Mortgage Overpayments - Part Repayment/Part Interest Only

fzjttl

Hi,

We currently have a part repayment/ part interest only mortgage and we are looking to start making overpayments on a regular basis.

Our mortgage provider allows over payments of up to £500 per month without incurring ERPs.

My question is which lump of capital we should be paying?
- The interest only or repayment

The interest only portion is at a slightly higher interest rate (5.49%) than the repayment (4.99%).

Thanks, L

InMyDreams

Depends a bit on how much you want to repay.

If you have less than the £500/month limit to throw at it, then pay it off the more expensive loan first. Your regular payments will reduce, and you can use what you save to add to the next months overpayment, so you can increasingly make a larger overpayments each month, as long as this doesn't take you over the £500.

If you're near that limit, it might still be worth paying off the £500 off the more expensive IO part and putting anything above that into a savings account (eg ISA) which you might even be able to do better than 4.99% on anyway. (Ie you'll be earning more interest than you would have been saving if you used it to pay off the 4.99% loan.) Then pay the lot, plus the interest earnt into the mortgage when your current deal ends. You'll be quids in.

If you have considerably more than £500 to overpay then it might depend more on what sort of figures you're talking about. How much do you have outstanding on each loan? How much would you ideally be overpaying by? How regularly? How long before your current deal ends? Are you able to save tax-free? (eg do you have any ISA allocation left or a non tax-paying partner)

Dithering_Dad

How are you covering the repayment of the interest only portion of your mortgage, is it an endowment or ISA or some other investment?

If it's an endowment, then do you know if the endowment will cover the entire amount or have you received any warnings about a shortfall?

If you have an endowment shortfall or no repayment vehicle at all on the interest only part of your mortgage then I would start repaying this first, at least to the point where you've covered any endowment shortfall.

If the IO part is covered adequately, then I'd start overpaying on the repayment portion of the mortgage.

fzjttl

Thanks for this. There is a small shortfall on one of the two endowments we have covering the IO part - We shall start paying here and monitor progress.

InMyDreams

Dithering_Dad wrote: »

If the IO part is covered adequately, then I'd start overpaying on the repayment portion of the mortgage.

Why would you pay of the cheaper debt first?