Paying off part of mortgage - help please!

Fred_T

We're in the fortunate position of being able to pay off a large chunk of our mortgage but don't really know which way to go. Our outstanding mortgage is around £60,000. Half of this is on interest only, the other half on repayment. We are on a fixed deal until next may at 4.64% with the Nationwide. We want to pay off £30,000 but can't work out which half of the mortgage would be best to pay off. Whatever we do, we'll have to pay an overpayment penalty of about £300. Please help!

JonnyBravo

Well with everything else being equal do you want to be left with an interest only mortgage (do you have a means to pay such a mortgage off at end of term etc?) or do you want to be left with a repayment mortgage?

getmore4less

If both parts are on the same interest rate then it makes no difference to the potential saving.

However it does depend on what you want to do next and what the choices are.

If you keep your total payments the same you just over pay and the loan gets paid off early anyway so no difference

If you want to reduce the payments and still pay of the loan on schedule pay off the interest only.

If you want to reduce payment and control your own payment schedule pay off the repayment.

Most lenders allow you to change between I/O and repayment and adjust the term for free(or nominal charge) and you will need to change anyway may next year.

Other options are to look for better places to put the money

Use up your ISA allowances this will pay more than you save.

Depending on the tax situation look at other accounts some of the current regular saving accounts are better than you mortgage rate after tax.

£300 is 1% over 12months so you may find an instant access savings account that pays about the same net.

so you could look at just keeping the money and utilising a lot of these regular savers.

StuartGMC

Could you move to an offset next year? Just a thought, but with £30k you would half the interest payable yet you would keep the £30k available to you should you need it at some stage. So you could then pay the same monthly amount, but more would be paid off the capital.
(Or you could put max ISA away each year for a few years whilst the remainder sits offsetting)

Offset's are very flexible and often don't have any ERC (or possibly only initially if a fixed rate deal). There is a good article here on MSE which comments on the pros and cons wrt to this and the interest you would need to earn to balance that made by interest saved on the mortgage.