Overpaying on an interest only mortgage.

Deeping_Dave

Hi there,

I've asked this elsewhere but I'm still a little unsure as to the best way forward. We currently owe £175k to Bank of Scotland and term ends in Feb 2027. I switched it to interest only years ago and the circumstances never allowed me to switch back to repayment. In the last 6 months or so things have improved. I spoke to my lender and told them the truth. The plan was to get my tax return done for 21/22 and go back to them and either increase the term on the current product or take another product or look elsewhere. Of course now with all the current problems in the market that's a lot more difficult and I'm still waiting for my tax return to be done anyway. My question is after speaking to them I was told my product allowed overpayments and had no limit yearly. I currently pay £329 interest a month. If I was to start paying £1000 a month would this be the best way to reduce the overall amount until I can change products and switch to repayment? Is it as simple as I'm clearing £671 of money lent each month on top of the interest or is there a better way to do it? Obviously we want to do this until the market hopefully settles and then we can re mortgage with a lower balance. Hope that makes sense just want to make sure I go about it the best way. I can't turn it into a repayment mortgage on the current term as it's 3.5k a month and we can't afford that.

Cheers

simon_or

Anything above your monthly interest payment will go towards reducing the capital owed.

With a mortgage that allows unlimited overpayments, you can effectively convert your interest only mortgage to a capital repayment one.

dander

My question would be are you doing anything to prepare to pay off the balance or are you just paying the interest and hoping that you'll be able to switch to repayment in time to pay the mortgage off? Your first priority needs to be getting into a position where you won't reach the end of the mortgage term and have no way to pay back the £175k. If you'd be paying £1k a month instead of £3.5k you're paying a bit towards reducing the balance but still significantly underpaying what you need to to be on track to pay the mortgage back. Personally I'd be looking at how to maximise return on that £671 a month.

When you say term ends in 2027, do you mean literally that's the end of the mortgage and the date you should be clearing your debt, or just the end of your current fixed term?

hildosaver

Deeping_Dave said:

Hi there,

I've asked this elsewhere but I'm still a little unsure as to the best way forward. We currently owe £175k to Bank of Scotland and term ends in Feb 2027. I switched it to interest only years ago and the circumstances never allowed me to switch back to repayment. In the last 6 months or so things have improved. I spoke to my lender and told them the truth. The plan was to get my tax return done for 21/22 and go back to them and either increase the term on the current product or take another product or look elsewhere. Of course now with all the current problems in the market that's a lot more difficult and I'm still waiting for my tax return to be done anyway. My question is after speaking to them I was told my product allowed overpayments and had no limit yearly. I currently pay £329 interest a month. If I was to start paying £1000 a month would this be the best way to reduce the overall amount until I can change products and switch to repayment? Is it as simple as I'm clearing £671 of money lent each month on top of the interest or is there a better way to do it? Obviously we want to do this until the market hopefully settles and then we can re mortgage with a lower balance. Hope that makes sense just want to make sure I go about it the best way. I can't turn it into a repayment mortgage on the current term as it's 3.5k a month and we can't afford that.

Cheers

If you have only got 4 and a half years to pay off £175k then you will need to overpay more than £1000 per month I'm afraid. You can use a mortgage overpayment calculator to help with this but roughly you would need to overpay £3365 per month to clear it within that timeframe.

Obviously you will be looking to try and get another mortgage but that will come down to your age and whether you meet the lending criteria at the time.

Deeping_Dave

Thanks guys. We are trying to reduce it by as much as possible until we switch to a repayment when things hopefully calm down. It's still on interest only. We want to pay more than the interest each month then change it to a repayment and extend by 10 years to make the payments manageable. I know we can do that just wanted to make sure there wasn't something I'm missing. 

Deeping_Dave

dander said:

My question would be are you doing anything to prepare to pay off the balance or are you just paying the interest and hoping that you'll be able to switch to repayment in time to pay the mortgage off? Your first priority needs to be getting into a position where you won't reach the end of the mortgage term and have no way to pay back the £175k. If you'd be paying £1k a month instead of £3.5k you're paying a bit towards reducing the balance but still significantly underpaying what you need to to be on track to pay the mortgage back. Personally I'd be looking at how to maximise return on that £671 a month.

When you say term ends in 2027, do you mean literally that's the end of the mortgage and the date you should be clearing your debt, or just the end of your current fixed term?

dander said:

My question would be are you doing anything to prepare to pay off the balance or are you just paying the interest and hoping that you'll be able to switch to repayment in time to pay the mortgage off? Your first priority needs to be getting into a position where you won't reach the end of the mortgage term and have no way to pay back the £175k. If you'd be paying £1k a month instead of £3.5k you're paying a bit towards reducing the balance but still significantly underpaying what you need to to be on track to pay the mortgage back. Personally I'd be looking at how to maximise return on that £671 a month.

When you say term ends in 2027, do you mean literally that's the end of the mortgage and the date you should be clearing your debt, or just the end of your current fixed term?

The mortgage ends in 2027 so we 'd have to sell the house. I want to overpay whilst it's on interest only for a bit then when my tax returns in and things have hopefully calmed down we'll remortgage to a repayment but extend the term to get the payments down to something we can manage. Spoken to my lender and they seem to concur with the idea. I just want to make sure the overpayments each month are being used in the best possible way and make sure I'm not missing a trick whilst I do it.

dander

It looks to me like you are on a pretty low interest rate there. I think there's some slightly complicated maths to do to try and work out whether slightly reducing the balance on which you pay a low rate of interest is better than getting a higher rate of interest on a small, slowly growing sum. It might work out that overpaying is as good a way as any.

housebuyer143

Deeping_Dave said:

Thanks guys. We are trying to reduce it by as much as possible until we switch to a repayment when things hopefully calm down. It's still on interest only. We want to pay more than the interest each month then change it to a repayment and extend by 10 years to make the payments manageable. I know we can do that just wanted to make sure there wasn't something I'm missing. 

You don't need to switch it to repayment. Just overpay and it's like a repayment anyway? 
That way if you hit hard times you can fall back on the lower payments.

silvercar

You could try different scenarios in the calculator here:

https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/

kittyJ_2

housebuyer143 said:

Deeping_Dave said:

Thanks guys. We are trying to reduce it by as much as possible until we switch to a repayment when things hopefully calm down. It's still on interest only. We want to pay more than the interest each month then change it to a repayment and extend by 10 years to make the payments manageable. I know we can do that just wanted to make sure there wasn't something I'm missing. 

You don't need to switch it to repayment. Just overpay and it's like a repayment anyway? 
That way if you hit hard times you can fall back on the lower payments.

I agree if you've got a good interest rate at the moment compared to what's happening with the market don't change the mortgage and just over pay your still paying off the mortgage