Interest and capital repayment split – which to repay?

by Readers Question

9:16 AM, 1st December 2015
About 3 years ago

Interest and capital repayment split – which to repay?

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Interest and capital repayment split – which to repay?

I have a mortgage split into two accounts with one interest only and one repayment. Is it better paying a lump sum to reduce the interest only part of the mortgage or the capital and interest repayment part. interest

I currently have a 70/30 split with the 30 being interest only.

Many thanks

Kevin



Comments

Neil Patterson

9:28 AM, 1st December 2015
About 3 years ago

Good Question Kevin,

It depends on why you are making a capital repayment and what you do after.

If you make a reduction in the size of the repayment loan, but do not recalculate the monthly payment then your monthly Direct Debit will remain the same and you will pay this part of the mortgage off faster ie. effectively reducing the term. However you could keep the term the same and have the lender recalculate the Direct Debit so you are paying less per month, but you will pay the loan off no faster.

If you pay a lump sum off the interest only loan this will not alter the term, but you will have a smaller amount of capital to find at the end to repay the mortgage.

So do you want to repay the entire mortgage over a shorter period of time or do you want to decrease your monthly outgoings or do you want to make sure you are not required to find a lump sum at the end of the mortgage term?

Any capital repayment element of a Buy to Let Loan is not tax deductible.

Carol Thomas

9:37 AM, 5th December 2015
About 3 years ago

Interesting question and unfortunately, one I don't know the answer to unless we know more about your circumstances (as stated by Neil). I have five properties on BTL, mainly with 25% deposits and I really wish someone could look at my situation and tell me what to do re Clause 24. I know I'm not the only one in this situation and for us it has come at the worst possible time - I am already retired and my husband has the choice of retiring next year at 60 or working on until his government retirement age of 66 (which takes him until 2022). I recently tried to sell a 1 bed house and couldn't get anywhere with it in spite of dropping the price under that of a 1 bed flat, so it's being rented again. Apologies Mark for not using this site, just wanted to test out the local market as Plymouth isn't that huge a market. Having said that, I raised the rent from £500 to £530 and after three viewings, I accepted tenants at £550 pcm! Something is definitely going on out there as this has never happened before. I will be increasing rents on the other three soon, the fourth one is "rented" to my Father at a token rent so no increase there! All the plans we made over the years and it's all gone to pot.
I am aware I have digressed from the original post, but I would love to hear more ideas about trying to pay off early or not.....


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