Overpaying mortgage payments

joseph80

We are considering overpaying on our mortgage with the hope of being mortgage free sooner. Either a lump sum or regular overpayments. 

Current mortgage balance
£126,495

This is made up of:
£31,087 (Interest only)
£95,4708 (Capital and Interest)

Remaining Term = 15 years (currently fixed rate to Nov 2027) - intend to reduce the term when the fixed term ends.

We are allowed to overpay on each element of our mortgage without penalty (up to 20% of the balance).

My question is, if we were to make a one-off overpayment of say £5,000 - is it financially better to pay this off the 'Interest only' element or the 'Capital and Interest' element of our mortgage? Same question if we opt to pay monthly overpayments rather than a lump sum - I presume the answer will be the same?

Thank you.

joseph80

That should have read...

*£95,408 (Capital and Interest)

badmemory

Are they both on the same rate of interest as I expected them to be different?

joseph80

badmemory said:

Are they both on the same rate of interest as I expected them to be different?

Both currently on 3.34% (fixed to Nov 2027)

Sarahwithlove

Personally I'd pay it off the interest only with the aim to keep overpaying that part to get rid of it. 

joseph80

Sarahwithlove said:

Personally I'd pay it off the interest only with the aim to keep overpaying that part to get rid of it. 

That was my thinking too and seems like the easiest to get my head around. But I'm unsure whether it is the most financially savvy thing to do or not!

I think you might be right though and then in 3 years time when we fix again, depending on what the interest rates are at the time, we can hopefully adjust the term accordingly so that our monthly payments are the same as now, but reducing the term in the process. 

badmemory

So it doesn't matter which you pay but the sooner you pay it the better as it will save you interest.  Check though that the interest only one doesn't just reduce the monthly payment if you overpay as that may reduce how much you can overpay in future & for any T &Cs which may be different.

saajan_12

joseph80 said:

We are considering overpaying on our mortgage with the hope of being mortgage free sooner. Either a lump sum or regular overpayments. 

Current mortgage balance
£126,495

This is made up of:
£31,087 (Interest only)
£95,4708 (Capital and Interest)

Remaining Term = 15 years (currently fixed rate to Nov 2027) - intend to reduce the term when the fixed term ends.

We are allowed to overpay on each element of our mortgage without penalty (up to 20% of the balance).

My question is, if we were to make a one-off overpayment of say £5,000 - is it financially better to pay this off the 'Interest only' element or the 'Capital and Interest' element of our mortgage? Same question if we opt to pay monthly overpayments rather than a lump sum - I presume the answer will be the same?

Thank you.

Depends on exactly how the following monthly payments are adjusted - if they don't change, then no difference. If overpaying the interest only portion reduces that portion of the monthly payment, then then you don't get any compounding benefit of your overpayments. Its usually possible to keep the monthly payment fixed for a capital & interest mortgage, whereby in the following months there's a little less interest due so that bit of your monthly payment goes to capital, thus compounding the effect. 

joseph80

badmemory said:

So it doesn't matter which you pay but the sooner you pay it the better as it will save you interest.  Check though that the interest only one doesn't just reduce the monthly payment if you overpay as that may reduce how much you can overpay in future & for any T &Cs which may be different.

On the online overpayment calculator (NatWest as that is who we hold our mortgage with), it shows that by paying £5k off the Interest Only balance, the balance reduced by £5k (so remaining balance would be £26k) BUT the monthly payments would also go down which isn't what I am trying to do, but I don't think NatWest will allow me to keep my payments the same. 

badmemory

Have you thought that a savings account could earn you a higher rate than you are paying on your mortgages.  So a fixed rate one now with whatever you have available & a regular saver to add anything in the future.  The biggest question with this way of attack is can you be sure if you put it in savings that it will stay there & you won't be tempted to spend it.  It is a question that we all need to ask ourselves in these circumstances.

joseph80

badmemory said:

Have you thought that a savings account could earn you a higher rate than you are paying on your mortgages.  So a fixed rate one now with whatever you have available & a regular saver to add anything in the future.  The biggest question with this way of attack is can you be sure if you put it in savings that it will stay there & you won't be tempted to spend it.  It is a question that we all need to ask ourselves in these circumstances.

I have a feeling I would spend it, so although I know with current interest rates it would be more sensible, I don't think it would be for me personally. Absolutely a good point to ask though.