Interest Only

marc-h_2

I currently have an interest only mortgage that allows over payments (which I think the majority do) as I like the flexibility this offers. Is there any point ever taking a repayment mortgage where the amount you pay off the capital is set for you? With interest only I can make overpayments as and when I like, every month if I want to make it the same as a repayment. If I am short I can go for years without paying any capital off and then catch up.

Is my understanding basically correct or is there some huge catch that I will discover in 20 years time!?

beecher2

It isn't really an overpayment as such if you're only paying the same as a repayment mortgage. If you go years without paying any capital off then you'll end up paying a lot more interest over the term.

dimbo61

The big catch in 20 years time is that you have not repaid enough off the mortgage and still owe a hugh sum and the mortgage company want repaying just as you are about to retire with a small pension ( or none at all!!!) Overpay every penny you can now while working and earning good money the sooner you are debt free the sooner you can save towards retirement.Interet rates are very low right now but who is to say they wont be 15/16% in 5/10 years.

Senior_Paper_Monitor

If you have the IO arrangement in place now - absolutely no problem if you are disciplined and organised with your finances (not everyone is).

If you want to get one now with this plan you will have difficulty doing so - as 'overpayments during term' are not an acceptable repayment vehicle under current guidelines (although if you have an ISA - contributions included in budget/affordability etc - you could always switch that over to repayments subsequently).

marc-h_2

I'm still at the stage were due to my age I expect my future earnings to be higher than they are now. That is why we initially went for interest only. It keeps it manageable now and then we can start making larger payments in future years. Although we are already managing to save more than we expected so may be able to make overpayments already. Just need to keep the rainy day fund at a reasonable level rather than all tied up in the mortgage.

marc-h_2

Senior_Paper_Monitor wrote: »

If you have the IO arrangement in place now - absolutely no problem if you are disciplined and organised with your finances (not everyone is).

If you want to get one now with this plan you will have difficulty doing so - as 'overpayments during term' are not an acceptable repayment vehicle under current guidelines (although if you have an ISA - contributions included in budget/affordability etc - you could always switch that over to repayments subsequently).

We have it in place now but I guess that is going to be the problem in the future. Overpayments during term was always our repayment plan. We are very disciplined and organised with out finances which is a further reason we went for IO, I can see how they aren't good if you aren't organised as all the extra money just gets spent rather than saved.

What are considered suitable repayment vehicles now?

Cannon_Fodder

You might want to review the likely future LTV, and adjust with overpayments, in time for your re-mortgage, as the lower LTV will get the best deals.

Repayment would have the effect of being certain of the amount of capital eliminated in a given timeframe.

marc-h_2

Cannon_Fodder wrote: »

Repayment would have the effect of being certain of the amount of capital eliminated in a given timeframe.

I suppose that is the main advantage. You can just make your payment every month knowing that if you did nothing you would be ok in the end. With IO you have to manage this yourself. If you just make the minimum IO payment for a while you then have to manage the overpayments to make sure you are still on track.

Senior_Paper_Monitor

As typical examples:

Abbey: "Acceptable vehicles are ISA, Endowment, Pension and Investment Linked"

Coventry: " We will accept ISA (PEPs), endowment policies, pensions, unit trusts etc. as suitable means of repaying the capital."

Sale is generally accepted on buy-to-let and second properties only and 'downsizing' is occasionally acceptable in certain circumstances.

Snippa

Is my understanding basically correct or is there some huge catch that I will discover in 20 years time!?

Your understanding is basically correct. The only real question is whether you think you can pay the capital off doing it that way? Are you disciplined enough to make enough overpayments?

The two catches, as I see it are:

1. If you're not paying down capital for a long period of time, you'll end up paying quite a lot more in interest over the term of the mortgage. You can play about with various overpayment calculators on the internet and see what difference it makes paying different amounts - it can be quite an eye-opener!

2. Interest rates are at a record low right now, and I/O means you're more vulnerable to them going up. If you can't afford to pay more every month now, you could be in trouble if they were to rise as that will push your monthly payment up anyway, while not paying off any capital. If you can pay down capital early, and while IRs are low, any hikes won't be such a big deal.

marc-h_2

Senior_Paper_Monitor wrote: »

As typical examples:

Abbey: "Acceptable vehicles are ISA, Endowment, Pension and Investment Linked"

Coventry: " We will accept ISA (PEPs), endowment policies, pensions, unit trusts etc. as suitable means of repaying the capital."

Sale is generally accepted on buy-to-let and second properties only and 'downsizing' is occasionally acceptable in certain circumstances.

Thanks. Would you typically have to provide evidence if you were using ISA as a repayment vehicle? If you have to guarantee paying enough into an ISA every year to cover the eventual capital repayment it probably doesn't make sense any more to go for IO. You would be earning less interest on the ISA than you could be saving by having a standard repayment mortgage. If it can't offer the same flexibility in the early years I may re-consider next time.