Question Of the Week: Mortgage repayment

Former_MSE_Penelope

Q. I've a repayment mortgage and am thinking of switching to a new deal – but I know in the early days all the money goes to repay the interest, so is it worth it?

Martin's A. This is a common confusion. Repayments are calculated so you'll repay all the debt AND interest over the full term (e.g. 25 years). As you say, that means in early years more of your monthly repayments go towards paying interest (as the debt, which accrues interest, is bigger).

Gradually, as what you owe falls, the interest decreases eg. on a £100,000 mortgage at 5%, you'll repay £70,000 in ten years, but only reduce what you owe by £26,100. Yet in the next ten years, another £70,000 repayed cuts the debt by a bigger £43,000, as much less interest is accruing (do your own sums on the mortgage calc)

So if you change mortgage deal (remortgage), provided you keep the same debt and remaining mortgage term (ie. your mortgage-free date stays the same), the logic is identical, so you don't lose out. If the interest's lower and the terms the same, you'll pay less.


Click reply to discuss.

[threadbanner]box[/threadbanner]

grimfixer

Is there a benefit/drawback to overpaying the capital on an interest only mortgage vice overpaying on a repayment?

dimbo61

First of all some lenders wont let you overpay an Interest only mortgage
By going IO you have lower payments each month that you HAVE TO MAKE.
But and this is the big BUT lenders now have to see a repayment vehicle in place and saying that you will make overpayments wont work.
Repayment mortgages are boring but you and the lender know at the end of the term the mortgage will be cleared.

Cannon_Fodder

IO+overpaying can be more flexible, as you can pick and choose the overpayment amount/timing.

But equally it can be more dangerous, especially for the inconsistent overpayers who a couple of years later wonder why they owe more than they thought.

Or 25 years later, have only paid off half...

So, take the worry and uncertainty out of the equation, use repayment.

A thread on here today, stated "they were told to take IO and sell the property in 25 years to repay the mortgage" - whichever organisation/broker sold that deserves shooting - what are these people supposed to live in after 25 years?

There will be an IO mis-selling scandal to rival the endowment mis-selling, soon.

olias

Cannon_Fodder wrote: »

IO+overpaying can be more flexible, as you can pick and choose the overpayment amount/timing.

But equally it can be more dangerous, especially for the inconsistent overpayers who a couple of years later wonder why they owe more than they thought.

Or 25 years later, have only paid off half...

So, take the worry and uncertainty out of the equation, use repayment.

A thread on here today, stated "they were told to take IO and sell the property in 25 years to repay the mortgage" - whichever organisation/broker sold that deserves shooting - what are these people supposed to live in after 25 years?

There will be an IO mis-selling scandal to rival the endowment mis-selling, soon.

Where were they living before buying the house? Presumably rented. Could they not just go back to rented after selling the house in 25 years and paying off the mortgage. Not saying I agree with this, just adding to the debate.

Olias

inca_2

olias wrote: »

Where were they living before buying the house? Presumably rented. Could they not just go back to rented after selling the house in 25 years and paying off the mortgage. Not saying I agree with this, just adding to the debate.

Olias

There are a fair few variables that make this option not that attractive or necessarily feasible. The idea of having a fixed end date on your mortgage means that the mortgage should ideally, although not always I realise, be paid off before retirement. If someone's income drops considerably upon retirement, if the mortgage is paid off it hopefully won't have as big an impact, however, if you still have to fork out for rent on a reduced income it could have particularly negative implications.

Also, what if the mortgage left is bigger than the value of the property or the house doesn't sell? By repaying the mortgage in full through either a repayment mortgage or repayment vehicle you have secured your future living arrangements for as long as possible by owning your own property.