Overpaying (capital) on interest only

Pezza4u

I'm currently on interest only and have been for 18 months. I've not been in the position to overpay on the capital until now.

My current tracker is 0.34% so 5.59% in total until the base rate drops, if it does. I have locked in a 5 year fix for 14 days at 4.46% before Santander put the rates up today.

If/when I accept this, which lowers my monthly repayments by £100, would overpaying (£200-£300 a month) be the same as being on a repayment plan or is the interest higher?

I've used the online calculator but I'm unsure as it doesn't show what goes on the capital and what's interest. It seems to show more interest is paid on interest only over the life of the mortgage. This is also with the term kept the same. Making regular payments on the capital will also reduce the monthly direct debit but I would add the difference to the overpayment.

Would I be better off moving back to a repayment plan with a higher monthly payment and then overpay with a lower amount, say £100-£150 a month? I'm just thinking if there is a month or two when I need the money for something else I will have it. If I'm on an repayment plan I won't.

vacheron

If you put your 5.59% rate into an online repayment calculator over your intended term, this will tell you the monthly repayment amount. In a repayment scenario, the amount of interest will slowly reduce over the term as you pay the capital down, so more and more of your fixed monthly repayment amount will be taken of the capital as a repayment mortgage progresses. With an interest only mortgage, the capital is not reducing, so you are paying interest on the whole borrowed amount every month. This is why the interest is higher on an interest only mortgage over the same term. 

Therefore if you arrange your repayments to repay a fixed amount per month to your interest only mortgage, with the instruction that any excess funds are used to reduce the capital, and also assuming your repayment mortgage recalculates your interest repayments monthly, you should end up paying off the mortgage over your chosen term the same way a repayment would. However, you would need to ensure that your mortgage provider allows this.

If you want to move back to a repayment plan, but with lower contractual monthly payments, you can always remortgage over a far longer term (as long as you can get) and then overpay in months when funds allow, remembering that many mortgages only allow you to overpay around 10% of the mortgage per year.  

BarelySentientAI

If interest only & repayment have the same interest rate, the effect of any payment will be essentially identical.

It's just either already (at least partly) planned for and scheduled in a repayment arrangement, or entirely a capital overpayment on interest only.

Other things (like the 10% overpayment limit) might apply but that's for you to check.

Hoenir

Being on a repayment mortgage at least provides the discipline that will ensure that the debt will be repaid at the end of the term. Overpayments on the mortgage can only then be beneficial. 

Pezza4u

Of course, I had completely forgotten that with the capital reducing on a repayment plan, the interest also drops! 🤦

I'm pretty good with our finances so I think I'll stick with interest only and setup a regular monthly amount to pay towards the capital. Then any extra as a one off payment each month.

If I go on to the Santander app and enter an overpayment amount it shows me the capital before and after with the reduced amount, plus the reduction in the following months direct debit for the interest.

It'll be a 10% overpayment limit on the fixed rate but I won't get anywhere near that. Should be moving to a cheaper area in a few years and I'm looking to pay the mortgage off when we do but in the mean time it'll be nice to make some kind of dent in it.

I'm abit weary about fixing for 5 years but I can't see rates being that much lower than 4.46% in the next couple of years. If it does drop lower, say to 3.5% the difference is something like £80 a month so I'll just have to suck it up.