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Help re: mortgage overpayment or repayment

(14 Posts)
chickenfoot Tue 21-Jan-14 16:58:16

Hello
I'm hoping someone a bit more financially savvy than me can help....we have a 250k mortgage which is in 2 parts - 150k of it is on a very low interest rate, fixed for lifetime of mortgage,and another 100k borrowed from the same provider when we moved house, on a higher interest rate. For a few years we've been paying interest only on the (lower rate) 150k, and repayment on the 100k. Now our incomes have increased and we're in a position to switch to repayment for both parts.
BUT... I am self employed so my income could easily decrease in following years - and interest rates could rise in the next couple of years - so would we be wiser to spend our money overpaying on the higher interest part of the mortgage for the time being, and keeping the lower-rate one as interest only?
Thank you!

LadyKooKoo Tue 21-Jan-14 20:06:41

What interest rate are you on for the 100k and how long over? How much more can you afford to pay extra each month?

TalkinPeace Tue 21-Jan-14 20:07:16

DONT switch : you'll never get that rate again.

Make the maximum capital repayments against the IO part that you are allowed, while keeping the monthly amount the same.
That way you'll make real dents in the capital sum owed while having the felxibility to reduce payments later if needed.
BUT
Use my mortgage sheet (on the other thread) to work out how much capital you need to be allowing each month to clear the IO by the end of the term.

chickenfoot Tue 21-Jan-14 22:12:27

Thanks for replies. Mortgage has about 12 years left. Interest rate on the 150k is 0.5 above base rate for lifetime, the other 100k is on standard variable interest, I think about 4% (not got details to hand).
If we switch to repayment on both products, it'll be £1700 a month. We can just afford this.
Repayment on the 100k plus I/O on the other 150k, is about £850 a month. So we have have remainder £850 to overpay/repay each month.

I'm trying to work out which of these options makes most sense (or other option not thought of yet) , bearing in mind income may decrease in future years, and interest rates increase...
A/ switch to repayment on both products (no money spare for any overpayments)
B/ repayment on the 100k, I/O on the 150k, then overpay by 850 each month (or as much of this as allowed) to the 100k loan
C/ repayment on the 100k, I/O on the 150k, then overpayment on the 150k of 850 a month
Thanks for any advice....

chickenfoot Tue 21-Jan-14 22:13:41

TalkinPeace - will look up the sheet you mentioned - thanks

TalkinPeace Tue 21-Jan-14 22:20:03

0.5% above base is like gold dust .....
see what your overpayment limits are
but if self employed, flexibility is king!

chickenfoot Tue 21-Jan-14 22:31:46

Thanks Talkin. There are no limits in amount we can overpay on the 0.5 rate (you are right, it is like gold dust!). So would you recommend over-paying as much possible on this product, rather than the 10% per year overpayment allowed on the higher rate product? Either option equates to about the same amount each month - just need to know which is most savvy in the longrun...

TalkinPeace Tue 21-Jan-14 22:38:35

Do both!

if you have an "overpayment account" that reduces calculated interest, but can be pulled back out later if work turns nasty, that is the ideal (I do - I use it as a savings account)
otherwise, capital redemptions ...

If you overpay the 10% on the repayment each year and then everything else you can on the IO
BUT keep your monthly amount at the same, you should be able to reduce them both significantly

plan it all out with a spreadsheet and then you'll be able to see the effects clocking through ....

chickenfoot Tue 21-Jan-14 22:48:49

Thanks, that's really helpful.

LadyKooKoo Tue 21-Jan-14 23:39:50

Makes sense to clear the 100k first if that is on the higher interest rate. My calculator shows 100k over 12 years at 4% as having repayments of circa £800 per month? If you overpay by £850 a month then the 100k will be cleared in 5 years. What is the term left on the 150k?

LadyKooKoo Tue 21-Jan-14 23:41:36

The above would also save you £15k in interest.

chickenfoot Wed 22-Jan-14 11:29:26

Thank you LadyKooKoo! Term left on the 150k is the same - 12 years

LadyKooKoo Wed 22-Jan-14 15:08:55

In that case I would overpay the 100k; as I said before, it would be clear in five years. Once that is paid off, I would take that £1700 a month and make overpayments against the £150k. After 7 years you would have about £5k left to pay. I realise this can change with interest rates going up but this calculator will help you play with numbers a bit.

BrownSauceSandwich Wed 22-Jan-14 19:03:40

I'm with LadyKooKoo. I'd throw all my resources into clearing the £100K, while paying interest only on the £150K. Once you've totalled the higher rate load, then you attack the lower rate.

Good luck with it smile

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