I have a mortgage of about £78k over 21 years. 20k is interest only. I'm looking to overpay by £100 a month on the repayment part of it. Would it also be smart to turn it into a full 100% repayment mortgage at the same time?
Sorry if this is a daft question!
Makes no difference at all unless the rate on interest only are higher than the rate on the repayment part.
All the people I've known who have had interest only mortgages have overpaid anyway without any issues.
Even if you aren't allowed to overpay your interest only part you only need to worry about it once the outstanding amount is reduced to 20k
Tim.
It rather depends on how permanent you want to make the £100pm increase, and on what plans you have for paying off the interest-only part in due course. If there is an endowment of sorts earmarked for it, it doesn't matter whether you then use it to pay off the £20k or whether you just keep it as a windfall if you've already paid it off from income.
You don't say what the interest rate is. Suppose it is 6%pa (0.5%pm). Then the cost of upgrading the £20k part from interest only (£100) to repayment over 21 years (252 months) is £40pm.
Assuming that £78k is the balance now (as opposed to originally, i.e. presumably 4 years ago) and includes the £20k part, then having already upgraded that part to 21-year repayment, your monthly payment would be £545pm. Having already spent £40 of your £100 budget, adding the other £60 to this would make the monthly payment £605. This would reduce your term from 252 to about 207 months (17.3 years).
Thanks, yes I made the increase to be about £40, too. Interest rate is actually 5.39% so not far out.
But this all makes no difference.
On 58k over 21 years you will be paying 385/month On 20k interest only you will be paying 90/month
So total 475/month.
If you increase this by 100 to 575/month but change nothing else then you will pay off the 58k in just over 14 years and have the 20k outstanding.
If you convert the whole amount to repayment then your minimum repayments will be 518/month. Paying 575/month, same as above then at the time when you would just be paying off the 58K and having the 20K outstanding, you would have 20k outstanding on your repayment mortgage.
So there is no difference at all in your position at all for the next
14+ years other than in one case you have 20K where you can make a minimum payment of interest only while in the other you will be required to make a payment larger than that. - in about 15 years time, if you leave the 20k as interest only your minimum payment will be 90/month while if you convert to repayment now it will be 325/month. (obviously if you chose to only pay the 90 then you will need to have another way to pay off the 20k at the end of the mortgage).And if interest rates go up to about 7.5% your minimum payment will be the 575/month you are thinking of paying if you keep the 20k as interest only. Convert the 20K to repayment and your minimum payment will be 615/month.
Tim.
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