Interest Only Mortgage Query 1 August 2020 at 3:04PM in Mortgage-free wannabe 19 replies 645 views

Wikikenkey

I have an interest-only mortgage with 8 years left to clear.  The balance at the moment is £126,000.  My mortgage is currently £257.00 a month.  I have two options: (a) Would it be better to overpay each month (I am not sure if one can overpay an interest-only mortgage, and does this reduce the interest or the capital), or (b) pay an initial lump sum of £30,000 and thereafter, lump sums of approximately £12,000 a year till the end date?  (I have checked with mortgage company and I can make lump payments as frequently as I wish without penalty.)   What would be the better route to get the balance down quicker?  Or is there another option?  Thank you. 

MovingForwards

Remortgage to a capital repayment mortgage.
Overpay current I/O mortgage.*
Pay lump-sum in one go (provided you have additional savings), then make overpayments.*

* By reducing the £126k, the interest payable each month will also start to reduce.

Thrugelmir

Yes you can overpay your mortgage. By reducing the debt owed, ie capital balance , the interest charged will fall. Interest is calculated daily and charged monthly. The sooner you overpay the more interest you'll save. 
Who is you lender currently? 

Wikikenkey

Thrugelmir said:

Yes you can overpay your mortgage. By reducing the debt owed, ie capital balance , the interest charged will fall. Interest is calculated daily and charged monthly. The sooner you overpay the more interest you'll save. 
Who is you lender currently? 

Ok - My current lender is Foundation Home Loans.

getmore4less

2.44% seems high with 8y to go what's the LTV. 

Socajam

I agree with MovingForwards - change to a repayment and pay the lump sum when you change

Wikikenkey

LTV is 37%
Equity is 214,000

Wikikenkey

Thank you all for your advice.  I have been looking at Martin's overpayment calculator and it seem that overpaying monthly brings the balance down quicker than overpaying annually so have decided to pay an initial lump sum in of £20,000 and then make monthly overpayments - if I can keep this up, I could be mortgage free two years before due date.  Will speak to mortgage company tomorrow.  Wish me luck.

Wikikenkey

Edit - Mortgage free one year before due date.  

Thrugelmir

Being mortgage free will be worth the effort. Something you'll never regret achieving. 

Wikikenkey

Hi all - re my previous query.  My mortgage company has said:

"you are able to make lump sum payments to your mortgage account as frequently as you wish, without incurring any penalties. Any payments received of £1000.00 is classed as a lump sum payment and will result in your monthly payment being recalculated".  

They have also said that any overpayments I make will go towards reducing the balance.

Martin has advised that one should always tell lender that you want your overpayments to reduce the term of the mortgage.  Am I right in thinking that reducing the balance is the same as reducing the term?  I just want to make sure that any overpayments I make are being used in the correct way.  Thank you