Interest Only Overpayments

nick100*2007

Hello everyone and thanks for looking....

I have a buy to let mortgage on interest only, balance is approx £66,000 and interest rate is 4.9% (£270 monthly payment).

The property is not currently tenanted, but when it is next month, I plan to pay the difference between rent payment (£600) and mortgage payment towards my outstanding balance.

I understand that the monthly payment is worked out based in balance and interest rate, so if my balance reduces my compulsory payments reduce. My question is, at what point will the lender work out what my outstanding balance is and how much my repayments will be? Every month? Every year? Or not until the end of the term?

Hope this is clear enough, I look forwards to reading your responses and thank you fit you help.

Nick

Thrugelmir

As you are on interest only. Then the interest (monthly repayment) will be only be recalculated at the next rate change.

Do you have a residential mortgage?

nick100*2007

Ok, so I continue paying £270 minimum for the term, and £330 each month I receive rent. So over to years I might have replayed nearly £8,000 but have payed interest as though the balance has remained at £66,000. Will the lender then work out I've paid a little too much interest and knock the difference off the balance?

And no, this is my only mortgage, I do not own another home.

Thanks

Thrugelmir

The actual interest charged will depend on the mortgage balance. So by making overpayments you will reduce the interest charged and therefore reduce the mortgage balance.

Being on interest only means that you'll need a plan to repay the mortgage by the end of the term. If you intend to retain the property in the longer term.

The reason I mentioned the residential mortgage. Is that it may be better to repay this before the BTL mortgage.

nick100*2007

I will be re-mortgaging this prop to my main res, my repayment plan is that the house will be worth at least £50,000 more than I paid (complete re-furb). I chose interest only to give me the flexibility of only paying a small amount whilst there is no tenant and a larger amount when there is one.

nick100*2007

Monthly payment = balance * 0.049 / 12

So in my case;

66,000 * 0.049 / 12 = 270

After 1 month (with £330 overpayment)

65,670 * 0.049 / 12 = 268

What happens to the £2?

After 12 months (with 330 per month overpayments)

62,040 * 0.049 / 12 = 253

What happens to the £17?

Thanks

lr1277

My building society only changes the interest they charge me on one of two ocassions.
1) If the society's base rate changes
2) If I overpay by £500 or more.

I rarely do 2, but do overpay by smaller amounts.
The way it works for me is the interest is charged daily and the overpayment is applied against the capital. So as the capital gets smaller with my overpayments, but my interest payments stay the same, this means there is money left over at the end of the month from my monthly payment. This tiny amount is also applied to the capital. Meaning the capital goes down slightly faster.
This is evidenced by the amount I owe at the end of the year being 10 - 20 less than at the start of the year, taking into account the overpayments.

HTH

HHarry

The £2 (and the £17) are in effect additional overpayments, and so will reduce your balance.

CLAPTON

lr1277 wrote: »

My building society only changes the interest they charge me on one of two ocassions.
1) If the society's base rate changes
2) If I overpay by £500 or more.

I rarely do 2, but do overpay by smaller amounts.
The way it works for me is the interest is charged daily and the overpayment is applied against the capital. So as the capital gets smaller with my overpayments, but my interest payments stay the same, this means there is money left over at the end of the month from my monthly payment. This tiny amount is also applied to the capital. Meaning the capital goes down slightly faster.
This is evidenced by the amount I owe at the end of the year being 10 - 20 less than at the start of the year, taking into account the overpayments.

HTH

I'm sure you mean to say that your 'monthly payments remain the same' and not 'your interest payments stay the same'

lr1277

CLAPTON wrote: »

I'm sure you mean to say that your 'monthly payments remain the same' and not 'your interest payments stay the same'

Now that you point it out, yes.