Fixed rate and overpayments

zenshi

I just can't get my head round this and hopefully will go in branch tomorrow and ask but can't always get mortgage person available, so thought you lot can help.

I have 5 year fixed term mortgage with an interest only part which I need to overpay and reduce substantially. Obviously my monthly payments are fixed, so how will making these overpayments work!?

I know the capital will be reduced, and on a variable I would expect to see interest less but how does it work with a fixed? I hope I've explained myself ok.

lee111s

The payments stay the same, the capital is reduced and the overall term will naturally diminish.

As the capital is reduced, so will the interest charged per day/month/year and therefore, your standard monthly payments will then be paying off less interest (as less is being accrued) and more off the capital.

zenshi

Brilliant, thank you

frazell

Zenshi,

You appear to have a part interest and part repayment mortgage, can you confirm?

If this is the case then you want to apply any overpayment to the capital portion of your repayment mortgage and NOT the interest only part. At least to start with.

Your overpayment allowance is probably 10% (you need to check with your mortgage provider) and from your sig you say that you have £49,200 remaining on your repayment portion which will make your overpayment allowance £4,920 per year (assuming 10%).

If you reach £4920 quickly you should not exceed the limit as you will be charged, you will have to wait until the following year to continue to make overpayments.

If you reach your limit and cannot make any further payments then you need to look at reserving the money until you can overpay. I would suggest that putting the money into high interest current account or an ISA would be the best way of building your overpayment pot.

Once you reach the end of the 5 year period you can then use this money to pay off the remaining capital on your property.

Taking lee111s comments above. Most mortgage providers allow you to overpay in two ways;

You can either choose to reduce the term of your mortgage and keep the payments the same. Or;

You can keep the term the same and reduce the monthly payment.

If you choose to do the latter then the effect will be to make your monthly mortgage payments less and therefore more affordable to you. Each month you can then increase your overpayment slightly, by the difference, which will compound the overpayment.

If you decide that you cannot afford it one month then adjust your payment accordingly, or if you become ill or out of work then your payments will have reduced and your mortgage more affordable.

zenshi

Frazzle...that is correct about my mortgage split. The interest only is an endowment shortfall with no back up to clear it except the house on sale. I'm on a fixe rate term so monthly payments cannot be reduced

Could you explain more as to why hit the repayment first? Yes, the limit is 10% over payment allowance and I will not be hitting that, sadly

frazell

Zenshi,

The interest only mortgage is just that, an interest payment.

To use the analogy of a credit card. Say you have a credit card and you spend £1000 on it (this is your capital) and the interest is 15%. Each month the bank adds 15% to the £1000 and so you have added £150 in interest.

With your "interest only" payments all you ever pay is the £150 per month, you never pay anything off your £1000. At the end of your term you still have the £1000 left to pay. In the case of your mortgage though, you have had the benefit of living in the house. You are still left with the capital payment at the end.

With a repayment mortgage your monthly payments consist of capital and interest. If you overpay on the capital then you reduce the overall interest you owe. This is what you want to do, pay down the capital to reduce your interest payment.

As you can see, interest only mortgages are effectively money down the drain as you never pay off any of the capital. You need to save separately to enable you to pay off the mortgage at the end of the term, or sell and downsize.

If you overpay and keep the term the same then your monthly payments WILL reduce, even if you are on a fixed rate mortgage, as I explained above.

How affordable is your mortgage at the moment and is your endowment separate to your repayment mortgage? Are they both on the same rate?

zenshi

So, maybe the heats fuddling my brain.......

Just re mortgaged, so both parts are on same fixed rate.
I understand the credit card analogy, however the 26k shortfall from endowment will have to be paid somehow. I am under the impression (by advice from mortgage company) that I am making OP to that shortfall

I'm not usually this dense but this is confusing me now :rotfl:

frazell

zenshi wrote: »

the 26k shortfall from endowment will have to be paid somehow.

That's what I'm saying, you normally have to make provision separately to pay this off. By opting for an interest only mortgage for this part of the loan you have not made provision to pay it off.

Your loan consists of;

Loan 1 = Repayment (capital and interest)
Loan 2 = Interest only (interest)

If you overpay on Loan 1 (to the capital) then you reduce the capital and therefore the interest.

If you overpay on Loan 2 you don't pay any capital off and therefore your interest does not reduce.

What is the total capital outstanding for each and the rate you are on? Also, what is the term remaining?

HHarry

frazell wrote: »

That's what I'm saying, you normally have to make provision separately to pay this off. By opting for an interest only mortgage for this part of the loan you have not made provision to pay it off.

Your loan consists of;

Loan 1 = Repayment (capital and interest)
Loan 2 = Interest only (interest)

If you overpay on Loan 1 (to the capital) then you reduce the capital and therefore the interest.

If you overpay on Loan 2 you don't pay any capital off.

What is the total capital outstanding for each and the rate you are on? Also, what is the term remaining?

I'm lost. Why doesn't an overpayment on an interest only debt reduce the capital?

I'm in exactly the same situation as Zenshi, pay off £1000 a month from the interest only part of the mortgage, and see the capital balance decrease each month (by a £1000 and a bit because the payment stays the same).

zenshi

The mortgage guy said if I overpay on loan 2, then that would chip away at the shortfall

Figures in my sig, I assumed loan 1 (as you described ) was all capital owing

Fixed at 3% for 5 years, total term left 16 years

zenshi

HHarry wrote: »

I'm lost. Why doesn't an overpayment on an interest only debt reduce the capital?

I'm in exactly the same situation as Zenshi, pay off £1000 a month from the interest only part of the mortgage, and see the capital balance decrease each month (by a £1000 and a bit because the payment stays the same).

That's what I was told by the mortgage advisor, now I'm confused too