Have I done the right thing?

Badger_Lady

When I first took out my Halifax Tracker interest-only mortgage, the monthly payments were £714 per month. Since the base rate has dropped, this is now £637.

I'm already paying the maximum tax-free allowance into an ISA and have more spare cash so, having gone through Martin's "should I save or pay off the mortgage?" article, I decided I should also start paying off some capital directly.

I called the Halifax and explained this just now - the chap straight away modified by Direct Debit to £750 per month.

But as I sat down again, I thought... will this actually benefit me in terms of capital repayments? Or, because it's an interest-only mortgage, will I just be paying more interest???

Think I've confused myself! :rotfl:

beecher

Think they must've changed it to a repayment mortgage, though I would've thought the jump would've been a bit bigger.

Put the figures in here to check

http://www.moneymadeclear.fsa.gov.uk/partners.aspx?Partner=6B5B2DDD-606D-48A8-9D3B-F7A9E78F63FC&Tool=mortgage_calculator

And phone them back to get them to explain exactly what has been changed if you're not sure.

Badger_Lady

Hmmm... he didn't actually state what a repayment mortgage would look like. He asked how much I wanted to pay (I said £750). He also advised that whenever the BoE base rate changes, I'll have to call and reinstate this amount of Direct Debit.

According to the calculator, a repayment mortgage would be about £750 per month - this is really what I was after .

Details (roughly):
- Mortgage amount 138,000
- Years on mortgage 34
- Annual interest 5.5 %

Noz

Did you suggest £750 per month or did the advisor?

sammyjammy

You still have an interest only mortgage as per your agreement, what you've done is overpaid it by £113 a month, this means the interest on your IO mortgage will very slowly reduce as you continue to repay extra, Ithink you've done the right thing as long as you've got an emergency fund available for if you need it.

Sam

beecher

It says

[FONT=arial,helvetica,sans-serif]Those with interest only mortgages need to be careful. Normally the repayments only go towards repaying the interest of the loan, not the capital (the actual amount you borrowed). So ensure any extra payments you make specifically go towards decreasing the capital (in other words decreasing the actual debt) to attract less interest.[/FONT]

elsewhere on this website.

So I'd phone them back and say you want them used as capital repayments (think that's the phrase - I was caught out with Halifax as my overpayments were just sitting there in my account because I hadn't specifically told them they were capital repayments)

Badger_Lady

Thanks. I did tell the adviser that I wanted to "overpay or come to some arrangement whereby I can start paying off capital", but that doesn't necessarily mean he listened...

It was I who suggested the £750 figure, so I think he's just "slowly decreasinng the interest". Which I really don't understand the benefit of at all!

Calling back now...

Noz

By setting the DDR to £750, anything over £637 will comes off the capital hence reducing interest over time

Badger_Lady

Gosh, they're quick and helpful in that call centre! :rotfl:

The chap this time confirmed that all overpayments come directly from the capital. Therefore I am effectively "doing" a repayment mortgage but with the flexibility to drop back at any time. And my ISA is fizzling away helping me to pay even more off when the time comes

Happy Badger again...

beecher

That's good Glad it is sorted out

redpete

This type of overpaymet works if 1) the terms of the mortgage allow this type of flexible payment and 2) interest is calculated daily.

My Coop interest-only mortgage allows this. I can pay off up to 10% of the outstanding balance each year without penalty charges. I do this with occasional lump sums and regular overpayment of the monthly payments.

The benefit is that you get the equivalent return as you would from putting that overpayment money into a tax-free savings account, the interest rate is the same as your mortgage rate. Depending on how the mortgage company run the account the result will either be that you reduce the term of the mortgage (because you pay it off earlier) or the monthly payments are lower e.g. at each annual review.

It's even more useful if the terms of the mortgage allow you to take out these overpayments in the future should you need access to the money. I try not to do this as it is a useful discipline to pay off the mortgage and treat it as a repayment mortgage but with me in charge of how much and when I pay the repayment part.