Overpayment on Interest Only mortgage

childrenanddogs

Hi all, I'm hoping you can help me - I suspect I'm just being really stupid but if anybody can help I'd be ever so grateful. 

We have 7 mortgages on our home, with Nationwide, and we're overpaying them as much as possible to try and be mortgage free in the next few years. 6 of them are repayment mortgages so when we make an overpayment the term reduces, but we have 1 that is interest only. In February we made our first overpayment on the interest only mortgage, a lump sum of nearly £25k. I was expecting our monthly repayments to go down in subsequent months but they've remained the same since. 

I've queried it with Nationwide and they've said that we can either reduce the monthly payment OR keep the payment and the term the same. And it's the second option that I'm just not understanding. If we keep the monthly payment and term the same, then what happens to the overpayment, where does that go? I just don't understand why if we pay off a large amount, and presumably then the interest due is lower, everything stays the same. Can anybody explain it to me, what am I missing?

Hoenir

childrenanddogs said:

I've queried it with Nationwide and they've said that we can either reduce the monthly payment OR keep the payment and the term the same. And it's the second option that I'm just not understanding.

If you maintain your regular monthly payment. Then you'll actually be eating into the capital balance owed on this particular loan. As the interest charged will be lower every month. In effect you've turned the mortgage into a repayment one from interest only. 

childrenanddogs

Hoenir said:

childrenanddogs said:

I've queried it with Nationwide and they've said that we can either reduce the monthly payment OR keep the payment and the term the same. And it's the second option that I'm just not understanding.

If you maintain your regular monthly payment. Then you'll actually be eating into the capital balance owed on this particular loan. As the interest charged will be lower every month. In effect you've turned the mortgage into a repayment one from interest only. 

Thank you. We're happy to keep paying the same amount and that would be great if it does reduce the capital balance. 

But if the interest charged is lower every month, then doesn't that mean our payments should be? As they just cover the interest for it? Or that the term should be reduced if we are eating in to the capital balance owed? 

Hoenir

As Nationwide have told you. You can reduce the fixed monthly payment if you wish. 

By maintaining your repayments at the same level. You are accelerating the repayment of the debt.  As the monthly interest charge slowly reduces. The greater the amount of capital will be repaid every month. 

As an illustration. 
Mth 1 £500 Repayment / Interest Charged £475 / Loan Balance reduces by £25
Mth 2 £500 Repayment / Interest Charged £474 / Loan Balance reduces by £26
Mth 3 £500 Repayment / Interest Charged £473 / Loan Balance reduces by £27

Exactly how a normal repayment mortgage works. 

childrenanddogs

Hoenir said:

As Nationwide have told you. You can reduce the fixed monthly payment if you wish. 

By maintaining your repayments at the same level. You are accelerating the repayment of the debt.  As the monthly interest charge slowly reduces. The greater the amount of capital will be repaid every month. 

As an illustration. 
Mth 1 £500 Repayment / Interest Charged £475 / Loan Balance reduces by £25
Mth 2 £500 Repayment / Interest Charged £474 / Loan Balance reduces by £26
Mth 3 £500 Repayment / Interest Charged £473 / Loan Balance reduces by £27

Exactly how a normal repayment mortgage works. 

Thank you. That does make sense, I'll have to wait and see if it does that. It hasn't yet - we've paid 3 months worth since the lump sum repayment and it's made no difference, our balance is exactly the same, which is where my confusion stems from.

snickpan

Hoenir said:

As Nationwide have told you. You can reduce the fixed monthly payment if you wish. 

By maintaining your repayments at the same level. You are accelerating the repayment of the debt.  As the monthly interest charge slowly reduces. The greater the amount of capital will be repaid every month. 

As an illustration. 
Mth 1 £500 Repayment / Interest Charged £475 / Loan Balance reduces by £25
Mth 2 £500 Repayment / Interest Charged £474 / Loan Balance reduces by £26
Mth 3 £500 Repayment / Interest Charged £473 / Loan Balance reduces by £27

Exactly how a normal repayment mortgage works. 

so if the debt is reducing, surely the term will be?

Yorkie1

On an IO mortgage, the term is the date when the full repayment of the capital amount is due. 

If you make overpayments, over and above the interest being charged, then either you will have paid off all the capital before the end of the full term (and thus you finish the mortgage earlier than expected), or at least you have reduced the amount you will owe at the end of the term. So the term does not automatically reduce with the O/Ps, but you might end up clearing the debt early.