Paying more off the mortgage

I have asked my bank to take extra payments every month on top of my mortgage to try and pay it off a bit earlier. I checked with them that these extra payments monthly will be coming off the principle and they said that it comes off principle and the interest. Is this right? I thought extra payments come off the principle only. I am already paying the interst due on my monthly payments.

Any insight appreciated.

homeowner said:

they said that it comes off principle and the interest. Is this right?

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Doesn't sound right to me. Any accelerated lump sum or capital repayments should really come off the capital only. Maybe the person you spoke to simply doesn't understand (not unusual)? You need to write to them and get it in writing that any unscheduled/accelerated additional repayments will be deducted from the capital. And, if you choose, that the effective term of the mortgage is reduced by you keeping your ongoing repayments are their normal scheduled level.

I think I will take your advise clubman and get it in writing. The person who I am dealing with is a senior financial advisor. She helped me with the initial mortgage application a few years back. Maybe she just doesnt know her facts.

Have I asked her for the right thing? I called it "extra monthly payment" should I be calling it something else?

I would just say that I want to keep my repayments at their current scheduled level and that any additional lump sum or regular payments over this amount are to be considered accelerated capital repayments to be deducted from capital immediately. This will reduce the effective term of the mortgage (without the need to explicitly renegotiate this) and save you money on interest charges avoided in the long run.

Thanks Clubman, here is what she replied to my question of why extra payment would come off the interest as well as the principle.

"if you still have the original paper work from the mortgage it shows you the chart of repayments over the 25 years where capital and interest are reducing by the repayments, in the initial years interest is the larger portion so takes up more of the repayment than the capital, that's why it takes so long to show capital reductions on mortgage balances."

It doesnt really explain why additional payments would come off the interest. Sigh....why do they make this so complicated.

I get the impression that she does not understand the concept and implications of accelerated regular or lump sum capital repayments! Try punching your mortgage details into Karl Jeacle's mortgage calculator first without and then with the accelerated/additional capital repayment details. Maybe print off the different amortization graphs and send them to your woman. She might learn something.

Yeah I used that calculator to make the decision on how much extra to pay (its really helpful) however here is what her latest reply is:

"It's the same as a monthly repayment, but as the capital is reducing slightly quicker there is less for us to charge interest on and thus the interest charged does gradually reduce. I can't really explain it any better, but if you want to ring BOI Mortgages customer relationship unit on 6113333 they might be able to explain better."

this makes me think that his mortgage calculator may not be correct, if what she is saying is true, I am just paying off interest quicker not actually reducing it by much. I wonder if his calculator takes this into account and how does one work out how much is it reducing it by? I think I need to talk to them in person.

Thanks for you help clubman.

homeowner said:

"It's the same as a monthly repayment, but as the capital is reducing slightly quicker there is less for us to charge interest on and thus the interest charged does gradually reduce. I can't really explain it any better, but if you want to ring BOI Mortgages customer relationship unit on 6113333 they might be able to explain better."

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Well at least that makes a bit more sense.

this makes me think that his mortgage calculator may not be correct

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The calculator is correct.

if what she is saying is true, I am just paying off interest quicker not actually reducing it by much.

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No - if your scheduled repayments are €1K per month and you decide to pay €1.2K then the additional €200 comes straight off the capital.

I wonder if his calculator takes this into account and how does one work out how much is it reducing it by? I think I need to talk to them in person.

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You need to understand the issues involved in and the implications of accelerated lump sum and/or regular capital repayments in addition to the regular scheduled annuity (capital plus interest) repayments. Once you understand it you can explain what you want to do.

I suspect that the financial adviser is trying to say that extra capital repayments mean that you pay less interest over the lifetime of the mortgage, as the remianing capital that they are charging you interest on is lower. This is why accelerated capital payments are a very cost effective way of using any spare cash which you have.

The mortgage calculator does take this into consideration and is correct as far as I know).

As long as you get confirmation in writing that your extra payments are off the capital as ClubMan as suggested, you will be getting the benefit of lower interest payments.

Post crossed with ClubMan

Why not ask the following question to the advisor:

If I were to pay the entire mortgage off in one go tomorrow, would I pay the entire capital or capital plus interest?

Clearly its the former.

I've reduced our mortgage with lump sum payments in the past, and it has all come off the capital amount that is outstanding. I can verify this by viewing the mortgage balance on my on-line banking a/c before and after making the transfer. No interest is ever charged.