Difference between reducing term and repayments?

fuzzipeg

Hi, long time lurker needs some advice from you fine folk...

We (me and 'im indoors) took out an interest only mortgage for £195k last September. We did this on the basis that we are both still studying and at the beginning of our careers so were banking on the idea of pay-rises and chucking lump sums at the capital as and when finances allowed. This has (so far) gone all to plan - we've had a nice hike in salary between us (with another rise to come in the summer) and have just chucked £2k at the mortgage (having first built up our six months of emergency savings) and plan to do the same again next month.

My question is, is there any benefit to reducing the term of an interest only mortgage? My instinct says, no - the interest bit is the same regardless of the term. Our monthly payments have gone down, but this is just the interest bit, so that makes sense I guess...

We intend to remortgage to a repayment one in 18 months' time when the fixed rate is up...

dimbo61

no point trying to change the term so carry on paying as much as you can afford extra off the mortgage. most likely to go up in 18 months time so keep
overpaying GOOD LUCK

Ma77hew

Agree, changing the term on interest only makes no difference at all.

I'm in a similar position and was thinking of working out how much a repayment mortgage would cost me each month and then getting my mortgage lender to fix my standard payments to that figure.

That way I won't see a massive jump next year, and will view my payments as repayments rather than overpayments. If that makes sense?

fuzzipeg

Were my provider to allow me to do this, my repayments would be more than £1500, which (conceptually at least) is a little too high for comfort.

I'd still rather be overpaying by a grand a month, which is daft in a sense, as that's more than £1500. Just sounds better to be overpaying. And I do like the letter you get reducing the interest payment!

getmore4less

If you are dispalined to actualy overpay then having a mortgage on the longest term possible with the lowest payment(interest only) give you the most flexability should income become an issue.

Restricted overpayments can be an issue so that has to be watched but there are options like spliting the loan into part I/O part repayment on different terms.

There comes a point if you are to become high rate taxpayers that using the ISA allowances has greater benifit long term than overpaying the mortgage so that can soak up some of the excess money.

fuzzipeg

getmore4less wrote: »

There comes a point if you are to become high rate taxpayers that using the ISA allowances has greater benifit long term than overpaying the mortgage so that can soak up some of the excess money.

Sorry to be thick, but can you elaborate on this bit please as I'm pretty sure I've reached that point of higher rate tax (just). My husband earns a third of my salary, so the savings are in his name to minimise tax (we don't yet have ISAs - it's on the list of things to do this month, honest!).

My figuring is that, if the house market is to drop, I want more equity in the house than I currently do (currently 13.5%) in order to be able to re-mortgage when our fixed rate is up in 18 months' time. I can only make up to 10% outstanding balance overpayments at the moment, which is fine for now, as we had to build up our savings again before starting to overpay.

getmore4less

fuzzipeg wrote: »

Sorry to be thick, but can you elaborate on this bit please as I'm pretty sure I've reached that point of higher rate tax (just). My husband earns a third of my salary, so the savings are in his name to minimise tax (we don't yet have ISAs - it's on the list of things to do this month, honest!).

My figuring is that, if the house market is to drop, I want more equity in the house than I currently do (currently 13.5%) in order to be able to re-mortgage when our fixed rate is up in 18 months' time. I can only make up to 10% outstanding balance overpayments at the moment, which is fine for now, as we had to build up our savings again before starting to overpay.

The problem you can get if you focus on paying of the mortgage is that you end up being able to save more than the ISA allowances once it is paid off so end up paying TAX on your savings, For most people the TAX savings will continue long after the mortgage is gone so starting the ISA sooner is more cost effective in the long run but more so for the HR tax payer than hte standard rate.

The emergency savings should be in cash ISA's allready.
Most emergancies can probably be handled by just not saving for a bit and not actualy drawing on the emergency fund.

Also watch for those pension lump sums, similar thing you cannot protect it from tax but if you use the ISA allowances and keep the mortgage you do it in advance..

The imprortant thing is to think long term and what is the final goal, for most it should be pay of the mortgage and have a big pot of money to give income in retirement. Note pensions wrappers are not the only retirement income option they are tax deveral schemes useing full ISA allowances should be considered also

The advantage of ISA is they hide the money from the tax man and the income don't count towards age allowance.

Having more equity to improve the mortgage situation can be done at the remortgage time if needed by using savings you don't have to overpay hte mortgage to acheive this.