Paying off a mortgage in full

inglesito75

I am due to inherit some money from my late father's estate and I plan to use the majority of it to pay off the mortgage I have on my shared ownership property. It would appear that at the beginning of a mortgage term, most of what you pay in your monthly repayments is interest and the proportion of capital gradually increases until by the end you are mostly repaying capital.

My question is whether they recalculate this when you end the agreement early. I am only 3.5 years into a 25-year mortgage which was initially £51250 and will have to pay an ERC (I still think it's worth clearing the mortgage despite this). From looking at my annual statements, I have paid around £10K to the mortgage company but the total capital has only been reduced by just under £3K (as of Dec 2011). When I come to clear the mortgage will the amount I owe change or will I lose the benefit of having paid so much interest at the beginning (I imagine that's the way it's set up for a reason!)

I hope someone can help with this - I've searched for the answer on the internet with no luck. Thank you

BOBS

http://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator

try this overpayment calculator to show how much you will save - used to be another one I used which was simpler but cant find it!!

Thrugelmir

The benefit is not having to pay interest in the future.

ScotlandM

What you owe won't change because you're trying to pay it off. You won't lose any 'benifit?' of paying interest in the early years.

Each day the lender adds interest to your mortgage amount, which in a total year adds up to the interest rate you pay. Each time you make a payment you reduce the mortgage amount and so there is less owed to be charged interest.

If you pay it of in one go, the mortgage lender will calculate what you owe up to that point and you can pay it. They won't charge future interest.

Have you checked the ERC fully, are you able to overpay 10% per year without penatly? Or after 3 years overpay as much as you want?
It could be better holding of the overpayment and safely investing the money instead (mainly depending on what interest rate the mortage is on, can you tell us)

inglesito75

Thank you for the responses - they are much appreciated. Yes, it makes more sense that at the beginning you pay more interest because what is left is a larger amount - sometimes it takes someone to point out the obvious, eh?

The ERC is in place until 1 Sept 2014 and it's 3% of the capital balance (does this mean what's left or the total at the beginning?). In any case the Key Facts Illustration says the maximum I would pay for early repayment is £1693 including fees which seems better than continuing to pay almost £4K a year to the building society and only getting rid of a third of that from the capital.

The interest rate is 5.74% which is pretty high and I don't think any savings account would come near that. I can overpay by up to 10% a year which might help if I time it so that I clear 10% before the end of December and then pay it off in January (if the ERC is in fact on a sliding scale).