Repayment or Interest Only

Cane_Family

Hi all,

I am hoping someone can help me out here, We current have a mortgage with Abbey on a Fixed rate until Aug-09. We are planning to emigrate to Oz as soon we get our visas, (approx feb-09) But it could take time to seel the house, I have spoken to Abbey and asked if we could go to interest only and they said we can, but we would still incur penalties if we sold it earier than Aug-09, but my question is, would you advise me to go to interest only and then plough my savings in to my esaver account rather than paying the catipal off the house?

All advice welocome, plus i will answer and other questions if needed.

Regards
Cane Family

poppy10_2

With house prices falling you normally want to repay as much of the capital as you can.

CLAPTON

if you can earn more money in the savings account (i.e. the net AER ) is higher than the APR of the mortgage then save otherwise pay the mortgage off.

bigbloke45

Have you got an "Offsetting" option? This would allow you the option of realising the same benefits of paying off your loan, but allow you to keep your options open.

Otherwise I agree with the other posters here, you will never find a saving account that will equal (after tax, or even before!) the rate you are paying on your mortgage. So, if you don't need the money or can't offset, paying off the mortgage makes the best sense.

Good luck!

Locoblade

If you expect to incur the penalties by repaying earlier than August, and the penalty is a percentage of the capital remaining then I suspect you'd be sligtly better off paying off as much capital as possible even if your savings interest is comparable rate to the mortgage, because as well as comparing the interest rate of your savings against the mortgage rate, you also need to take into consideration say a 2% charge on the remaining capital, so in effect any money you pay off now, you're earning your mortgage rate +2% (or whatever the ERP penalty is).

e.g
You have £100,000 left on your 6% mortgage now and plan to pay it off in 6 months, with a 2% early repayment penalty payable at that time. Repayment costs £644 a month, Interest only would cost £496 a month for a 25 year mortgage.

If you continue repayment onto the mortgage over 1 year, you'll have approx £99,100 of capital left in 6 months.

If you go onto interest only and pay the difference (£148) into a savings account at 6% instead, you'll still have £100,000 left on the mortgage but will have about £900 including interest in the account after 6 months, unsuprisingly equal to the difference in capital from the repayment mortgage.

If you weren't redeeming and there were no fees, there would be no financial difference, but If you redeem the repayment mortgage with a 2% fee, you're only paying that fee on £99,100 so you'll be charged £1,982, but if you redeem early on £100,000 (the interest only option) you'll end up with a fee of £2,000, so it works out slightly more expensive.

There's only £20 difference in this example because the timescale is so short and the money being paid per month isnt a lot, but you get the idea.