Paying off interest only mortgages

bananabrain_2

Hello folks,

If anyone out there could offer some advice to a financial luddite I'll be very grateful.

About three years ago I entered a new fixed rate mortgage deal which ends this month.

My mortgage at the time was part interest only/part repayment, and as a solution to underachieving endowment policies I also decided to aggressively overpay each month within the £500pcm limit imposed by the terms and conditions of my new fixed rate mortgage. As it turned out, I only missed about three months of £500 overpayments in those three years. (I guess if I had known I was able to do that at the time I could probably have arranged a better mortgage, but no matter...)

My initial problem was, because it was a part-and-part mortgage, even though I could see what I owed the building society falling each month, I was never quite certain about how the overpayments were being used to pay off my debt. I finally twigged when I noticed my last yearly statement no longer advised a part-and-part situation, but just said "interest only", so it seems the repayment half of my debt was what the extra payments had been reducing.

The thing is, it now seems clear that the repayment portion of the loan was completely paid off about five months before the end of the fixed rate term, so my question is, where does one stand with an interest only mortgage if he pays off more than the required interest each month (which is clearly what I've been doing for five months)?

I hope the above makes sense to someone. You can be assured I'm suitably embarrassed by my ignorance in these matters.

silvercar

Any overpayment of interest would be a repayment of the capital amount outstanding. You might want to check with the lender that this has been applied correctly. If it has your outstanding capital amount should be reducing each month.

bananabrain_2

This means then, that if I payed £1000 over and above the required interest payment on a £100000 interest only mortgage, then next month they would only require interest to be paid on £99000?

Is this common practice? None of the lenders object to people doing this? It seems to my mind a far better way to deal with poorly performing endowment policies than taking out further policies with the insurance companies. Or am I wrong to think that way?

Many thanks for your help with this.

silvercar

This means then, that if I payed £1000 over and above the required interest payment on a £100000 interest only mortgage, then next month they would only require interest to be paid on £99000?

Yes, provided that there are no early redemption penalties that would be applied to the part repayment and that interest on your mortgage is calculated daily.

Is this common practice? None of the lenders object to people doing this? It seems to my mind a far better way to deal with poorly performing endowment policies than taking out further policies with the insurance companies. Or am I wrong to think that way?

Your effectively turning your mortgage into a repayment one as you are repaying some capital each month. By doing it in this way, your obligation is only to pay the interest and so, if you hit a difficult time, you could just pay the interest.

Seems a very sensible way forward, particularly if you have the discipline to continually make the repayments.

martinman3

silvercar wrote: »

Any overpayment of interest would be a repayment of the capital amount outstanding. You might want to check with the lender that this has been applied correctly. If it has your outstanding capital amount should be reducing each month.

The OP must check if the interest is calculated daily or annually. My old interest only mortgage with the Woolwich calculated interest annually and if you overpay, the account goes into pre-payment and the amount in surplus is only taken off the capital when the annual statement is created, meaning the overpayment has no effect until this happens.

Safer to find out from the lender if part-redemptions can be made and what the minimum amount that can be made is.

robnye

i have under performing endowment policies and have been increasing the repayment portion to allow for any shortfall..... when my endowments mature (in 3 years time), the interest amount shoul dbe covered..... then i will be able to overpay on the repayment side, reducing it from the remaining term (after endowment maturity) to a third, ie 12 down to 4 years over and above the 25 years for the endowment.

not quite the same way as you, but it follows a similar principle in reducing the interest amount.

one option you have is to change you mortgage back to part and part and continue overpaying if you are able to.

bananabrain_2

Yes, you've paid your loans off the opposite way around to me. I had no control over this however, and wonder if it makes any difference. Also, I've unwittingly paid £2500 off the interest only part of my mortgage after the repayment part had gone completely. I must find out if the Nationwide calculate their interest on a daily basis. If not, it seems I've thrown 2.5K into the bed mattress for a year - can I get it back and stick it in my ISA?

Thanks again folks for the valuable advice in here.

martinman3

bananabrain,
This thread seems to answer some of your questions

http://forums.moneysavingexpert.com/showthread.html?t=892181

mcphail

Hi - we are thinking of doing exactly the same - the woolwich allows you to overpay 5% each year, without penalties. We are in the process of taking out the 10 year fixed. Can anyone advise if the woolwich calculate interest daily or annually - don't want to pay it earlier in the year, and find out it will have no benefit until later in the year. Thanks for advice.:o