Interest only mortgage over payments

[rob_benton]

Hi

I have a Part interest only and repayment mortgage.

I am making overpayments to the interest only side to reduce the final balance.


E.g.

The interest only is £102k. Making £200 over payments a month for 8 years at 2.89%.


Obviously the overpayments will reduce the payments but want happens to the interest charges ?
I presume the charges will go down each month as the balance gets reduced. I will continue making the same mortgage payments but I don't understand how the interest charges work.

I'm sure I'm being thick and would appreciate any advice. I've spoken to the mortgage company but they didn't make sense.

Thanks

[Doofus]

rob_benton said:

Hi

I have a Part interest only and repayment mortgage.

I am making overpayments to the interest only side to reduce the final balance.


E.g.

The interest only is £102k. Making £200 over payments a month for 8 years at 2.89%.


Obviously the overpayments will reduce the payments but want happens to the interest charges ?
I presume the charges will go down each month as the balance gets reduced. I will continue making the same mortgage payments but I don't understand how the interest charges work.

I'm sure I'm being thick and would appreciate any advice. I've spoken to the mortgage company but they didn't make sense.

Thanks

How can you overpay an interest-only mortgage?

[PhantomPH]

Doofus said:

How can you overpay an interest-only mortgage?

Is it not that the OP is not 'overpaying' the interest, but in actual fact decreasing the capital that makes up the interest only calculation? So in theory, the interest should be recalculated at the lower capital amount and the ongoing interest payments be adjusted accordingly?

[Doofus]

Ah. OK.

[Alex]

PhantomPH said:

Is it not that the OP is not 'overpaying' the interest, but in actual fact decreasing the capital that makes up the interest only calculation? So in theory, the interest should be recalculated at the lower capital amount and the ongoing interest payments be adjusted accordingly?

Also known as a "repayment" mortgage.

[rob_benton]

PhantomPH said:

Doofus said:

How can you overpay an interest-only mortgage?

Is it not that the OP is not 'overpaying' the interest, but in actual fact decreasing the capital that makes up the interest only calculation? So in theory, the interest should be recalculated at the lower capital amount and the ongoing interest payments be adjusted accordingly?

That's correct.

[I-A]

The interest amount is based on the value of the outstanding loan - thus repaying the capital (loan) will reduce the interest charge, as it's now a % of a smaller loan amount.