Going from Interest only to repayment?

sugartree

Hi,

We have been on an IO mortgage fr 6 year snow and really need to start paying equity. I just wondered how much we would pay? Do we pay the amount of the mortgage divided by the remaining length of the mortgage plus interest or a %? Thanks

getmore4less

put the amount you borrowed rate and remaining term into a calculator

http://www.whatsthecost.com/mortgage.aspx

make the total payments each month more that that required for repayment

Imma_Number

What getmore4less said, but I prefer: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx as it does months rather than just years. (Just ignore the $ signs)

sugartree

Many thanks both, I tried both calculators. As we have an unsecured loan on the same length as the mortgage I would presume we would add the cost on top of the repayment. Which is actually less than I estimated.

holly_hobby

Just also be aware that your lender will also need to run an affordability assessment to change you from IO to repayment, as in essence the IO mge will be closed down and a new repayment one opened up in its place.

And once you've committed to repayment thats it (as in todays mge market IO is hard to obtain, with repayment vehicles robustly checked) - meaning that if it becomes a bit tight in some months then you're stuffed, as it may be difficult/not possible to switch back to IO either wholly or partly to ease the squeeze.

My preference would be to stick on IO (whilst you can), and instead make regular lump sum repayments (within ERC free paramaters), as this will give you the flexibility of just paying the contractual IO element, when you have a sticky month or two/unexpected bill turns up, and saving and throwing more money at the debt when possible.

Of course you must be disciplined to make this a cost effective exercise, as regards the difference in overall cost over the term, when compared to you switching to repayment (and the overall saving in interest this will achieve you). But if you are disciplined, then I believe the financial flexibility of remaining on IO and making use of the penalty free overpayments/lump sum reductions, may make it a better fit for your circs .... but the choice as to whether you jump horses is of course your own, and one you must be comfortable with yourself.

Hope this helps

Holly

getmore4less

Imma_Number wrote: »

What getmore4less said, but I prefer: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx as it does months rather than just years. (Just ignore the $ signs)

The calculator I pointed at does months just press details.

You can do just about any calculation you like with a simple calculator if you know what you are doing.

if the secured loan has a different rate just do two calcs and add together.

As above don't change just start overpaying.

If you switch to interest only and stick in what you can afford it will show you the new term.
to find out how much is owing at any point look at the details or set the term shorter.

Imma_Number

getmore4less wrote: »

The calculator I pointed at does months just press details.

getmore4less: I meant months in the term field. I see it does allow fractions of years and calculates the amount correctly however the details part doesn't show it well. eg try 12.25 years and 12.75 years and look at the end of the details.

getmore4less

Imma_Number wrote: »

getmore4less: I meant months in the term field. I see it does allow fractions of years and calculates the amount correctly however the details part doesn't show it well. eg try 12.25 years and 12.75 years and look at the end of the details.

Agree it don't do part year terms well rounding down to years in the results.

if you change to interest only and actual payment it gets it right(as long as the term field is big enough.

sugartree

Again, thank you all. After reading the comments then maybe sticking with the IO may be better and start making extra payments, discipline will be hard but the need to move is much greater and i think lets try it that way and if we can't stay disciplined then we'll need to go to repayment.

If I was to save around £250 a month, how often would it best to pay the lump sum? Every 6 months, 12 months? Should we store the money in an ISA or other savings?

Really appreciate all the advise recieved.

holly_hobby

Check out what your penalty free lump sum repayments are with your lender, if your under product say a fixed rate, a typical penalty free amount is 10% of the os balance.

If you are not on a; product but on variable svr, there shouldn' be any ERCs (but you will have admin fee when you completely repay the debt).

If you are penalty free, and can't acheive a NET investment that exceeds your morgage payrate, pay regular to reduce the balance as quickly as possible, meaning that over the term you will save more interest.

If you have ERCs then obv you can only repay the max permitted (without incurring fees), so I would continue banging in the surplus each month into tax efficient vehicles, and/or those that will provide the best net return available (which means if 1 of you are a higher tax payer, you utilise the basic/non tax payers allowance to incur a lower tax liability - and then at the end of each yr making your lump sum repayments, until you're out of ERCs and can paydown at will.

If you want to sit with an IFA whom will explain in detail how to operate this, including savings planning, how to minimise tax and diversification of your portfolio, it may make things clearer for you.

Hope this helps

Holly

comeandgo

You mentioned you were maybe not disciplined enough to save it - can you not just set up a direct debit to take the amount each month? That is what I've done so it comes out of the bank so I cant touch it.