Overpaying on Interest only mortgage

Bobby_Peel

Hi all,

I have a mortgage broker looking at some deals for me and I just wanted to ask a question to put my mind at ease before I return on money.

my property is worth £200,000 and remaining mortgage is £103,000.

I was originally looking at repayment mortgages and they came out at around £470 a month.

The interest only deal is around £150.

The broker asked had I ever looked at interest only and I didn’t realise you could overpay on these to buy down the debt.

As my current mortgage is £570, I’m hoping to pay £600 in total each month on either option to reduce the debt faster.

So my question on the interest only deal is could I get stuck further down the line, say when I owe £40,000. At the moment I would be paying £450 a month on overpayments but these would exceed the 10% rule.

I’m not sure if there’s a calculator that would work it out but in my head at the moment I see it as a £103,000 debt and as I’ll be overpaying by £5400 each year I’ll be fine until £54,000.

I also guess as the years go on the £150 amount would reduce as there’s less debt when I take new deals?

just don’t want to sign up for something to reduce the term but in the end might extend it slightly compared to a repayment deal if that makes sense ☺️

george4064

First of all, do you have an existing mortgage now?

Is this additional borrowing you are considering? Or are you just re-financing the existing mortgage?

Before you look into Interest-Only (IO) in detail, make sure you meet the minimum requirements. As always it varies, but typically requires £75,000 sole income or £100,000 joint income.

getmore4less

With that LTV you should have very decent rates and saving rates will come close.

If the goal is just pay off the mortgage(rather than invest/pension) then you can just save excess  over 10% and then pay that off at switch time penalty free.

You do lose the option to switch early but that only matters when rates are dropping.

the other thing to look out for is payment recacluation and how they measure 10% lenders do it differently.

There are some that have unlimited(or very close) overpayment options First direct and Barclays come to the top of my head there may be others.

Pretty easy to knock up a spreadsheet to do the numbers.

interest only is just an extreme of longer term, you could look at going longest term possible and overpay that.

Once the mortgage is lower you can always revert to a shorter term repayment to up the payments  if the funds are still available. 

steampowered

Key information: What is the difference in interest rate between the two mortgages?

Going for a reduced monthly payment is silly if it means you will end up lining the bank's pockets over the long term by paying more in interest. Property is a long term investment. 

george4064

steampowered said:

Key information: What is the difference in interest rate between the two mortgages?

Going for a reduced monthly payment is silly if it means you will end up lining the bank's pockets over the long term by paying more in interest. Property is a long term investment. 

Assuming the OP is referring to their only and main residence, then you could argue that the property is NOT an investment at all but a roof over their head!

I tend to try think of my house as a home/roof over my head rather than an investment, helps me align/allocate my goals appropriately.

Bobby_Peel

steampowered said:

Key information: What is the difference in interest rate between the two mortgages?

Going for a reduced monthly payment is silly if it means you will end up lining the bank's pockets over the long term by paying more in interest. Property is a long term investment. 

I haven’t seen the internet yet, just the initial quote but they said they’ll call me on Monday so I’ll see what it is then.

Looking at the Halifax website I think:

repayment - 1.27% - 1.56%

Interest only - 1.51%

Bobby_Peel

getmore4less said:

With that LTV you should have very decent rates and saving rates will come close.

If the goal is just pay off the mortgage(rather than invest/pension) then you can just save excess  over 10% and then pay that off at switch time penalty free.

You do lose the option to switch early but that only matters when rates are dropping.

the other thing to look out for is payment recacluation and how they measure 10% lenders do it differently.

There are some that have unlimited(or very close) overpayment options First direct and Barclays come to the top of my head there may be others.

Pretty easy to knock up a spreadsheet to do the numbers.

interest only is just an extreme of longer term, you could look at going longest term possible and overpay that.

Once the mortgage is lower you can always revert to a shorter term repayment to up the payments  if the funds are still available. 

Ahhh, so do you mean the extra I’ve saved up but couldn’t use at it would exceed the 10% of the mortgage at the time, when I come to remortgage I could borrow less as I could submit the extra I had saved at the time?

getmore4less

yep just pay what you have saved up at any time there is no ERC to pay  up to the 10% or deal change.

You can pretty much ignore the term/interest only as it is what you pay that determines how long your mortgage takes and how much interest you pay, all the term does is set a minimum contractual payment.

eg £103k @ 1.27%  paying £600pm is 15 years 10 months(£598.72) if you have a term longer the payment goes down
15 £629
20 £486
25 £401
30 £344
35 £304
40 £274
IO £109

max term tends to be limited by age but having a higher contractual payment gives more headroom for the £600 cashflow
if  paying £600pm 

At end of  year 7 you are at around £60k

With interest only you would have a payment of £64 and £600pm would be overpayment around £6400 £400 excess for that year

if you started with a 40y term, new payment(£60k 33y) would be £186 and £600pm generates overpayment around £5000 less than the 10% limit

Thing is the difference is not that big if you have to carry over and even less if you can get a bit of interest in savings.

if you look at the interest in the first year

Max worst case is between paying the overpayment per month or all at the end.

£1,308  interest only
£1,274  pay £600pm

The difference in interest is £34.
it would be £0 up to Y7 then creep up depending on mortgage rate and interest rate.
That Y8 surplus would be £400 for about a month at the end of the year extra interest 42p


Don't forget whatever calculation you do it will all change as rates change.