Interest Only or Fixed Rate - Any Advice?

Huggins

Hi All, Looking to move house in the v. near future and have the option of taking on a fixed rate mortgage or interest only mortgage.

Please can someone knowledgeable advise on the pro's and con's of each. This is how i view the situation at present:

Fixed = approx 30% higher monthly repayments (over Interest Only) Pro's: i'm paying off the both the mortgage loan and the interest. Cons: would be running tight on monthly outgoings etc

Interest : approx 30% lower monthly repayments (under Fixed rate) Pros: less monthly outgoings - more manageable Con's: i'm only paying the interest not re-paying the loan.


In an ideal world: Would i be better off taking out an interest only mortgage and putting the extra money I would have been paying off (had i opted for the Fixed rate) into a savings account and building up money to pay off the mortgage that way? or would it be better to stick with the fixed and chip away at the mortgage loan in the traditional manner ?

Can anyone give me any pointers or advice on the best way to proceed.

Many thanks in advance

Huggins

Huggins

can anyone help me on this? or point me in the right direction? many thanks huggins

stanmoresaver

Huggins wrote:

Hi All, Looking to move house in the v. near future and have the option of taking on a fixed rate mortgage or interest only mortgage.

Please can someone knowledgeable advise on the pro's and con's of each. This is how i view the situation at present:

Fixed = approx 30% higher monthly repayments (over Interest Only) Pro's: i'm paying off the both the mortgage loan and the interest. Cons: would be running tight on monthly outgoings etc

Interest : approx 30% lower monthly repayments (under Fixed rate) Pros: less monthly outgoings - more manageable Con's: i'm only paying the interest not re-paying the loan.


In an ideal world: Would i be better off taking out an interest only mortgage and putting the extra money I would have been paying off (had i opted for the Fixed rate) into a savings account and building up money to pay off the mortgage that way? or would it be better to stick with the fixed and chip away at the mortgage loan in the traditional manner ?

Can anyone give me any pointers or advice on the best way to proceed.

Many thanks in advance

Huggins

Probably the reason why no brokers have answered your post is because you questions require much more background info, including facts and "needs and preferences".

Find a decent face to face WoM broker to analyse your situation.

HTH

SS

InMyDreams

stanmoresaver wrote:

Probably the reason why no brokers have answered your post is because you questions require much more background info, including facts and "needs and preferences".

And any non-brokers are probably confused.

I'm assuming you don't mean 'repayment' where you say 'fixed' ?

I've also been debating the pros and cons of switching to just an interest only mortgage next time we switch. At the moment we have 1/3 on repayment and 2/3 on IO. We had no repayment vehicle set up, but (as expected) three years in and we can now afford to put a little extra away to bring us back in line with what a 100% repayment would be costing us. We chose to open a regular saver (at 10% for one year) to make sure that we really do put this money (plus a bit extra still) aside, (plus have an instant access on-line saver for any extra tiny amounts or amounts we 'think' we can probably stash away but don't want to necessarily lock up just yet) and intend to repay a lump when the saver matures.

It has occured to me though, that as a non-tax payer, it certainly seems to make sense to keep our overpayments (above the basic interest) in a saving account in my name earning more interest than it is costing us to borrow it. At the end of our current mortgage deal, I'm tempted to get just an interest only mortgage to give us more flexibility without compromising on interest rates.

The advantages I see are...
1. The money will be earning more interest than it's costing us to borrow.
2. It gives us more flexibility (we can over- or under-pay as we wish) without compromising on interest rates for a 'flexible' mortgage. (We could even pay the interest part out of the savings if necessary, and take a payment holiday!)

The disadvantages I see are...
1. We will have to be *very* disciplined to make sure we are putting enough away (and very careful calculating it!) since the mortgage company is not calculating/taking it for us. Especially if we take a 'holiday'.
2. Takes a very trusting dh as all the savings will be in my name!

The other thing that has only just occured to me is the implication of our life insurance. Should one of us die, the mortgage is paid off. But does that take into account what savings we have? If we ploughed all our savings into the mortgage, the surviving partner would be house-rich but cash-poor. On the other hand, in sickness/injury the mortgage payments are protected, but presumiably not any payments to a savings account.

Anyway, these are my current musings on the subject. Hopefully some food for thought, but it's certainly not 'pointers or advice' as I'm no more knowledgable than you. Would be interested to hear others musings though. I've been watching this thread since you initially posted, but didn't really feel qualified to respond!

IMD.

tomstickland

I read it as a simple problem. If you go for an interest only and then put the money into a savings account then the question is: will your money grow more quickly in the savings than the mortgage debt that it's offsetting.
Seeing how most savings accounts are 5% max and therefore 4.2% after tax and how most mortgages are more than 4.2%, you're better of paying off the mortgage via a repayment mortgage rather than going IO and saving the money.