Interest only vs Capital and interest with an offset mortgage

elinachris

I have received some advice recently that it would be better to have an interest only mortgage than a capital and interest one when it is an offset mortgage. The reasons I was given are as follows:

If I choose interest only, but overpay to the sum that I would have paid had it been a capital and interest, I will pay less money back in the long term. For example C&I would be £1100, and Interest only would be £900, but I choose the interest only, and overpay by £200, I will end up paying it back earlier. The advice I was given suggested that due to the way banks front load the C&I mortgages with mainly interest at the beginning of the term, overpaying on an interest only will ensure that I pay more of the capital back quicker?

The other benefit is that any overpayment can be claimed back if I needed to at a future point. I have checked this, and it is correct. This would definitely give me more financial flexibility.

Any views, comments, or insight would be welcome.

Darryl

The flexibility of being able to withdraw overpayments is a correct benefit (and one I use myself on an interest only mortgage).

My calcs don't suggest you'll pay back the mortgage earlier if you pay the equivalent of the capital+interest each month, and the amount of interest you pay will be about the same too. If there was any at all I can't believe it would be that significant.

But, I'd certainly like to know if this is possible...

Darryl.

Hobo_2

elinachris, it may be of some use if you visit " the One Account" website and use their calculators as they offer CAM/offset/int only & C&I options

david78

The advice I was given suggested that due to the way banks front load the C&I mortgages with mainly interest at the beginning of the term, overpaying on an interest only will ensure that I pay more of the capital back quicker?

You are being misled. It doesn't make any difference.:( Capital & Interest (repayment) mortgages do not front-load the interest. All that happens is that little capital is paid off in the first few years because the amount owed is is high. The same thing happens with an investment vehicle run in parallel with an interest only mortgage - there is less growth on the investment in the early years because the amount invested is small.

lisyloo

The first part of what you have been told is rubbish.
An interest only mortgage with overpayments will be paid back at exactly the same point as a repayment mortgage with the equivalent repayments.
There is NO difference.

The second part of what you have been told is true.
Interest only give you more flexibility in two ways.
Firstly you can claim back your overpayment, secondly you have lower payments.