming endowment), no questions asked about why I wanted to switch and presumbaly my income satiafied the lender that I could pay. This did not increase my mortgage term.

Don't think I could have lived with two mortgages and no repayment plan in place though!

All the best.

kingstreet

You can ask a lender to change you to repayment at any time, but there's probably no route back, so think very carefully if that's the best option for you.

You may be able to make overpayments at any time to reduce the outstanding mortgage. One may have a rate higher than the other and it would be prudent to pay that mortgage back faster than the cheaper one.

Don't forget you can't offset capital repayments against tax on the BTL mortgage, so changing that to repayment may not be the best idea.

Voluntary overpayments can be varied at any time and you can pay more to one than the other and vice versa, each month or two. Sticking yourself on repayment for both mortgages may provide marvellous discipline, but will mean you losing all the flexibility you currently enjoy.

Check mortgage terms for permitted overpayments if within early repayment penalty periods.

HappyMJ

Personally I would not make any overpayments on the BTL mortgage. You will be better off saving the money for the mortgage in tax free ISA's or a pension as you can deduct the cost of the interest on the BTL mortgage against the income received in rent reducing your tax bill.

choccadoobie

Thanks for both sets of advice, I hadnt considered the fact that once on repayment I couldnt switch back if any issues ever arose. Not like the ability to be switching back and forth a few years ago!

The tax is a good point as the BTL is currently performing well and makes a reasonable profit which I pay a nominal annual tax on, changing to repayment could actually leave me out of pocket due to the tax requirements, well spotted!

Going to run some spreadsheets tonight to look at the best option. Looking at a 25yr sheet though never feels real as it feels so far off, I'll be there before I know it though!

choccadoobie

HappyMJ wrote: »

Personally I would not make any overpayments on the BTL mortgage. You will be better off saving the money for the mortgage in tax free ISA's or a pension as you can deduct the cost of the interest on the BTL mortgage against the income received in rent reducing your tax bill.

The ISAs seem a practical way of making the savings accrue interest without me becoming liable for the income tax on property, will check this out.

I can see myself already becoming a MSE convert. Forum reading weekend in store I expect......Mortgage free by monday?!

getmore4less

Just pay of the debt thats the best don't worry about saving unless that give a better return than paying down debt

depnds on the rates,overpayment limits before penalty, your marginal tax rate and how close to the next band, how much rent is taxable.

RenovationMan

A lot of people with repayment mortgages think that they can easily switch to an IO mortgage when things get tough financially and are often sorely mistaken and can end up with arrears and a trashed credit history. Much better to be on an IO mortgage from the outset and make capital repayments manually. With this in mind, I wouldn't even think about moving from IO to repayment.

I also agree with others who are saying that you should not make any repayments to your BTL property. I'd go with the consensus and put any profits into an ISA with the view to paying off the mortgage when you retire (and then all the BTL profits become retirement income).

With your home, I'd suggest finding out what the limit on your overpayments are and trying to hit that limit year on year. I'm with Santander and they allow 10% overpayments per year, starting from 1st Jan to 31st December.

Your aim with your home mortgage should be to calculate what the mortgage balance would be now if you had had a repayment mortgage from the start and to try to 'catch up' over the next few years. An amortization calculator is great for this.

Using my figures from when I bought my house in May 2010 with a £300k IO mortgage, the amortization calculator gives the following table:

http://www.amortization-calc.com/#loan-300,000-23-2.54-5-2010-2

Date......Interest........Principal.........Balance
2010.....$5,032.31.....$6,458.20......$293,541.80
2011.....$7,341.30.....$9,894.46......$283,647.33
2012.....$7,087.04.....$10,148.73....$273,498.60

So if I had a repayment mortgage, by May 2012 I should have repaid £26,501.39 off the principal and have a mortgage of £273,498.60. However, as a dedicated overpayer, I have repaid £50k in that same period using direct overpayments onto the IO mortgage.

I suggest you do the same with your figures and make it your first priority to 'catch up' and then your next priority to 'get ahead'!

Good luck

choccadoobie

Thanks Renovationman, clearly sound advice, not sure I can be as disciplined as you on the over payments though!

The overpayments route seems a sensible way forward for my home and will give me an opportunity to catch up over the next few years. The weblink you provided puts into perspective the significance a 4 year repayment 'break' can make, but no doubt I can catch up over time. I think my limit is 10% p.a. but would be a push for me to aim for 5% as it is a sizeable mortgage. Will discuss with the better half to see if she is willing to agree on forfeiting a few comforts for a while!

The ISA for long term savings and pay off of my BTL also seems to be a general consensus as a sensible plan. Will have a good think about all this!

Edit - I suppose by overpaying, the interest owed become lower over time and thus the overpayments can become higher as you have more money to make capital repayments.

RenovationMan

choccadoobie wrote: »

I suppose by overpaying, the interest owed become lower over time and thus the overpayments can become higher as you have more money to make capital repayments.

This is the great thing about making overpayments, it reduces your monthly mortgage interest payments, freeing up more money to make more overpayments, which reduces your monthly mortgage payments and so on in an increasing spiral of debt repayment.

Thrugelmir

Which mortgage type do you have with each lender?