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Original poster

Our interest-only mortgage has dropped - what should we do with the extra money?

63 replies

BEAUTlFUL · 16/03/2009 20:38

Our interest-only mortgage has gone down with every base-rate cut, and is now £750 cheaper every month. for some reason, this fills me with fear!

What should we be doing with that extra money - paying off some of the capital? (We can do that without any charges.) That would mean we don't get as screwed long-term if the rates start climbing again... am I right?

That would be better than just saving the difference, wouldn't it? Would it?

Neither DH nor I are very good at money, so any help would be fab.

OP posts:
TrillianAstra · 16/03/2009 21:48

Use it to pay off the capital.

The interest you would earn if you put the oney in a savings account is not as good as the money you save by paying off your mortgage.

But keep a bit of money out (in the best high-interest account you can find) in case of emergency, like if someone loses a job or becomes ill.

www.moneysavingexpert.com was mentioned earlier. Go there.

Blu · 16/03/2009 21:50

The best thing anyone can do now, I reckon, is pay back the capital.

Beautiful - don't get an endowment, get a epayment mortgage and start paying!

OR for some people it may be worth getting an 'offset' or 'smart' mortgage, saving - and letting the savings offset your mortgage.

So, if your interest bill reduces, keep up the payments anyway and over-pay.

brettgirl2 · 17/03/2009 08:10

So why exactly are interest rates going 'up up up'? Although it is true they cannot go down in the current economic climate they can't go up either. Comparisons to the previous recession are just wrong because it is a completely different situation. Then there was high inflation, now we are bordering on deflation

To the OP I can't even believe that you need to ask this - unless you save up the capital to buy your house when your mortgage finishes (at the end of the 25 years) you will either have to take out another one or move out. You NEED to pay off the capital otherwise you never own it. Apart from in emergency situations interest only mortgages are absolute madness, particularly when house prices are going down and if you sell you will end up owing even more!

brettgirl2 · 17/03/2009 08:16

Although the OP's personal interest rate will go up, because if currently you are lucky enough to be on a silly tracker deal these will not be renewed!

thirtypence · 17/03/2009 08:19

I'm not sure how your mortgage is structured but surely if you pay off some of the capital then the amount of interest you need to pay will continue to go down.

HecatesTwopenceworth · 17/03/2009 08:21

yes, I think paying off some of the capital would be a very sensible move.

DaisyMooSteiner · 17/03/2009 10:32

"Although the OP's personal interest rate will go up, because if currently you are lucky enough to be on a silly tracker deal these will not be renewed!"

Although there are a number of us who are on 'lifetime' tracker deals that are pegged to the base rate for the whole term of the mortgage. Mine is also free of redemption penalties so we can switch to a fixed rate without being penalised

Original poster
BEAUTlFUL · 17/03/2009 10:33

We have just called them, and are now overpaying CAPITAL off, at £500 a month. I'm persuading DH that that should go up as much as possible, after we have also set aside an "emergency fund" savings account, of say £2000 to cover anything dire.

I rang an IFA - he charges £87 for the initial chat, then around £120 to do anything! DH says that's too expensive and we can do it ourselves. what do you think? Does that sound v high to you?

OP posts:
Original poster
BEAUTlFUL · 17/03/2009 10:35

Daisy, your mortgage sounds awesome! Who's that with?

OP posts:
duckyfuzz · 17/03/2009 10:40

ours is similar to daisy's, with first direct, life time tracker of .49 above base rate

we are paying off capital with the money we're saving on interest payments, can't see why anyone would do anything different, especially with savings rates so low now

justaboutback · 17/03/2009 10:42

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DaisyMooSteiner · 17/03/2009 10:43

It's with The Woolwich and we took it out last January. We were very, very lucky to find, plus it also had no fees to take it out! It's 0.6 above the base rate (in the past they sold the same deal at 0.18 below the base rate!) but the same deal now is about 3% above the base rate and has a hefty fee attached. We agonised over whether to go with it or to take a fixed rate with another provider at 5.99%, as at the time the tracker worked out slightly more expensive. I had a hunch that interest rates would come down a lot and luckily I was right as it's saved us thousands of pounds.

