It Pays To Watch, Wednesday 26 March: Why & How Pay Capital Before Interest?

Tastylicious

On the Wednesday 26 March programme, Martin said to pay the capital 1st. But he didn't say why, nor how you can specify this. It's not divided into 2 by the lender, is it? And don't you pay interest on the interest?

Andrew

melancholly

have you read through martin's article on paying off your mortgage?
http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings

(don't know the answer but that's the first place i'd go!)

teapot2

I was wondering about that too when I saw the prog. Does it just apply to an interest only mortgage?

Anyone know?

Lunar_Eclipse

Tastylicious wrote: »

On the Wednesday 26 March programme, Martin said to pay the capital 1st. But he didn't say why, nor how you can specify this. It's not divided into 2 by the lender, is it? And don't you pay interest on the interest?

Andrew

Hi, Andrew

Martin's right. It's because the interest amount charged relates directly to the loan (capital) amount thus directing overpayments to the capital first has the advantage of reducing payments quicker (via the interest element of a repayment mortgage). The effect is immediate for anyone whose mortgage interest is calculated daily.

You should be able to make a quick phone call to your lender to make this request. Usually if the request is not made, any overpayments will be applied to the interest first (because it is better for them and not you) and is most likely stated in the small print of the mortgage t's & c's.

ETA - yes, repayment mortgages are effectively divided into two by a lender. Because as a mortgage term decreases and thus the amount owing reduces, the portion of capital being repaid by every payment increases as the interest due decreases. Initially, monthly payments for repayment mortgages are mainly interest. Only a tiny amount of the capital is paid off each month to start with. Hence the increasing popularity of overpaying on mortgages and offsetting, to reduce the term and hence overall interest paid. HTH, not sure how clear an answer this is.

Steel_2

Just out of interest, how does directing the overpayments to the Capital Vs Interest first compare in terms of saving money and term years?

Is there a caclulator that can help you work this out? Most calculators are set up to work out the overpayments on the interest first.....

Hubby and I have been overpaying for the last year and reducing the term, but if it makes more sense and savings to reduce the capital first, we'll try and do that. We're due to meet with the mortgage adviser next Monday to get onto a new fixed rate and I'd like to sort this out then.