UK Landlord Forum / Life

Last month I reduced one of my mortgage balances by 5k because I wanted to reduce the interest I was paying. I assumed my payments would automatically recalculate and my interest payments would reduce.

I checked my statement this month, and they were still taking the same amount I had always been paying. I called my lender, Northern Rock, to find out what was going on. What my lenders did was carry on taking the same payments, but used the excess amount to reduce my balance (effectively repayments). I didn't mind, seemed reasanble enough.

I just thought it was a bit odd because it was an interest-only mortgage, but now i'm making repayments each month. So do I have a repayment mortgage now? So has my mortgage become repayment simply because I reduced my outstanding balance?

Do I still, on paper, have an interest-only mortgage or a repayment? If I was going to switch payments type, I assumed I would need to sign something...

Don't think you have to sign - I'm making repayments (overpayments) on my interest only mortgage at the moment, although that does have a future switch to repayments and mention of the overpayment option in the T&C's. Worth digging out the contract and checking, or ringing them back - you need to know where you stand sooner rather than later, so you can challenge their "assumption" if its not what you want.


V

I don't see the point. If you're making overpayments, don't you effectively have a repayment mortgage?

So what's the difference between a repayment mortgage and an interest only mortgage where you make overpayments?

We need a mortgage broker on here!!

An interest only mortgage where you're making overpayments is flexible. If I want to pay just the interest next month I can.

A repayment mortgage requires that you pay the agree repayment amount including something off the capital and the interest.

You could take a payment holiday from either - I guess the main difference is the flexibility you have with your cashflow.

That's as much as I know.


v

I don't know why everyone doesn't just get a flexible interest-only mortgage then...

Because they don't understand interest?

Come to think of it, there is sometimes also overpayment limits on interest only mortgages - they want to be sure they'll get their money and you won't pay it off too quick. But that's mostly with fixed rate deals. I have an overpayment limit at the moment, but when my loan switches to repayment the overpayment limit vanishes.


V

You're a handy little thing, innit, V?

Danke shon




V

"One solution is an interest-only loan that allows penalty-free overpayments. Here, you are not committed to paying a higher monthly sum but can pay in spare cash to whittle away at the capital.

Most lenders allow at least 10 per cent penalty-free overpayments per annum, but check before taking out the loan. "

Indeedlydoodly

My mortgage with HSBC lets me make up to 20% regular overpayment, which is quite natty.


V

Hi,

Propertyfag did you work out what Northern Rock did when you made an overpayment on your interest only mortgage? I too would assume that it would lower your monthly payments and reduce the capital.

I wouldn't expect to be paying the same amount the following month else why bother making the overpayment even if it does reduce the capital. If this was the case then surely you'd be better off leaving the lump sum in a savings account and collecting the interest rather than giving the excess amount to the bank each month to reduce the capital.

E.G.

£100,000 mortgage 25yrs interest only @5.55% with monthly payment of £462.50. Pay off £10,000 so now you should only be paying interest on £90,000 giving reduced monthly payments of £416.25. So if I continue to pay £462.50 then I'm overpaying by £46.25 each month. Over a year I'm overpaying by £555, couldn't this be better invested else where?

Hmmmm I'm confused....

Hey cFTB,

Yup, I worked it out. Well, the lender explained it to me.

what the lender did was continue to charge me at the usual rate, but take all the extra money as overpayments. I could have reduced the monthly payments if I wanted to. But I figured i'd save more in the longrun if I didn't do that.

Hope that makes sense.

Yeah I see what you mean.

I think I'd rather have the reduced monthly payments and put the excess into a savings account.

What am I cautious about? At the moment getting tied into a mortgage with terms that don't suit. Well I'll go see them and see if I have the option of reducing the monthly payments or if I'm forced to pay the same regardless.

You won't be forced to pay the same, you'll only need to pay the amount in which your interest rate is set at. Anything beyond that is your choice.

You could always remortgage (during the penality free period) if things don't suit you.

True, I'll go see them next week to clarify and let you know. If all goes well then I'll be taking the mortgage by the end of the week and getting the wheels in motion 

Out of curiosity, what type of mortgage is it, and what's the interest rate?

It's an extremely odd time to be applying for a mortgage...

What's odd about it, new year just around the corner? Well I put in an offer and had it accepted a week or so before xmas so been trying to get a mortgage sorted sinse then, got a feeling the seller is getting frisky so want to tie it up sooner rather than later.

It's an interest only 2yr discount tracker @ 5.55% with Britannia BS

Sounds like a reasonable rate "for now".

However, it's an odd move because interest rates are due to drop on the 10th of January. Additionally, there's a lot of speculation about the rate dropping to as low as 4.5% in the coming months. Most people are waiting around to see what happens.

At least it's a tracker, that's a good decision

Oh, just as a tip, make sure you find out the following things before signing on the dotted line:

1) how long you are tied in for i.e when can you remortgage without being penalised
2) are their any penalities for overpayments
3) is there a limit to how much overpayments you can make in one year
4) are there any penalities for reducing your mortgage early

A lot of lenders have nasty ways of tying you in...