DaisyMooSteiner · 17/03/2009 10:47

BTW, we're currently not overpaying on the mortgage as we're planning to do a substantial extension this year and all the money is being saved towards it. If we didn't save it and overpaid then we would need to borrow it back from the mortgage company to do the extension, Apparently it would be counted as a further advance and the interest on the extra amount would be based on the SVR which is considerably higher than the rest of the mortgage. So for us, it makes sense not to overpay. Of course once we've saved for the extension we will start overpaying.

brettgirl2 · 17/03/2009 10:50

Daisy - I was assuming that the OP is in the same situation that we are currently paying .75% interest. Is yours pegged to the BOE rate for lifetime? Or is it related to the actualy banks rate? If it is the first I am REALLY jealous lol. Ours finishes next February and I thought we were lucky to be on this even in the short term. It's great though, we are just paying capital at the minute with the same repayments.

DaisyMooSteiner · 17/03/2009 10:54

It's pegged to the 'Barclays Base Rate' for the lifetime of the mortgage. We had worried that this could mean that they would just stop dropping their rates if the BOE base rate went too low, as there's no collar on the mortgage. However, so far they've mirrored the BOE every time and I think that given that they strongly implied that their rate was the same as the BOE's when we took it out, we might have a case with the FSA if they raised their rates/didn't drop them again if the BOE does.

Niecie · 17/03/2009 10:58

I would be over paying repayments now and looking for a repayment mortgage as soon as you have to review your current deal (assuming you don't have 10 years or something silly to run on it).

titchy · 17/03/2009 10:59

Make you you tell mortgage company the overpayments are to come off the capital, otherwise they will take them as advanced payment of interest and you'll still be in the same position as you are now.

mummydoc · 17/03/2009 11:05

overpay as much as possible, unless you have any other debts such as credit cards which will be costing you in high interest rates. all the financial gurus reccommend paying off the debts with the highest interest first then pay off your moetgage. we alos have a fab life time tracker at .79 above base rate with no cap to how low it can fall - we are now overpaying by £600/month . It not only reduces the capital it reduces the interest owed , the time it will take to pay off altogether and if/when interest rates go up we will already be used topaying that amount an dknow we can manage to ( though it is tempting to have the money for holidays!)also financial advisers usually do not charge for their time ?

Original poster
BEAUTlFUL · 17/03/2009 11:44

Thanks Titchy, we did this. good advice.

Mummydoc, do they usually not charge? Eeek! Will cancel him ASAP. Thanks!

We don't have any debts at all, other than the mortgage. Even my credit card is all paid off!

OP posts:
MadameCastafiore · 17/03/2009 11:47

You need to pay it off as fast as you can the capital that is.

You should change toa repayment mortgage too if you can afford it or you never own your house just the difference between the amount you borrowed and the value of your house when you have paid off the interest - so are just renting it for a very long time.

noddyholder · 17/03/2009 11:51

agree with morningpaper.This is going to be short term.save it you can still get some good deals if you don't need quick access to the money.No repayment vehicle and interest only is risky as it is like renting from the bank really.You are betting on the house eventually going up in value which this time around will take years or may never happen in our lifetime!

Original poster
BEAUTlFUL · 17/03/2009 11:52

The problem with switching our mortgage is:

  1. We are both self-employed. It was a self-cert mortgage and we wouldn't get another of those.
  2. We will lose this rate of interest, so for the moment we are better off where we are, making overpayments of the capital. (Aren't we??)

So I think the best idea is stay put, overpay the capital like mad, and sort out a repayment vehicle. Yes?

OP posts:
MrsMattie · 17/03/2009 11:56

If you are saving £750 a month and are paying interest only - start repaying!

justaboutback · 17/03/2009 11:57

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brettgirl2 · 17/03/2009 11:58

Yes, that is right. If you are on an interest only mortgage then the important thing is to set up a plan as to how you will raise the capital - ie save it up over the 25 years. If you do this, then you are able to pay the loan off. If you can make overpayments of capital then you are repaying your mortgage. It's only a problem if you just pay the interest each month, because at the end the loan amount is still outstanding. Apart from, if you are on a repayment it forces you to raise the capital.