Interest only can someone please explain..

deefadog

Bit of a dumb question i am sure, but if you get an interest only mortgage how does it work exactly, using £100k over 20 years at 5% for example.

How is it calculated? what do you pay and what happens if you change to repayment, does just the capital move?

Or if you sold the house, is it just the capital gets paid off, does the interest amount just disappear?

Thanks for any advice.

Joe_Bloggs

There is lots of help on the Money Made Clear part of the FSA site. This bit explains the difference between interest only and repayment.

5% per annum of £100,000 is £5000 per year or £416.66 per month interest payment per month. After 20 years you will still owe £100,000.

With a repayment mortgage the first months interest would be the same however a payment of £243.29 is paid off the capital thus a total payment of £659.96 per month.
The result of the capital repayment is that the capital owed is reduced and the interest charged on it is less. In the second month the interest is £415.65 and the capital paid is £244.21. The total payment is still £659.96. After 20 years there will be no capital left.

J_B.

sandrad44

Hopefully you may be able to answer my question. we have an interest only mortgage of £121500 paying £350 per month at moment 3.45% i think ( on libor rate ) I have asked if I can overpay but was told only one lump sum of £1000 per year. I was hoping to save £200 per month into a savings account. How much quicker would it be to reduce the mortgage by using savings to reduce mortgage amount ? ( sorry if I have hijacked the thread )

deefadog

Thanks Joe, Sorry did not explain my self (I am terrible at it on forums), i understand the principles of both repayment and interest (and all links basically say the same thing, i have googled honest). But on an interest only what happens if after say 5 years you can pay the whole mortgage off, do you have to pay the full interest for the remaining 20 years and the capital, or just the capital.

Thanks and sorry for not explaining myself LoL

VIGILANT22

deefadog wrote: »

Thanks Joe, Sorry did not explain my self (I am terrible at it on forums), i understand the principles of both repayment and interest (and all links basically say the same thing, i have googled honest). But on an interest only what happens if after say 5 years you can pay the whole mortgage off, do you have to pay the full interest for the remaining 20 years and the capital, or just the capital.

Thanks and sorry for not explaining myself LoL

you save yourself all that interest........

Conrad

You only pay intesrt up until the date redeemed, never for any 'future' interest. Some sharks used to charge for future interest due, and from memory that was know as the 'rule of 78'.

So if you owe £100 capital at point of redemption, you just repay that sum and the monthly interest payment ceases.

deefadog

Thanks Vigilant22!

Conrad replied before your answer, so ignore below

So at any point i pay off the capital or sell the property the interest stops at that point yes?

Sorry just need to be very clear.

loracan1

Plus if you pay off any of the capital, the interest will drop (immediately depending on the mortgage)

I find this tool quite helpful for working out interest.

Joe_Bloggs

@sandrad44
I am a little puzzled as how this interest only mortgage is supposed to end. What happens at the end of the full term ? For instance, do you just pay off the capital from savings you have built up during the term ? Do you remortgage ?
What are the early repayment penalties if you can pay of the mortgage in full at some time in the future ?

Edit I am now asking the same questions as deefadog, It is difficult to crunch the numbers when you do not know when to stop.
J_B.

redpete

Sandrad44 wrote:

How much quicker would it be to reduce the mortgage by using savings to reduce mortgage amount ?

It depends on the savings rate you could get, the interest rate on the mortgage, and the level of penalty fees if you pay over the £1000.