Overpayments

steliz

Hi,

I'm looking for some advice on mortgage overpayment.

I currently have a 75% interest only mortgage and I am not sure where to direct the overpayments. I think I should pay off the loan amount rather than the interest, am I correct?

Thanks

kingstreet

Overpayments are credited to the account and should reduce the capital owed. If your interest is calculated daily, the overpayment will reduce the balance immediately and you will see the interest reduce for future payments.

japmis

http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings?utm_source=MSE_Newsletter&utm_medium=Email&utm_term=16-Apr-13&utm_campaign=mortgages&utm_content=54

steliz

Hi thanks for replying kingstreet,

I suppose my confusion arises from when I called to change my direct debit I was asked if I wanted the overpayments to be credited to the interest payments or the loan amount. I chose the loan amount.

The reason I chose this type of mortgage was because I intended to overpay and eventually reduce the term. Can you tell me how I can specify the term reduction rather than the payment reduction please.

Thanks

kingstreet

You don't reduce the term on an interest-only mortgage. Only on capital and interest mortgages can you choose to reduce the monthly payment, or the term.

An overpayment on an interest-only mortgage automatically comes off the capital owed, reducing the future interest payments. The term remains the same.

steliz

OK, thanks.

If I wanted to keep my monthly payment consistent would I have to call them every month and adjust the direct debit and will I have to wait until the 3 year deal has expired to change the term?

Thanks

kingstreet

You are only paying the interest on what you owe. The term of the mortgage is irrelevant to that. Basically, you will repay the mortgage when you repay the mortgage.

There is no option of "keeping the payment the same" because you are only paying interest. You pay the interest due on the date is is due and any payments you make to reduce the capital do exactly that.

You are trying to apply the logic of a repayment mortgage and that doesn't work in these circumstances.

The lender might have confused you with this;-

I called to change my direct debit I was asked if I wanted the overpayments to be credited to the interest payments or the loan amount

as the lender appears to be suggesting it will credit the overpayment into a "suspense account" against future interest payments, perhaps to give you scope for a future payment holiday, rather than to reduce what you owe, so the future interest payments are lower.

steliz

OK thanks for all your help, I think I understand now.

One last point, which I perhaps didn't make clear in my first post. My mortgage is 75% interest only and 25% repayment. Does this information offer an excuse for my confusion?

Thanks

kingstreet

Yes. It makes the situation completely different.

You need to tell the lender which part of the mortgage you want to overpay - the repayment part or the interest-only part.

Then, if overpaying the repayment part, you need to tell them if you want your overpayment to reduce the term, or the monthly payment.

steliz

Brilliant, as clear as glass now.

As I mentioned before, I have opted to direct the overpayments to the repayment part (is this the wisest choice?). However, I wasn't given a choice over reducing the term or the monthly payments.

I'll give them a call and sort it out.

Thanks again

kingstreet

It depends. Do you have a repayment vehicle to repay the interest-only mortgage? If you don't, overpaying that first would appear the most sensible option.