Changing mortgage payment allocation

dime81

Hello

Not sure if this is the right place or maybe debt free wannabe, but I had a question I hoped someone could help with please. 

I have applied to change my mortgage so I apply more of the monthly payment towards my higher interest rate part. I think I will be better off but just sense checking. 

Part 1 is currently 1.18%, £600k ish. 3.5 years left on deal, 28 years on term. 

Part 2 is 5.74%, £95k. 2 years left on deal, 20 years on term. 

Total repayments around £2800.

I am switching part 1 to part interest only, part repayment and intend to keep total payments at £2800. Part 1 term reduces to 25 years, part 2 to 11 years. 

Any reason this won’t work out better for me overall? It looked like I should save around £2.5k interest over 3 years but wonder if I’m missing something. 

Thanks

dimbo61

Well you need your lenders permission and the computer may well say NO.
Lenders don't like Interest only mortgages and seem to offer them to wealthy  borrowers who earn over a Certain Income £75/100,000 a year and have savings/ stocks and shares etc.
WHY you might ask !
The hundreds of thousands of borrowers who took out Interest only mortgages and Endowment mortgages in the 1980 s and 1990,s who are now near retirement but still have huge mortgages and NO way of repaying them.
Nothing to stop you overpaying the expensive part of your mortgage if you can afford to do that ?

Having said all that with a £695,000 mortgage you dont work as a Paramedic do you ?

housebuyer143

I'm not sure you can just change these fundamental things without losing your product. Not many lenders do interest only, and again you are in a fix, they are not likely to let you change the term or the repayment terms, and even if they did, it's not likely you could have interest only, unless you are very wealthy. 

Same for part 2. Might be something to consider when your fix ends but I would be surprised if they action any of this now. 

dime81

Thanks for the replies

We meet the criteria and it’s going through the process, it was surprisingly easy - could keep rates, term etc and no new valuation or affordability checks needed. 

It’s more the maths/principle I need checking as it should make sense that paying more towards the higher rate will be better - we’re paying off more interest on the high rate rather than principal on the low rate. The bank’s adviser is being a bit cagey and putting it back to us, just saying it’s our choice and if it works for us that’s fine…so not really advice! 

We haven’t had anything from them showing eg total balance after 3 years on current arrangement vs new arrangement, which is really what I’m after. 

thanks

MWT

dime81 said:

Any reason this won’t work out better for me overall? It looked like I should save around £2.5k interest over 3 years but wonder if I’m missing something. 

I've not attempted to check your maths, but have you calculated how much less you will have paid off on the capital element of part 1 vs how much more will have been paid off on part 2?

Ideally though you do need the full calculation of what will be left at the end of say 3 years, but you could work out the numbers at 2 years more easily as it avoids making assumptions on the interest rate after the fix on part 2 ends...

dime81

MWT said:

dime81 said:

Any reason this won’t work out better for me overall? It looked like I should save around £2.5k interest over 3 years but wonder if I’m missing something. 

I've not attempted to check your maths, but have you calculated how much less you will have paid off on the capital element of part 1 vs how much more will have been paid off on part 2?

Ideally though you do need the full calculation of what will be left at the end of say 3 years, but you could work out the numbers at 2 years more easily as it avoids making assumptions on the interest rate after the fix on part 2 ends...

Thanks, not exactly but I have used amortisation calcs for both scenarios, splitting out the parts and seeing total balance at end. Probably easier if I post that working when next at a PC. 

grumbler

Unless I misunderstand something, I don't think that any calculations are needed to prove the obvious fact that paying off the debt @ 5.74%  is MUCH better that paying of the debt @ 1.18%.

MWT

grumbler said:

Unless I misunderstand something, I don't think that any calculations are needed to prove the obvious fact that paying off the debt @ 5.74%  is MUCH better that paying of the debt @ 1.18%.

Agreed, you only need the calculation if you want to know how much better it is after allowing for the interest -only part of how the payment balance has been shifted...

dime81

Thanks again

Yes it seems obvious and I agree if you have 2 debts both on normal repayment, overpaying the higher rate clears it quicker

However I wasn’t sure if this still applied if one debt is on interest only…I guess it should