Interest Only

Worried2009

Myself and 2 friends were having a debate the other day about interest only mortgages. One has a interest only mortgage for approx £300,000 and the other a repayment mortgage for £144,000. I said in my opinion it is always best to have a repayment mortgage even though in the early years paying next to nothing off the capital. However my friend with the £300,000 mortgage said our other friend would be better off going on interest only and putting the difference between what he would pay on interest only and repayment either into a saving account or making overpayment to his mortgage.

Which in the professional world is the best way to do it.

Thanks

rsykes2000

Not a professional opinion, but I think it will depend on the interest rates you are both paying on your mortgage and receiving as interest. Also, it depends if the market is falling or rising and how long you intend to stay in the house - in a falling market, repayment is better as it lessens the risk of negative equity.

VIGILANT22

You will find a discussion here on the topic of IO mortgages..

http://forums.moneysavingexpert.com/showthread.html?t=2337265

Please note this is based on opinion..

Cannon_Fodder

'IO plus overpayments' is the same as 'repayment', no mathematical difference if the interest rates of the products are the same - except for differences between the daily/monthly/yearly calculation/application of the interest/overpayments, perhaps.

You can get repayment products that also allow overpayment, so even if you wanted to over-overpay, the two methods come out the same.

One of the mistakes IO people make is to think that anything above Interest is 'overpaying'. In the terminology of the product it is, but mathematically compared to repayment it is 'underpaying'. Only if you match the repayment figure does the playing field stay level.

So, if the IO person needs to take a break from high overpaying, they may not realise they are falling short of keeping track with repayment - which incurs more interest in the long run and risks extending the term overall.

If there is a difference between the limits on overpayments, between the two product types, then someone whose product allows them to vastly overpay is going to move ahead of the other product - but if you know you can vastly overpay then you should pick a product that allows it.

Savings accounts today are pretty unlikely to be above your mortgage rate. Trackers may be beaten by some 3.5%ish ISAs, but in 6 month's time the Tracker might have gone above 3.5%, so the benefit of saving is not certain.

If the IO person took out his mortgage/savings two years ago and got 6% or 7% Fixed savings accounts that are still running, and his mortgage moved in the right direction then they could be ahead, for now.

The problem for the IO person will be that on re-mortgage he may find Lenders reluctant to proceed without proof of a repayment vehicle. Intending to overpay or adhoc saving doesn't count.