Interest Only - overpay - reduce Term?

G

Goldie

Registered User
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37
Hi all,

My brother attended a property seminar (brainwash seminar!) yesterday. One of the the speakers suggested the following to reduce the term of a mortage-

Change existing mortgage to interest only, overpay the mortage to the difference between interest-only and original repayments (when it wasn't interest only).

The speaker suggested that this approach would enable you to pay off your mortgage quicker than paying in the mornal way (interest and capital as part of a monthly repayment), his reasoning was that in the early years of the mortgage that instead of your repayments going against mainly interest that the overpayment was going straight against the capital element.

Do you agree / disagree? Anyone aware of how this can be proven?

Thanks,

Goldie.
 
If you change to "interest only" then surely they won't let you pay off any of the capital ?
 
Fair point, but if it's not a fixed rate mortgage can you be prevented from overpaying your mortgage even if it is supposed to be interest only? I don't know, just throwing it out there!
 
They'll let you pay off capital but AFAIK it's usually a lump sum not a monthly basis as, I'd imagine, the admin would be a nightmare. I suppose if you paid 1k off 3 months after you took out the mortgage then the interest would go down faster than if you paid the same 1k over twelve months?
 
Um, I don't think so. Say on a €300,000 mortgage over 25 years at 4.5%. Annuity repayments - €1668; interest only €1125 hence a difference of €543 per month or €162,900 over the term leaving a shortfall of €137,100.

Sarah

www.rea.ie
 
Nonsense it will be exactly the same.

If he was advising you to pay more than the ususal repayment then it would make more sense

Eg 100k over 20 years at 4%
cap & int - €605.98
int only - €333.33
therefore cap repayment would be €272.65

If you decide to take interest only and pay in 272.65 seperately, it's going to be the exact same.


You can overpay the mortgage any time you wish in order to reduce either the term or the repayments. You don't need interest only to acheive this.

The only exception where you cannot overpay is if you have a fixed rate.

Bob
 
Change existing mortgage to interest only, overpay the mortage to the difference between interest-only and original repayments (when it wasn't interest only).
Click to expand...

I misread this...thought you meant pay more on top of what original repayments would have been.

Sarah, maybe you could give me a different example, I'm a bit slow this morning!;) If you took out an interest only mortgage and paid say 1k off it at, or near the beginning of the term then you'd pay less interest over the rest of the term. I think there's a flaw in the comparison i.e. they shouldn't have compared it to paying an annuity mortgage, but rather stated that if you pay some off the capital, interest repayments over the term are reduced. I hope your brother didn't pay for this seminar Goldie.

I agree with Bobk except that if you paid the 272 X 12 up front then the interest would be reduced. As I said, a bit slow this morning so if there's a flaw in this logic, I'd appreciate it being pointed out.
 
Sarah W said:
Say on a €300,000 mortgage over 25 years at 4.5%. Annuity repayments - €1668; interest only €1125 hence a difference of €543 per month or €162,900 over the term leaving a shortfall of €137,100.
Click to expand...

Hi,

That doesn't seem quite right.

On a 300,000 mortgage over 25 years @ 4.5% the payment on month 1 would be 1125 interest and 542.50 capital repayment (giving a payment of 1667.50)

The 2nd month the interest payment would be lowered as your actual mortgage is now down to (300,000 - 542.50) 299, 457.50 so you would pay 1122.97 interest and 544.53 capital repayment (again giving a payment of 1667.50) and so on.

Basically, you would not be left with a shortfall of 162,900 because your capital repayment increase every month.

Cheers, mw
 
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