Captial or Repayment?

fooddestroyer

Hello guys

Currently on an interest-only SVR @4.54% (£529 per month) with NRAM. Wanting some advice on whether its better to stay on this and make capital repayments.

or

Go on to a repayment deal @£760 per month (my only other option with NRAM - bum, yes)

Cant go with another lender as Im 40k in neg-eq!

I could afford to pay around £800 per month.

Thanks!

Thrugelmir

Making overpayments gives you flexibility as to much you actually pay in a month. Switching to repayment does impose a discipline.

If you can afford £800. Switch to repayment and make £40 overpayments.

While negative equity may appear daunting initially. The quicker you repay the capital owed down. The less interest you'll pay every month with every payment.

TrickyDicky101

I wouldn't give up an interest only mortgage as it provides a great deal of flexibility eg in case you neec to utilise the capital element for another purpose in a particular month. If you surrender the IO you are unlikely to get it back in the future due to the limited availability of IO deals. It does require discipline however as mentioned to ensure you do ultimately repay the capital.

dimbo61

What is the Interest rate on the repayment deal?

fooddestroyer

dimbo61 wrote: »

What is the Interest rate on the repayment deal?

Not too sure. Current owe £141600 with 26 years left?

£760 was the figure I was given; no paper work with it, just a telephone conversation.

Thanks

fooddestroyer

TrickyDicky101 wrote: »

I wouldn't give up an interest only mortgage as it provides a great deal of flexibility eg in case you neec to utilise the capital element for another purpose in a particular month. If you surrender the IO you are unlikely to get it back in the future due to the limited availability of IO deals. It does require discipline however as mentioned to ensure you do ultimately repay the capital.

But am I right in thinking that the £529 IO is wasted money; would I not be better off just making a stab at the repayment.

With IO and making capital repayments, the £529 IO payment would be wasted - not paying anything off the balance?

lucie_1985

With those parameters £760 per month indicates an interest rate of 4.37% for the repayment option

lucie_1985

The interest portion of the £760 is c.£516/month so going for this option actually only saves you £13/month in interest. Relabelling that £13 as a pseudo insurance policy in my mind actually makes it worthwhile keeping the interest only and overpaying where possible so that if required you are not obligated to pay the additional capital in months where it isn't feasible.

TrickyDicky101

fooddestroyer wrote: »

But am I right in thinking that the £529 IO is wasted money; would I not be better off just making a stab at the repayment.

With IO and making capital repayments, the £529 IO payment would be wasted - not paying anything off the balance?

Interest is charged on the outstanding capital balance, so if you make additional overpayments on your IO mortgage you will reduce the outstanding capital balance and thus the interest you will be charged next month will be less. Make sense?

Thrugelmir

lucie_1985 wrote: »

you are not obligated to pay the additional capital in months where it isn't feasible.

Though longer term interest rates are only heading one way. So failing to make the necessary capital repayment one month. Simply means that more will have to be found in the future. Then one month becomes two, becomes three. The months tick by and one could find oneself chasing an impossible target. Tackle the challenge like a marathon by setting a comfortable pace.

lucie_1985

Thrugelmir wrote: »

Though longer term interest rates are only heading one way. So failing to make the necessary capital repayment one month. Simply means that more will have to be found in the future. Then one month becomes two, becomes three. The months tick by and one could find oneself chasing an impossible target. Tackle the challenge like a marathon by setting a comfortable pace.

Of course, the debt isn't going to go away without repaying it but then the issue becomes more of a behavioural one. Financially you're better off chipping away at the debt sooner rather than later thereby reducing the interest by having the rate applied to a lower debt balance.


Obviously the issue is more complicated as rates will rise and we don't know the security of the OP in relation to employment etc. If it were me I would retain the interest only product and overpay such that the total payment is £800/month. The rates aren't different enough to make it worth losing that level of flexibility.