overpaying which bit interest only or repayment? 28 July 2013 at 9:39AM in Mortgage-Free Wannabe 7 replies 618 views

gele

Having asked the question on another thread is it worth it? meaning overpaying when only small mortgage and short term left, I have been convinced with your help that it is, and I'm determined to overpay as much as possible as often as possible.
I have a couple of questions though. My mortgage is part interest only [14000] and part repayment [6000]. Is there any benefit in putting overpayments against 1 part as opposed to the other?
I am thinking, pay it off the interest only as its the biggest amount and the repayment will pay itself off. Our endowment forecast will cover the balance on interest only part with a few thousand over but Im thinking paying off interest only will mean more left in endowment pot. Have I got the right idea?
Also if you can overpay 10% per year Im assuming that's on the remaining balance each year as opposed to original mortgage ? and lastly if you can pay your 10% at the start of the year as opposed monthly will this be beneficial? Thanks so much in advance.:)

Wentthedaywell?

Is there any point is overpaying the interest only part? I thnk you might just be handing over interest apyments in advance when you don't need to; I'm not sure it reduces the capital like it would on a repayment mortgage. So I'd say pay off the repayment, as you wil be reducing the capital.

Or, if you have a good rate, do what I do, and make the minimum payment and save the rest in a dedicated account (no dipping in!) that pays more. My mortgage 1%, but I get 4% in a savings account so my "over payments" actually go into savings.

If you are overpaying 10% more than you have to and keep the repayments the same as when you first took out the mortgage, each year more of this sum goes toward clearing the capital, because you have less debt to have to service. So in subsequent years you will actually be overpaying by more than 10%, but as it's all wrapped up in a constant figure, you don't acutally see this (till the end of year statement).

Yes, 10% at the beginning f the year is better than 1/12th of the amount throughout the year as you would be saving interest over the whole 12 months. Of couse, that depends on whether you can find a higher rate savings account as I mentioned above.

Best of luck, Gele!

gele

Thanks for your reply. My mortgage rate is 4.74% so not low enough to save elsewhere. I thought I had read somewhere that it didn't make too much difference which part you overpaid but based on your reply [and the fact that I cant remember the explanation given] I'm not sure now. I have overpaid odd bits and pieces in the past and my monthly payments have never changed over the year. This is normal isn't it? Also if I overpaid on the repayment bit instead, obviously the capital is reduced, but would my payments still stay the same and if that's the case the repayment bit would finish early. Is this right? I am getting very confused. please clarify anyone. I am planning on setting up an overpayment direct debit first thing tomorrow.

Wentthedaywell?

If you make an overpayment, unless you ask them to re-adjust your monthly payments to reflect the fact you owe a tiny bit less, you will pay the same every month. However, there's usually no point in making an overpayment just so you can pay a little less each month. The aim is to shorten the term and hence pay less interest overall.

By overpaying, you owe less on the capital and so you will pay less interest. However, as you are still paying the same monthly payment, a greater percentage of this goes towards paying down the debt and hence there is less interest to pay the next month. So every month a little bit more goes more to go towards paying the debt and reducing the interest. On and on each month the benefit grows, infinitesimally to begin with, then more obviously many years in.

So yes, you will pay the loan, and the interest it generates, over a shorter time, saving time and money.:)

Just make sure the over payment is credited immediately to your mortgage, not sat in the bank's account till the end of the year. Most mortgages now work on a daily, or at least weekly rest (i.e. overpayments are paid off the capital straight away). Make sure you tell them it is a capital payment.

gele

Thanks again wentthedaywell? I will call them tomorrow and make sure any overpayments go against the repayment part. Although its not a big mortgage I cant wait to start eating into it. My plan is to pay £150 per month for the next 6 months [Sept til Feb], then when my household expenses are cheaper come spring and summer up it to £200 for as long as I can. I'm not sure how significant this will be but whatever I save will be better in my pocket than theirs!
:j:j

Wentthedaywell?

Absolutely, Gele! And a couple of hundred every month and the interest that saves really does add up. If it's a regular DD payment that goes from your account without you having to physically hand it over, means you don't really miss it and just adjust your lifestyle a bit.

Welshlassie

I'd say OP the interest only, assuming that the interest rates are the same (if different pay the one with the highest interest rate). If you are positive the endowment will clear the IO mortgage then you will just end up with a bigger pot to do with as you please. The repayment will sort it self out, the interest only one will cost you less over all if you send your OPs there.

gele

Welshlassie, Your idea of paying interest only was what I was going to do originally. There seems to be different opinions on which is best. I suppose as long as Im overpaying one of them I wont go too far wrong but if anyone else has any thoughts please post. The more informed I am the better. Thanks all