Interest Only dilemma

rtw123

Hi guys

Just looking for a bit of advice with our mortgage. Currently on an interest only mortgage with ING direct which has a rate of no more than .89% above base rate. We owe £82k and the current interest each month is £95. We have now started making overpayments of £500 each month.

Now here's the dilemma - do we stick with the current option and carry on with the £500 overpayments each month, bearing in mind that the rate will go up when base rate increases, so the overpayment amount we make will then have to reduce in line with the increase. Or, do we switch over to a fixed re-payment mortgage whilst the rates are low (ie 3.99% over 5 years)???? I seem to think we would be better of sticking with the rate that we have got and keep overpaying - surely this would pay the mortgage off quicker as the overpayment amount is reducing the mortgage each month by a lot more that what it would on a repayment mortgage - isn't it?

A bit unsure what to do and wondered if anyone could offer any advice on what they think the best option would be in order to pay off our mortgage quickest.

Thanks

opinions4u

1) Rate wise, I'd stick with the tracker. It's extraordinarily low. You clearly understand the risks of rising rates, but with your current overpayment strategy you can also clearly afford higher payments should rates turn against you.

2) For now, ditch your overpayment strategy, stick with interest only and move the funds in to savings accounts. By paying things off the mortgage you are effectively getting a savings rate of 1.39%. Max out cash ISAs (e.g. C&G at 2.7%) or use monthly savings accounts (e.g. Norwich & Peterbrough are paying 4% gross, 3.2% net on £250 a month). If you prefer the convenience of your main bank, check out what they are offering - it's likely that there are many ways to beat 1.39% and some banks have excellent monthly saver deals for existing customers.

3) Assuming you implement (2) keep an eye on the savings rates you are getting every month, and, if necessary, move the money to different providers or alternatively pay off the debt when the differential between savings rate and net mortgage rate turns against you.

In other words, at present ING will be delighted that you are overpaying, as the mortgage rate they are committed to will be losing them money.

Gorgeous_George

I wholeheartedly agree with O4U.

First Direct pay 5% gross on their monthly saver. The monthly limit is £300 and runs for 12 months. With the FD offer, you can vary your payment and only need to pay in £25 if money is tight one month (and subsequently you can pay in more than £300 providing you do not exceed the £300 per month 'since the start balance').

This beats most cash-ISAs in the short term.

After 12 months, take the £3.6K and stick it in a cash-ISA then start the regular saver again.

Rinse and repeat (until mortgage rates exceed 4% if you are a basic rate taxpayer or 3% if you are a 40% taxpayer).

GG

ETA: Thanks to O4U

rtw123

Hi

Thanks for the advice, never though of this idea so you have given me another option. If I did go for the first direct option and put the £3.6k in an ISA in 12 months, what happens if rates rise sharply and I need access to the money to reduce the mortgage so I can tie in to another rate? Will I be able to get access to the money in the ISA?

Also, how much money would I be likely to earn in an ISA with £3.6k?

I was just a bit concerned about getting tied into a rate in 12-24 months at a lot higher rate that the 3.99 rate currently looking at.

Also, if my boiler breaks down (for example) and I have savings in FD account it would be very tempting to use for emergencies, whereas if I pay off my mortgage I wouldn't have that option!

Thanks again

Gorgeous_George

If the risk of interest rates rising is significant, you should consider a fixed rate. Personally, I don't expect base rates to average 3% over the next 5 years but with the Tories, who knows?

You could run a monthly saver for 12 months to save £3,600 + interest. After 12 months, move this money to a cash-ISA at 3% tax free (if they still exist). Then start a new monthly saver for year 2.

If rates rise such that your tracker exceeds the ISA-rate, you could withdraw your ISA money and pay a lump sum off your mortgage (t's and c's permitting).

I started my own First Direct monthly saver this morning to lock in the 5% interest rate (after o4u kindly pointed out that LloydsTSB have reduced their regular saver to just 2%).

My BTL lifetime tracker is 0.89% above base rate. I'm lending the money that I save on this rate in Zopa.

GG

dimbo61

Stick with your tracker as interest rates would have to rise to over 3.5% before you are worse off and that does not take into account the £999 fee you would need to pay to get the 5 year fix.
Save into the first direct regular saver and also try and fill a cash ISA which pays more than your mortgage rate, if you have any spare cash after that then OP the mortgage.

dimbo61

Just checked and you need a current account with First Direct to enjoy there regular saver , same applies to HSBC RS