Overpaying Mortgage - Interest Or Capital

Gaz83

Good afternoon,

I've recently been approved for a mortgage and all going to plan we'll be moving home shortly. I'm hoping to have the mortgage paid off within 12-15 years, half the term. I have a pretty good income and we're not overstretching ourselves so I aim to pay off at least £150-£200 per month extra on our mortgage (with that amount rising as I have a guaranteed pay progression over the next five or six years).

A quick question, though (I tried looking elsewhere but couldn't find an answer). We're borrowing £140,000 and my initial monthly payment will be £653.73 per month. I know that my first mortgage payment will only pay off £122.68 of the capital, with the remaining £531.05 going towards interest - so after that first month the principal would have only reduced to £113,877.32.

My question is, if I was to make an overpayment of (say) £200, would all of this go to the principal (thus making it drop to £113,677.32) or would part of it go to the interest as well? My gut is telling me the former, but I wanted to double check.

Cheers!

Suarez

Any over payments will reduce the capital.

You will also reduce further interest (than you would have before)

NewMoneySaver13

Hi Gaz83,

I am in a very similar position to you where I have recently taken out a mortgage for £140,000 with similar monthly repayments. I am trying to make overpayments each month but that only tends to be around £100pm. I wish I could have it all being paid off within 12-15 years but I can’t see that being the case.

A question that I have always wondered which is open to all MSE experts? When I come to re-mortgage at the end of my 3 year fixed mortgage what do people generally think is better. Is it better to have a longer term and lower monthly repayments and continue to pay an overpayment each month or is it better to get a shorter term with slightly higher monthly repayments with no overpayments? Is there a correct answer or is it all down to personal choice and the situation you are in? Is there actually any difference between which way you choose to repay?

It is something I have always wondered about how and how people's views differ on this topic.

Thanks

black_taxi_2

My mortgage was interest only,with endowment

I used to get letters,my endowment was in shortfall and might not cover mortgage end of term.

I switched to capital repayment mortgage,no penalties o/p

Best thing I ever did.

1.you no exactly date you will be mortgage free
2.when you o/p you can see monthly interest on mortgage come down
3.when you o/p you can see the shorter time your mortgage will be.

JCL

Put your name down for the MFW 2014 thread when it comes up. You commit to an overpayment target at the start of the year and track your progress throughout. I've found it a great way of keeping motivation for our own target and others as well.

NewMoneySaver13

Previously I have always put back £100 PM for an overpayment. Then after 5 months I have cashed a cheque and made a £500 capital payment.

Assuming I am ok to do so, would it be better to made a payment each month rather than collate it over a period of months? Would this have any effect on the interest I am charged?

What I am trying to get at is would I have paid more in interest if I made an overpayment each month of £100 or an overpayment of £500 after 5 months, would I have paid exactly the same interest after 5 months regardless of which way the overpayments have been made?

As far as I am aware my mortgage interest is calculated daily, so not sure if it matters when I make an overpayment.

MallyGirl

unless the place you are holding the overpayment money is paying more net interest than your mortgage rate is, then its better to get the money in as an OP as soon as you can so that the daily interest is calculated on just the amount outstanding.

jamesd

NewMoneySaver13 wrote: »

When I come to re-mortgage at the end of my 3 year fixed mortgage what do people generally think is better. Is it better to have a longer term and lower monthly repayments and continue to pay an overpayment each month or is it better to get a shorter term with slightly higher monthly repayments with no overpayments?

Best if just overpaying is interest only and the longest possible mortgage term, then overpay as you want to. This gives you as much flexibility as you can get while overpaying on a standard mortgage because you can drop back to the lowest required monthly payment or increase as you want to.

There's no interest cost difference at all because all that matters for that is when the payments are made. £700 required payment or £200 required payment and £500 overpayment has exactly the same effect.

What this does is make your emergency fund last longer and help you to deal with the strife that life can throw your way.

Best of all for straight overpaying is an interest only offset mortgage because not only can you cut back on the mortgage payments, you can withdraw the money to do that and cover living expenses from the offset savings account, which is just a massive emergency fund in effect. Some of these allow you to pay into the mortgage account, not the offset account, and withdraw money later, at the discretion of the mortgage lender. That can be useful for things like long term unemployment because the mortgage portion isn't savings, while the offset savings account is, so counts against means tested benefits.

NewMoneySaver13 wrote: »

Is there actually any difference between which way you choose to repay?

Some mortgages restrict how much you can overpay. For those a way to pay more is to reduce the mortgage term. But the catch is that you aren't likely to be able to increase it again if something like unemployment happens, so there's significant extra risk from doing this.

Some people find that they need to be forced to make overpayments so prefer the higher mandatory payments. Others don't need that and can benefit from the flexibility.