Overpay Interest or Capital and Repayment

Osprey379

Hi,

I am sorry if this has been asked before, but I want to over pay my mortgage. It is made up of 2 parts, one part interest only and the other capital and repayment, both due to end in 15 years. 

Does it make more financial sense to overpay the interest only or capital and repayment part?

Thanks in advance.

grumpy_codger

It makes sense to overpay the part with higher interest rate. 

If the rates are the same it makes more sense to overpay (within the limits) the part less flexible in terms of overpayments.

lfc321

What are your plans for repaying the capital on the interest only part at the end of the term? If those plans are in place and on track (i.e., you are sure you will be able to repay the capital at the end) then, as grumpy_codger says, it would make most sense to overpay the part with the higher interest rate.

If your plans for repaying the capital are not on track, then I would focus on that.

Osprey379

Thanks for your quick responses. My payment method is 100% going to pay off the interest only part when it ends and both parts are on the same interest rate.

With this in mind, am I right in thinking that it doesn't really matter which I overpay as the end result will be the same?

MWT

Osprey379 said:

Thanks for your quick responses. My payment method is 100% going to pay off the interest only part when it ends and both parts are on the same interest rate.

What is the interest rate, is it fixed at the moment and if so for how long?

The reason for asking is if it is on a long term fix at a relatively low rate then there is no point in paying of either part of the mortgage if you can earn more in interest than you are currently paying...

Osprey379

The interest rate is fixed at 3.9 for the next 4 years on both parts.

MWT

Osprey379 said:

The interest rate is fixed at 3.9 for the next 4 years on both parts.

It depends on your tax position and how much/how often you were planning to overpay, but you can still get over 4% on savings without too much difficulty right now. 

Hoenir

If you overpay the interest only part. Then you'll see a tangible reward for your efforts. A reducing mortgage balance. 

poseidon1

Hoenir said:

If you overpay the interest only part. Then you'll see a tangible reward for your efforts. A reducing mortgage balance. 

Effectively turning the interest only mortgage into a quasi capital repayment one, which is probably not a bad thing if the OP is aiming to be mortgage free by the end of the term,

However, hopefully the OP is on track with decent pension provision. Some on the pension forum would suggest overpaying mortgage not necessarily a good thing if pension building is woefully short of the mark and being neglected.