Am I Really Better off with Capital Repayment

malko

Hi Im a guy in his early 30s, living alone, no kids, no dependents. Like most guys my age i dont intend to live in this house forever, its not a family home and obviously in time i'll either move on or buy a place with a partner.
I am currently on a captal repayment mortgage. Having looking at my statements i've worked out i have payed off approx £1200 of the mortgage in the past 18 months- i started off with £86k and now owe £84isk However the diference between interest only and captial payments is £180 a month which if i then multiply by 18months (the term i have been paying my mortgage) is £2880......i'm thinking i would be better off on interest only and putting the £180 a month into a savings account? Afterall the only reason im really on capital repayment is to pocket more when the property is sold but with my workings out i could pocket more paying interest only and putting the money I "save" by switching to interest only into a savings account?
Maybe im getting this wrong. More experienced advice would be appreciated.
:beer:

Cat695

Interesting this

But doesn't your mortgage company make you have some sort of endowment policy if you go interest only so that you can pay off the capital at the end??

Makes sense though in what your saying (IF interest rates for your savings is good which by the look of things won't be soon)

malko

i think they would look for some endowment policy but i have a work pension which i assume should be okay.

dimbo61

putting aside the question from the lender of ( how are you going to pay off the mortgage " what is your repayment vehicle" )
You would be better off with an interest only mortgage if you could over the next 25 years get a better rate from savings after TAX than you are paying on the interest only mortgage.
If you had say a 10 year fixed IO mortgage of 5% and could get 6.5% in a cash ISA then saving into ISA,s would give you a better rate of return.

minibudgetgal

Interesting one this. We switched in interest only in response to hugely inflated living costs a year or so ago. WE are coming to the half way point in paying back our debts and should be debt free by dec 2010 which will allow us to restart our capital repayments, or start some some of savings vehicle to re[ay the capital in our mortgaga. Abbey National did not make us take out any form of repayment vehicle at the time, though this was before the property crash/whatever you want to call it.

Anyway, I did some research today. Our mortgage payments will go up by around £700 per month when we go back to cap repayment. This will mean that in 25 years time we will have paid off 280k mortgage. However if I save 700 per month in a savings plan, and raise my investment by 5% per year (roughly what we are getting through bonus and pay rises) I will have over 700k saved, according to the calculator on whatsthecost.com.

Now, whether I have the restraint not to touch that money, I dont know, but when it comes down to us making a decision on this I wont necessarily be putting all my eggs in the housing basket. If one of us loses our job, we would still have substantial savings invested to pay mortgage. If we had been good and paid off the capital every month, the mortgage would still need paying and we would not have sufficient savings to keep going beyond a few months.

Sorry, will stop now, but it is a funny one dont u think?

dimbo61

You need you pension and the lump sum to live on in retirement and not to pay off a big mortgage.
Or do you fancy living in poverty in old age.
Repayment is simple to understand
You can watch your debt reduce year on year and overpay
You are not hopeing that the stocks and shares are going well when you need to cash them in.
Or that your endowment will pay the debt.
Stick with the best deal you can get on a repayment mortgage and overpay,
also save £3600 each year into a cash ISA. simple

malko

thanks for the replies. However thinking about the short term e.g. next 3 years. Which would be the better option? Capital or Interest? I assume the amount of capital i pay is on a sliding scale with more being payed off over time but if i work on current figures, even if i had just put the money i saved from being interest only (compared to capital repayment) under my matress i would have saved £2880 in the past 16 months which is over 2xs the amount of capital i have payed off! . Is there something i am missing?
Thanks

*edit* to the post above..........my original point is i dont intend to have this property for much long than another 2 or 3 years, with my albeit simple calculations it seems like i am wasting money on capital repayment in the short term.

Rikki

Interest only mortgages have to be repaid by a capital lump sum at the end of the term and/or paying off capital during the life of the mortgage.

dimbo61

Compound interest !
You are now only paying interest on £84k and not £86k
If on interest only you would carry on paying interest on the whole ie £86k amount and hope your savings grow with interest at a higher rate.
I have reduced the interest part of my mortgage by £170 a month by mortgage payments and overpaying therefore I am now overpaying by an extra £170 a month on top of my other overpayments.
The decision to go IO or repayment is dependant on the interest rates you are going to pay on the mortgage and the interest you can get from your savings after TAX

Rikki

dimbo61 wrote: »

Compound interest !
You are now only paying interest on £84k and not £86k
If on interest only you would carry on paying interest on the whole ie £86k amount and hope your savings grow with interest at a higher rate.
I have reduced the interest part of my mortgage by £170 a month by mortgage payments and overpaying therefore I am now overpaying by an extra £170 a month on top of my other overpayments.
The decision to go IO or repayment is dependant on the interest rates you are going to pay on the mortgage and the interest you can get from your savings after TAX

Have you checked this is where the overpayments are going? My bank doesn't work like that.

I have part interest only and part repayment. I can only make capital repayments on the interest only side by sending a cheque specifying this. Any monthly overpayments come off the capital repayment side.

Worth checking for peace of mind.

dimbo61

offset mortgage and full repayment
check the balance almost every day ( sad I know )
No stocks and shares or S & S ISA,s just a very big mortgage
Does it matter if the overpayments come off the IO part or repayment part ( if on the same rate )
As soon as you have repaid the repayment part you can then use all the payments to clear the IO part.