Mortgage talk - advice required please

[BeauNidle]

Just having lunch with my friend and we are discussing different mortgages. Now, if you have an interest only mortgage and have some money left over each month, what would you do.

a) Make an overpayment each month
b) Transfer it to a repayment mortgage.

Is either one a better choice?

I would definitely start paying some capital off - you'll be so glad you did once interest rates rise in the future.

yes, but which option? Pay an extra lump sum each month on an interest only, or just transfer it to a repayment mortgage and pay whatever that amount is?

Thanks for answering !

Personally I would go for repayment because then you know you owe that every month & it doesn't become an option. I have 8 years left to pay & it is great to think that the house will actually be mine!

Yes, that is my thinking too. She thinks if she stayed on I.O. then paid a lump each month, if things got tight she could have a month back on just the I.O. Apparently if you come off I.O. to a repayment, you cannot go back on it which is her worry. Like a safety net, sort of thing.

It depends when she wants to finish paying her mortgage. How long is the interest only term? If she doesn't pay the capital off by then, what does she want to do?

She has the I.O for the entire term of the mortgage, but has spare cash, so was trying to see if one way was financially more beneficial than the other. I felt that to get going on payment was the way forward, yet she feels keep the I.O. but pay the capital off at the same time in extra lumps each month. Both ways would pay the mortgage off at the same time, i think but am not hot on this. We have another friend over in a minute, so will get another view

An IO that allows overpayments effectively is a repayment mortgage, just one that allows you discretion over the amount of capital repaid in any month.

Repayment still unless she has another vehicle for paying back the capital at the end of the mortgage term - it is too easy to spend the money otherwise.

slhilly - it started out as a repayment mort then changed a couple of years ago to I.O. Now she has the other funds available she was not sure which way to do it.

Third friend just arrived, and says 'repaayment, no question' !

I say again: if her IO mortgage lets her make overpayments, it is a repayment mortgage, albeit one that doesn't require her to make a particular level of repayment each month. If she has capital available, she should pay that in straight away, not dripfeed each month. Every pound of capital paid down is a pound less on which interest accrues.

I personally would transfer to a repayment mortgage because as already stated you don't want to run the risk of coming to the end of the term and not having the funds to clear your outstanding balance.

Slhilly - so are you saying she reverts it to repayment method or leaves it as iO and just throws lumps at it, i.e larger lumps some months and smaller the next. Basically whatever she has free each month. Rather than revert to repayment which will go up so there would be no spare. Is it swings and roundabouts, cos I am confused?

If its interest only and overpayments are allowed you can set it up to overpay to the same amount as it would be repayment, people did it where I worked all the time. Means they have a safety net of not overpaying if money is tight as a regular overpayment can be cancelled.

Get them to call the mortgage provider and work out the figures for them and check there is no penalties for doing this. Most people like the security of a repayment mortgage but for periods of time it's sometimes not manageable for people. Mortgages are very flexible now a days. So always best to call to see the options.

Overpayment can only be max up to £500 p/m, it is better option if you know that after few month you won?t have enough money to carry on. If you change your mortgage to repayment you cannot go back to interest only.

Oh we didn't know about max of 500, thought it was minimum of that and max of 10 percent of the mort value in any given year?

It depends on the type of mortgage you have, what overpayment limits are. Call the mortgage company and ask.

or you can build up a surplus in a separate account with the "spare" money and pay off a lump sum of capital - within the limits- every 6 months/year. It may not be £500pm , sometimes it is up to a % of the balance max pa, check terms and conditions.

It depends. The self employed with variable income would do better with the paying when they can afford it IF they can control themselves not to overspend in months when they have spare money.