Repayment v Overpay Interest Only

Goonerak

I have a £75000 interest only mortgage which is fixed until August 2009. I had been investing in an ISA to pay it off but I have lost all faith in investing to pay off a mortgae.

Next time I remorgage I was thinking of changing to a repayment mortgage which would put me back at square one.

However, would I be better off taking out an interest only mortgage and overpaying by the difference of the repayment mortgage?

E.g. £75000 @ 4%
Repayment - £395.88 / month
Interest only - £250 / month + £145.88 overpayment.

I'm comfortable with my current payments so I would be looking at a total monthly outgoing of about £500 / month.

Or, if I can find one that does, invest the overpayment into a building society with a higher interest rate than the mortgage rate? I could invest in the missus' name and get the gross rate as she is a non-taxpayer.

Leighthal

This is a good idea if you want flexibilty.But you have to make sure you overpay and not just lapse into paying the interest only part as you'll never reduce your debt.
I have a Nationwide fixed rate from October 2007(5.98% :mad: ,does'nt look attractive in the current climate,oh WTH) on Interest Only.I have however been paying the max 500 quid overpayment each month.
Looking back though,I wish I'd gone with the fixed rate on an Repayment basis AND still made the overpayments.
We have ISA's also but if interest rates stay low into next year then I dont think we'll get much of a deal on our pot come April time.

Gorgeous_George

Goonerak wrote: »

I have a £75000 interest only mortgage which is fixed until August 2009. I had been investing in an ISA to pay it off but I have lost all faith in investing to pay off a mortgae.

However, would I be better off taking out an interest only mortgage and overpaying by the difference of the repayment mortgage?

E.g. £75000 @ 4%
Repayment - £395.88 / month
Interest only - £250 / month + £145.88 overpayment.

I'm comfortable with my current payments so I would be looking at a total monthly outgoing of about £500 / month.

Or, if I can find one that does, invest the overpayment into a building society with a higher interest rate than the mortgage rate? I could invest in the missus' name and get the gross rate as she is a non-taxpayer.

There is no difference in the two options other than you might have easier access to the overpaid - but you might not. Regardless, you may not be able to find a lender offering an interest only deal.

If the total repayment is less than £400 why are you looking at a total monthly outgoing of about £500 per month? Where does the other £100 go?

Investing at a higher rate than your mortgage charges makes sense. Your method may be classed as tax evasion and you run the risk of your wife making off with her lover and your savings. This upside down world may not last for very long.

GG

Locoblade

As George says, there is no monetary difference between the two options. With interest only you might have easier access to the overpayment as mentioned, and it also gives you the option of dropping back down to lower interest only payments if times became hard (you lose your job etc), but you need to be diciplined to ensure when rates rise you continue to overpay sufficiently to cover it as full repayment over the term you want.

As to saving elsewhere, as long as you're married I don't believe putting savings in the lower taxed halfs name is classed as tax evasion?

smiths84

Locoblade wrote: »

As George says, there is no monetary difference between the two options. With interest only you might have easier access to the overpayment as mentioned, and it also gives you the option of dropping back down to lower interest only payments if times became hard (you lose your job etc), but you need to be diciplined to ensure when rates rise you continue to overpay sufficiently to cover it as full repayment over the term you want.

As to saving elsewhere, as long as you're married I don't believe putting savings in the lower taxed halfs name is classed as tax evasion?

I have just switched from an interest only to a repayment mortgage...

Why is it that the monthly savings I am making from the recent 0.5per cent base rate cut (its a BR tracker) are almost HALF what they would have been if I had stayed on interest only mortgage (and made voluntary overpayments off the capital)...£22 off my monthly repayments rather than £39???.

I have asked my lender this but the woman on the end of the phone seemed as perplexed as me....

thanks!

Mr._Nice

smiths84 wrote: »

Why is it that the monthly savings I am making from the recent 0.5per cent base rate cut (its a BR tracker) are almost HALF what they would have been if I had stayed on interest only mortgage (and made voluntary overpayments off the capital)...£22 off my monthly repayments rather than £39???.

I have asked my lender this but the woman on the end of the phone seemed as perplexed as me....

It can seem unintuitive, but makes sense when you look at the amortisation tables.
With a repayment mortgage, although your monthly payments are fixed, gradually the amount of that paying interest falls, and the amount paying capital rises (due to the gradual fall in capital owed reducing the interest incurred). So what happens if the interest rate is cut? Will trivially the monthly interest accrued falls, but not so obvious is that this actually also decreases the rate at which the increasing capital reduces the monthly interest payments (since theres less interest to begin with), and hence the amount by which the monthly capital payments rise also falls. So in fact to maintain the same term of the mortgage with a fixed monthly payment, the amount of capital payment now must rise, so compensate for the slower increase in the future. This "increase" is of course always lower then the fall in the amount of interest accrued each month, it simply serves to mean the monthly payments fall by less then this (which is equivalent to falling by less then the payment on an interest only mortgage).
The opposite happens when rates rise, an interest only payment will rise by more then a repayment mortgage.
The shorter the remaining term of the mortgage, the more noticable this effect is.

Blofeld_2

Have you looked at Offset mortgages on an interest only basis? Such a mortgage allows you to build up a cash balance to repay your mortgage whilst neting off the interest flows. Furthermore if you decide you wish to use the cash in the future you can simply withdraw funds from the saving account.

smiths84

Mr._Nice wrote: »

It can seem unintuitive, but makes sense when you look at the amortisation tables.
With a repayment mortgage, although your monthly payments are fixed, gradually the amount of that paying interest falls, and the amount paying capital rises (due to the gradual fall in capital owed reducing the interest incurred). So what happens if the interest rate is cut? Will trivially the monthly interest accrued falls, but not so obvious is that this actually also decreases the rate at which the increasing capital reduces the monthly interest payments (since theres less interest to begin with), and hence the amount by which the monthly capital payments rise also falls. So in fact to maintain the same term of the mortgage with a fixed monthly payment, the amount of capital payment now must rise, so compensate for the slower increase in the future. This "increase" is of course always lower then the fall in the amount of interest accrued each month, it simply serves to mean the monthly payments fall by less then this (which is equivalent to falling by less then the payment on an interest only mortgage).
The opposite happens when rates rise, an interest only payment will rise by more then a repayment mortgage.
The shorter the remaining term of the mortgage, the more noticable this effect is.

Wow! thank you so much for this prompt and brilliant reply. Yes it's complicated (I've read your answer about ten times!) but at least there IS an explanation and it isn't just a terrible ripoff/mistake on the part of the bank. Also good to know the effect works in my favour if interest rates go up!....I wish the bank (First Direct) had at least TRIED to explain this to me. I rang again and got another chap who basically said "It's too complicated to explain .."

Thanks again!

smiths84

Blofeld wrote: »

Have you looked at Offset mortgages on an interest only basis? Such a mortgage allows you to build up a cash balance to repay your mortgage whilst neting off the interest flows. Furthermore if you decide you wish to use the cash in the future you can simply withdraw funds from the saving account.

interest only offset is what I had before and it was great. But the product came to an end and the new deal I found (First Direct tracker at 0.99 per cent above base) was too good to miss.

Also I kept "borrowing back" my overpayments and since I have no other repayment vehicle, I decided it was time to get tough on myself and finally start paying the damn thing off!

Thanks anyway