Mortgage - Lump Sum Repayment - Which Figure?

tadhg2011

Hi,

My girlfriend bought a house 2 years ago (Buy-To-Let Mortgage). She came into some money lately, and wants to use a lump sum (EU20,000) to pay some of the mortgage off. I don't own a house and I have no idea about mortgages so was hoping somebody could help me with one question.
Her Loan Offer says something like :

Loan Advanced - EU200,000
Period of Agreement - 25 years
Number of repayments - 300
Total Amount Repayable - EU312,000
Cost of Credit - EU112,000

Q. Will the EU20,000 be taken off the EU200,000; or will it be taken off the EU312,000?

Thanks.

fricatus

tadhg2011 wrote: »

Q. Will the EU20,000 be taken off the EU200,000; or will it be taken off the EU312,000?

The best source for an answer to this question is the bank, but generally, the lump sum reduces the outstanding capital balance (which means you now owe 20,000 less).

More often than not, your payments will stay the same (probably because they're set on the bank's computer system), but because you're now paying less interest (because of a lower capital sum), more of the repayment is going towards reducing the capital balance.

This means that in the long run, you pay less interest and the mortgage ends quicker.

Some lenders may have penalties, but given that they're all trying to repair their balance sheets since the crash in '08, they're generally happy to have you pay back the loan quicker. Speak to them though, to know the whole score.

phormium

It will come off neither, it will come off whatever the balance is now. The 200k was the originally amount borrowed, that will be have changed monthly with the addition of interest and deduction of monthly repayments. The 312k was a notional figure based on paying the initial repayment for the full term, this could change depending on interest rates over the full period of the loan.

Usually when you pay a lump sum you have the option of either reducing the monthly repayments and leaving the term the same or keeping the monthly repayments the same and clearing the loan earlier (this is the better option normally if you can afford it). Actually a combination of the two is sometimes the better, if the bank allows it, keep the term the same, reduce the monthly repayments BUT keep paying the same amount. This allows you to clear the mortgage early BUT if circumstances change it allows you to drop back to whatever the reduced payments were and stop overpaying.

tadhg2011

Thanks guys for your prompt responses. I think I had over-simplified it in my head a little, but what you have both stated makes sense.
Your mention of 'notional interest' particularly just brought everything flooding back, so I know where I stand now. I will go with herself into the bank regardless, but now I have a much better understanding of it. Appreciate your help.

chris85

it will come off the current capital balance at present. Her bank will have thsi figure available for her immediately.

If it is a fixed rate she may be penalised to pay part of it off early. Ifs its variable/tracker there is no penalty.

If its a fixed rate i would get a term deposit account and earn interest on it and when fixed term over (it it is set time period) then pay off balance.

amen

it will come off whatever the balance is now

as long as she tells the bank to reduce the principal it will do so.

Paying off a lump sum may not be the best idea. It may make more sense to increase your monthly payments and thus reduce the term.

This depends though on how much extra you pay off and the interest rate.

tadhg2011

Certainly food for thought guys, and appreciate your comments. Can I just ask amen, would her paying off a lump sum of the original amount not also reduce the term, or at least the size of the monthly repayments thereafter?

I think I understand what you're saying, but why would increasing monthly repayments be better than paying off a lump sum? If she held back the lump sum and instead chose to use it to pay back larger installments on a monthly basis, she would continue to be paying partly interest every month(?)
Her goal is to pay as little interest as possible by paying off a few lump sums as early as possible (hopefully paying off approx 100k over 5 years). . .. this made sense to me, but again, I may have over-simplified this.
(BTW, it is a Variable Mortgage).
Would appreciate your thoughts.
Cheers.

phormium

Paying off the lump sum will result in greater interest savings than paying extra per month as you are always paying interest on the outstanding balance so obviously if that suddenly becomes 20k less then less interest will be charged. If the rate on the mortgage is low i.e. tracker, then you may get more on deposit for the 20k but you must take into account DIRT and TRS to work that out. If the savings rate is better then you could invest the 20k for a term and then pay it off the mortgage when it matured plus the interest earned. Not worth the hassle if there is only few quid in the difference.

The only other reason for not paying off the lump sum is if you think you will need the money again in the future, it will probably be impossible to remortgage should the need arise, if you thought it would be needed, some banks can put the lump sum as a credit on the account, it still saves you interest but does not technically come off the balance and is available for withdrawal in the future.

Really confused you now !

chris85

amen wrote: »

as long as she tells the bank to reduce the principal it will do so.

Paying off a lump sum may not be the best idea. It may make more sense to increase your monthly payments and thus reduce the term.

This depends though on how much extra you pay off and the interest rate.

The option is still there to reduce the term. This option will be made available if lump sum is paid to reduce term or reduce payments.

OP unless you can get a deposit account with a rate greater than your mortgage rate it is more beneficial to pay a lump sum off the mortgage.

amen

Paying off the lump sum will result in greater interest savings than paying extra per month

not always.

phormium

Under what circumstances would it not?

chris85

amen wrote: »

not always.

it will unless you can get a deposit rate greater than mortgage rate.

Otherwise you are talking out your rear end.

randombar

Lads just wondering if you can increase the payments (by a small amount) on a fixed rate? I know there is penalties if you pay off a large amount but I'm just wondering what people mean by "large" and "small" i.e. an extra 100 a month ok??

phormium

That will depend on the individual banks policy, those that do it usually have a percentage of payment or loan as the guideline.