Overpaying on Repayment and Interest only.

MrsX_2

Hi everyone.

Inspired by this site I rang my mortgage company to arrange a monthly overpayment.

They stumped me a bit by asking which loan I wanted to overpay on! I have £30,000 on interest only, for which I have an endowment with a projected shortfall of upto £6,000 and a repayment mortgage for £46,000.

The question is would it be best to overpay both mortgages or just one? Currently I am overpaying £75 on the repayment mortgage.

Yours in confusion, Sara.

julbags

Ooh, that's interesting, we have a similar mixed mortgage (with same amount on interest only) and was going to overpay once we remortgage, my feeling was to overpay the repayment part as well though I'm now wondering if this is best like you.

Moniker

If you can afford to overpay can you afford to convert the both loans to repayment thereby ensuring that you will pay off the loans at the end of the term? We did this last year (though I had a hard job convincing my OH who wanted to retain 'flexibility'). However, if you can make 'flexible' overpayments there is always the tempatation to skip a month.

I like the fact that we will definitely pay off the loan in 4 years and our endowments will be ours to do with what we like at the end. Plus we are going to pay it off 4 years early so we will be able to save what we were paying on the mortgage towards our retirement.

Even if you can't afford to convert the whole thing to repayment you can do a 'part and part' - talk to your lender about it. After all, the more you pay off the less interest goes in the bank's coffers which must make sense!

MrsX_2

Moniker wrote: »

If you can afford to overpay can you afford to convert the both loans to repayment thereby ensuring that you will pay off the loans at the end of the term? We did this last year (though I had a hard job convincing my OH who wanted to retain 'flexibility'). However, if you can make 'flexible' overpayments there is always the tempatation to skip a month.

I like the fact that we will definitely pay off the loan in 4 years and our endowments will be ours to do with what we like at the end. Plus we are going to pay it off 4 years early so we will be able to save what we were paying on the mortgage towards our retirement.

Even if you can't afford to convert the whole thing to repayment you can do a 'part and part' - talk to your lender about it. After all, the more you pay off the less interest goes in the bank's coffers which must make sense!

Thanks for your answer, we already converted £5,000 or the interest only to repayment, and intend to do this everytime we remortgage.

Martinslovechild

Are both loans on the same interest rate? If not, then overpay on the loan with the higher rate.

If they're both on the same rate, then overpay on the interest-only mortgage as this loan will be charging you the most interest each month (given that it never decreases throughout the term).

jamesd

Moniker, just in case you didn't know, it's better to start investing for retirement instead of overpaying than it is to overpay than start investing for retirement. If you're investing (S&S ISA or pension) rather than using savings accounts.

MrsX, there's no difference between the two in money saved if the interest rates are the same. Overpaying on the repayment mortgage will leave you with greater future payment flexibility since more of the payment will be voluntary if it's only the interest only mortgage left with no repayment portion in that loan.

Investing via a stocks and shares ISA will probably do better than overpaying. When it comes to shortfall projections you should also be aware that they are often very misleading, with some companies completely ignoring the terminal bonus or a mortgage repayment promise. If you do have such a guarantee that's one possible additional reason not to overpay off the interest only part now, since reducing the interest only part may eliminate the guarantee's value. If you give details of the policy and projection someone may be able to tell you how reliable the projection is.

jamesd

Martinslovechild wrote: »

If they're both on the same rate, then overpay on the interest-only mortgage as this loan will be charging you the most interest each month (given that it never decreases throughout the term).

You repay 100 extra off the interest only mortgage. Amount owed has decreased by 100. You repay 100 extra off the repayment mortgage. Amount owed has decreased by 100. Either way, you're paying interest on 100 less compounded over the remaining term of the mortgage.

The proportion of the repayment mortgage that is interest will decrease over the term of a repayment mortgage but that makes no difference, since it comes about as a result of the reduction in capital owed and you reduce the capital by the same amount whichever loan gets the 100 overpayment.