Mortgage overpayment question. Capital or interest?
Discussion
Hello all. Just a quick question. I was someone could help me out.
I'm interested i repaying my mortgage sooner than the arranged period. If I overpay the mortgage does this money come directly off the capital owed or a combination of the interest and capital owed.
E.g - Fictional figures.
If I owe the bank £100k over 20 years and my monthly mortgage payment is £1000, most of this £1000 is actually interest. Say only £200 is actually paid off the capital owed. After one year of paying this £1000 (£200 off the capital each month) per month, I have reduced the capital owed by £2400(£200 x 12 months) which reduces the total amount owed to £97600.
Now if I overpay the mortgage by 20% each month this is £200 extra on the monthly payment. The total monthly repayment is now £1200.
My question is, does the extra £200 come directly off the capital owed, therfore reducing the capital owed after another 12 months of overpaying by £2400? Or does this overpayment of £200 mostly just cover the interest again?
We're trying to save money to move as we need capital for another deposit but this won't be for a few years. Just trying to work out whether to save the money through reducing the capital owed to the bank or to just save it in a bank account.
I realise this is probably a daft question as I presume the overpayment will mostly cover the ineterst. Just wanted to double check.
Cheers
I'm interested i repaying my mortgage sooner than the arranged period. If I overpay the mortgage does this money come directly off the capital owed or a combination of the interest and capital owed.
E.g - Fictional figures.
If I owe the bank £100k over 20 years and my monthly mortgage payment is £1000, most of this £1000 is actually interest. Say only £200 is actually paid off the capital owed. After one year of paying this £1000 (£200 off the capital each month) per month, I have reduced the capital owed by £2400(£200 x 12 months) which reduces the total amount owed to £97600.
Now if I overpay the mortgage by 20% each month this is £200 extra on the monthly payment. The total monthly repayment is now £1200.
My question is, does the extra £200 come directly off the capital owed, therfore reducing the capital owed after another 12 months of overpaying by £2400? Or does this overpayment of £200 mostly just cover the interest again?
We're trying to save money to move as we need capital for another deposit but this won't be for a few years. Just trying to work out whether to save the money through reducing the capital owed to the bank or to just save it in a bank account.
I realise this is probably a daft question as I presume the overpayment will mostly cover the ineterst. Just wanted to double check.
Cheers
All other things being equal, anything you pay over and above will reduce the capital.
This in turn will mean that more of your basic payment will be for capital, as there is less interest on the lowered capital, so you will reduce the time taken to pay it off completely.
Paying off more of your mortgage is a good idea if you can, and since the interest cost of your mortgage is PROBABLY more than what you would earn in savings, the best bet.
This in turn will mean that more of your basic payment will be for capital, as there is less interest on the lowered capital, so you will reduce the time taken to pay it off completely.
Paying off more of your mortgage is a good idea if you can, and since the interest cost of your mortgage is PROBABLY more than what you would earn in savings, the best bet.
IL_JDM said:
You would be repaying capital.
Overpayments is highly recommended, though check your documents, some mortgages have small print related to this and cap what you can overpay (25% or so)
Yes, it's set at 20%. But paying that over the 22 yrs we have left reduces the term by about 6 yrs (if that makes any sense) and £17k in interest! Will change lenders in the future and try to overpay even more if possible.Overpayments is highly recommended, though check your documents, some mortgages have small print related to this and cap what you can overpay (25% or so)
Seems too good to be true!
It comes off the capital. The lender can't just charge you more interest on a whim just because you are paying them more money (early repayment penalties aside).
Your loan is for 100k, interest rate is (say) 9.6% so you need to repay £9600 interest in a year, which is £800/month (lets assume interest is calculated annually although I don't think anyone does that any more now the abacus has been invented). Anything beyond that £800/month interest will repay capital.
Note 1 - I am not an IFA. I might have made all of that up.
Note 2 - if you want to overpay then potentially access the overpaid money later, get a mortgage with an offset facility. But see note 1 first.
Your loan is for 100k, interest rate is (say) 9.6% so you need to repay £9600 interest in a year, which is £800/month (lets assume interest is calculated annually although I don't think anyone does that any more now the abacus has been invented). Anything beyond that £800/month interest will repay capital.
Note 1 - I am not an IFA. I might have made all of that up.
Note 2 - if you want to overpay then potentially access the overpaid money later, get a mortgage with an offset facility. But see note 1 first.
With regard to moving in a couple of years time, chat with your current mortgage provider relating to whether your mortgage is "portable."
If it is, you could be able to move more easily when the time comes.
Also, when it comes to remortgaging, the better deals come in when you are borrowing less of the value of the house. (Lower LTV.)
I am not regulated by the FSA, you can't come back to me if it goes tits up. Your arse may be at risk if you light your farts.
If it is, you could be able to move more easily when the time comes.
Also, when it comes to remortgaging, the better deals come in when you are borrowing less of the value of the house. (Lower LTV.)
I am not regulated by the FSA, you can't come back to me if it goes tits up. Your arse may be at risk if you light your farts.
If you pay back more than 20% of the mortgage before you remortgage, that would be damn good work!
Note that quite often if you overpay then although you may not be able to take the money back out again you can take payment holidays where you pay them nothing at all for a while. So you could get the money back slowly that way.
Of course if you do reach the 20% limit then just keep saving and when you remortgage get a smaller loan!
Note that quite often if you overpay then although you may not be able to take the money back out again you can take payment holidays where you pay them nothing at all for a while. So you could get the money back slowly that way.
Of course if you do reach the 20% limit then just keep saving and when you remortgage get a smaller loan!
there are dozens of calculators out there for this - an easy to use one on
http://www.lovemoney.com/mortgages/mortgage-calcul...
usually the overpayment limit is quite high - few people can pay back 25% of what they owe in a year etc.....
generally speaking at todays rates, if you have a 25 yr mortage, and double your payments, you pay it off in 7 years ...the other 18 years are the interest you would have paid (!)
hence its generally a very good idea to overpay a 25 year mortgage, and stay away from 30 or 35 year ones like the plague...you usually save a small amount per month and pay another 5-10 years in interest
http://www.lovemoney.com/mortgages/mortgage-calcul...
usually the overpayment limit is quite high - few people can pay back 25% of what they owe in a year etc.....
generally speaking at todays rates, if you have a 25 yr mortage, and double your payments, you pay it off in 7 years ...the other 18 years are the interest you would have paid (!)
hence its generally a very good idea to overpay a 25 year mortgage, and stay away from 30 or 35 year ones like the plague...you usually save a small amount per month and pay another 5-10 years in interest
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