Interest Only mortgage overpaying?

Legacy_user

We have read the article about the interest only timebomb and have a question regarding our situation.

Firstly we own a property in Germany which, depending on when we sell it, will go a long way to clearing our interest only mortgage. We rent that property out and the profit goes towards lump sum payments off the mortgage too. Usually twice yearly.

Secondly we overpay to the mortgage company by about £120 per month.

Now my question is this. We don't understand the maths of compound interest (?) and paying extra and so are wondering if we would be better saving the extra £120 per month and adding it to the rental profit and paying it yearly or should we continue as we are doing?

Thrugelmir

How much do you owe, at what interest rate, and how many years do you have left on your mortgage.

With this we can give your some information.

dimbo61

Pay every month as much as you can afford and when you get the income from the rental property in Germany then pay that off as well PROVIDED you will not be hit with any ERC,s

System

We owe approx £100K. Property currently worth about £78K. I think the interest rate is 0.5% and we have 12 years left. Oh and the rental income to pay in is about £2000 each year

ViolaLass

If the interest rate on the mortgage really is 0.5%, you would be better off putting all overpayments into a savings account, where you could easily earn more interest.

System

Violalass sorry to be so stupid but could you explain why.

I'll check with Woolwich in the morning what rate we are down to now because I can't find a document with the current rate on it. It is very low though which is why we are overpaying.

ViolaLass

Pam17 wrote: »

Violalass sorry to be so stupid but could you explain why.

I'll check with Woolwich in the morning what rate we are down to now because I can't find a document with the current rate on it. It is very low though which is why we are overpaying.

If you overpay one year by £20k, the next year your interest bill will be £100 lower (approximately and assuming your rate remains at 0.5%). But if you put that money into an interest earning account instead at 2% for example, you could earn £400 (minus tax unless you put it in an ISA), which is more than the £100 you would have to pay on the mortgage. After tax, you could end up about £200 up.

If interest rates were to increase such that the mortgage cost more than the savings could make, you could then use your increased savings to pay a lump sum of the mortgage. This assumes that you have no early repayments penalties on your account.

System

Thanks ViolaLass.
I checked today and the rate is 0.67%. We have a lifetime tracker of 0.17% above the BOE base rate. I think we'll start looking at the best savings accounts.

Thrugelmir

You need to be putting by £450 around a month to pay off your mortgage at the end of the term. This is on top of your rental income.