Lump sum Mortgage towards capital or interest?

Hi,

I've read several threads about lump sum payments but couldn't find answer to my question.

We took a mortgage this year with AIB, variable interest rate.

Iwas told by a friend longtime ago that when lump sum payment are done there are 2 options: payment towards capital or payment towards interest, and that I should be very careful with banks because one of them is more beneficial for them than the other (which happens to be the opposite for the client). But I can't recall any more details about the conversation.

Which option is more beneficial for me? I want to minimize the total amount of interest that I will end up paying to the bank on top of the borrowed money.

I'd be grateful if someone can shed some light on this.

Thanks,

reduce the interest is not an option,

you can lodge the lump sum thus giving you two options after the balance is reduced
you can keep the term the same thus reducing the monthly repayments
or you can keep the repayments the same thus reducing the term.

there is no option to pay towards the interest, as mortgages are not front loaded with interest

Not really sure what your friend is talking about.

You owe the bank say €200k and you pay down a lump sum of €20k, so now you owe the bank €180k. The interest is computed on the outstanding balance and as its lower now than it was then you pay less interest.

The next question is, do you want to continue paying the existing repayment and pay the loan off faster or reducing the repayment to keep the existing term. Overpaying will save you more interest.

Some banks used to offer the option of having the payments marked as payments in advance. You could then use them at some point in the future to stop making payments without going into arrears.

I did recently hear of an old product that charged the full terms interest up front effectively, so additional payments would be in any way beneficial. Definitely a strange one and no the norm.

Thanks for the answers. Much more clear now.

Which option is more beneficial for me? Keeping the same term and reducing monthly payments OR reducing term and keeping same monthly payments?

@Joe_90, by

Joe_90 said:

Overpaying will save you more interest.

Click to expand...

do you mean the option "reducing term and keeping the same monthly payments"?

As an fyi, and based on other threads about the topic, I don't have any deposit, so there's no question about where the interest rate is higher, which I believe could play a factor in the answer to my question above.

Thanks,

Reducing the monthly payments without changing the term will generally be better. You are free to keep up the higher payments and end the mortgage sooner, but if you need to you can drop to the lower payments easily enough.

Thanks Ryaner!

ryaner said:

Reducing the monthly payments without changing the term will generally be better.

Click to expand...

can you share more details about why this will be more beneficial for me? This is aligned with what Joe_90 said earlier on too, but don't understand why this is more benefitial for me.

I want to fully understand

Maybe read this Key Post and post again, if you still don't understand it.

Brendan Burgess' guide to Mortgage Repayment Calculations

holaquetal said:

Thanks Ryaner!



can you share more details about why this will be more beneficial for me? This is aligned with what Joe_90 said earlier on too, but don't understand why this is more benefitial for me.

I want to fully understand

Click to expand...

My last post was removed for some reason, didnt think I was hijacking the thread as it was more of a follow on question.

I too want to understand why keeping the term the same after paying a lump sum is more beneficial. Is it just because you have the flexability to overpay if you wish and then reduce down to the current repayment level if circumstances change?

You will obviously save more in interest if you reduce the term?

Sorry, it was moved to the Key Post.

boe said:

You will obviously save more in interest if you reduce the term?

Click to expand...

I understand if you reduce the term and pay the same amount per month, it will cost less in interest vs. keeping the term the same and paying off less per month.

However, if you were to pay off a lump sum and keep the same term, but then overpay such that you pay off the same amount each month as if you had reduced the term, are the overall interest costs the same or different?

Also, are there any implications for Mortgage Interest Relief for opting for reducing the term vs reducing the monthly amount?