Yeah that's one of the reasons I went with a tracker. I don't have the luxury of hanging around to see what is going to happen though as the seller is getting impatient.

But with a tracker I should benefit from any drop as long as they get applied by the BS quickly. Another point I remember reading in the key facts is that any interest rate change "on or after the 10th of a month will be effective from the 1st of the second month following the change". Not sure if I like the sound of that, is that a standard? Any change before the 10th is effective from the 1st of the following month.

OK thanks, think I know the anwsers to those but will double check,

1) With the 2 yr tracker it's 2 years at that rate before you are moved onto their variable rate.
2) From what I understand there is no penalty
3) From what I understand there is no limit
4) If you pay off all of the mortgage before the end of the term there is a £125 fee to pay

Quote from: CautiousFTB on December 29, 2007, 08:33:51 PM
Yeah that's one of the reasons I went with a tracker. I don't have the luxury of hanging around to see what is going to happen though as the seller is getting impatient.

But with a tracker I should benefit from any drop as long as they get applied by the BS quickly. Another point I remember reading in the key facts is that any interest rate change "on or after the 10th of a month will be effective from the 1st of the second month following the change". Not sure if I like the sound of that, is that a standard? Any change before the 10th is effective from the 1st of the following month.

I don't think that's standard, more of a decision made by the lender...

But don't quote me on that. I'm sure your broker will be able to clarify.

But yeah, I understand what you're saying- when you can't hang around, you can't hang around. But I think you've definately picked the right mortgage given the circumstances you're in.

Good luck

Compound interest is a bizarre thing. Someone convinced me a while back that putting your money in a savings account instead of making overpayments wasn't the best idea because over time you'd end up getting charged more interest on the mortgage than you would accrue on the savings (assuming the same interest rate).

But I've just knocked together a spreadsheet that suggests that's balls. As my intuition initially told me it would be.

ARGH.


V

Was there a big difference?

Saw the bank yesterday and they told me that when making overpayments on an interest only mortgage they CAN reduce your monthly payments and capital but you need to tell them in writing when you make a lump sum payment else they will just continue taking the same montly payments and use the excess to reduce the capital. That seems OK, would be a better idea to keep the excess money saved from making the overpayment in a savings account as a reserve rather than paying off £40 odd on the capital each month.

Now I just need to decide which of the 3 mortgage options to go for:

All interest only 2yr tracker and over 25 years on £100,000

Option 1 - 5.55% £499 product fee and £150 valuation Fee - £462.50 per month

Option 2 - 5.75% £399 product fee and free evaluation - £479.17 per month

Option 3 - 5.95% no fees to pay - £495.83 per month

Any ideas much appreciated

When I made a lump payment, I just called my lender and did everything over the phone via direct debit.

Ok, let's do the math...

Option 1: 462.50 x 24 = 11,100
Option 2: 479.17 x 24 = 11,500.08

11,500.08 - 11,100 = 400.08

Option 2 will only save you (649 - 400.08) £248.92 in the space of 2 years.

IF interest rates drop to 4.75 (which they are rumoured to do so), that will mean there will be a 0.75% drop. Let's assume that happens after a year of your mortgage (just to be safe):

Option 3, rate @ 5.95
495.83 x 12 = 5949.96

Option 3, rate @ 5.20
433.33 x 12 = 5199.96

Option 3 Total: 11,149.92

------------------------------------------

Option 1, rate @ 5.55
462.50 x 12 = 5550

Option 1, rate @ 4.75
395.83 x 12 = 4749.96

Option 1 total: 10,299.96

-------------------------------------------

11,149.92 - 10,299.96 = £849.96

849.96 - 649 = £200.96 (total saving by choosing option 1 IF rates drop)




Ok, in conclusion, option 3 is most likely the "safest" option (if you think the rates will drop by 0.75%), because after 2 years you'll save £200 (IF interest rates drop by 0.75%).

Overall, there honestly isn't much in it. But it all depends on how much faith you have in interest rates, because they could increase, and that's when option 3 may sting you. But then again, in the space of 2 years, i doubt rates will change drastically. I doubt you'll lose more than £500 in the space of 2 years, whichever option you choose.

I guess the compromise really is option 2, which may be the best option...

I think i'd go for option 1, because I personally believe rates will drop quite early on in the year. But please, don't let that sway your decision.

Yeah , I was thinking option 1. Even though it has the highest upfront fees (I don't want to add these to the mortgage and can afford to pay them upfront) over 2 years (assuming interest rates remain the same) it still works out cheapest per month and is closest to the base rates.

Option 1 @ 5.55%
               Fees = £649 / 24 months = £27.04
               Total Monthly payment = £462.50 + £27.04 = £489.54
               Total cost over 2years = £11748.96

Option 2 @ 5.75%
               Fees = £399 / 24 months = £16.63
               Total Mothly payment = £479.17 + £16.63 = £495.80
               Total cost over 2years = £11899.20

Option 3 @ 5.95%
               Fees = none
               Total Monthly payment = £11899.92