mortgage repayment query

xyz123

hi

i have been making some overpayments when i can on my mortgage which is only 1 year into 25 year term. I was browsing the net and found following quote from a website.

"If you have a repayment mortgage, remember to make sure your overpayments are going towards paying off your overall balance, not just the interest. If you overpay on the interest, this will have no effect on reducing your mortgage cost or term."

This is from http://www.money.co.uk/article/1004009-should-I-overpay-on-my-mortgage.htm

Can someone please explain this. what do i need to do when making overpayments?

My lender (post office) reduces the monthly payments whenever i make an overpayment. There is no option to keep monthly payments the same and reduce mortgage term when overpaying.

ta

hamster2013

i dont think any lender uses the early repayment as a payment towards interest only - maybe if you have an interest-only mortgage. which is not your case.

as for the term being reduced v/s the amount - it is recommended to leave the term the same - for the simple reason that in case you of unexpected situations - loss of job for example -it gives breathing space, as once you reduce term, it is very had to 're-increase' it.

xyz123

sorry to come up with this again.
How is the split between interest and capital determined from any monthly payments? I have asked my mortgage provider (post office) to tell me some details of how overpayments are assigned but am waiting for an answer.

kingstreet

Normally, before you make an overpayment, you ask the lender to either;-

- use the overpayment to reduce the balance and the future monthly payment
or
- use the overpayment to reduce the term and keep payments as they are.

Contact with the lender is essential to ensure you get the overpayment allocated as you want it.

Imma_Number

xyz123 wrote: »

How is the split between interest and capital determined from any monthly payments?

You can use a Mortgage Amortization Calculator to produce a table or you can calculate it yourself. The interest portion is based on the current balance and the capital repayment part is what is left over from your regular mortgage payment.

So assuming your mortgage was £100,000 over 25 years @ 6% and you are currently 10 years in an haven't made any overpayments your balance would be £76,351.98 and regular repayments would be £644.30

Of which £76,351.98 * 6% / 12 = £381.76 is the interest portion and
644.30 - 381.76 = £262.54 is the capital repaid that month.

This makes the next month's balance: £76,351.98 - £262.54 = £76,089.44 and the split would be £76,089.44 *6% /12 = £380.45 Interest and £263.85 capital repayment and so on....

So you can see month by month the interest portion decreases and the amount of capital repaid increases.

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