Interest-only mortgages?

nw_man

JenE wrote: »

Thanks for all the replies - you're confirming my original view of IO



My understanding was that with a repayment the monthly payment in the early years is almost all interest, very little capital?
What I had in my head was numbers along the lines of:
Repayment (say) £1600/month of which about £1400 is interest
IO at £1200/month, so paying £1600 pays off twice as much capital
Am I way out?

Totally understand the need for discipline in paying it off and I am pretty good at that, but hubby less so!

Yes, afraid so !

If the repayment is £1600 and the £1400 is interest, then how can the interest only be £1200?

It will be £1400 the same as the repayment !

Get a repayment.

beecher2

JenE wrote: »

My understanding was that with a repayment the monthly payment in the early years is almost all interest, very little capital?
What I had in my head was numbers along the lines of:
Repayment (say) £1600/month of which about £1400 is interest
IO at £1200/month, so paying £1600 pays off twice as much capital
Am I way out?

Totally understand the need for discipline in paying it off and I am pretty good at that, but hubby less so!

The amount of interest would be the same in both cases so there wouldn't be an extra £200 being paid off the capital.

blueberrypie

JenE wrote: »

My understanding was that with a repayment the monthly payment in the early years is almost all interest, very little capital?

If you owe £100k at 4% interest, whether it's a repayment mortgage or an interest-only mortgage doesn't make any difference at all to the interest you'll pay. Each day you will be charged 4/365% of what you owe. The calculation is exactly the same.

If you have a 25-year repayment mortgage with the above figures, your monthly payment will be £527.84, and after 25 years you'll owe nothing.

If you have a 25-year interest-only mortgage with the above figures, your monthly payment will be £333.33, and after 25 years you'll still owe £100k. If you make an overpayment of £194.51 (the difference between the two payments) every month for 25 years, after 25 years you'll owe exactly the same as if it had been a repayment mortgage all along - nothing.

You're correct that in the early days of a repayment mortgage, most of your payment goes towards interest - that's because you're paying interest on a higher balance-owed. But the same amount goes towards interest if you're on an interest-only mortgage.

With interest-only, you have more flexibility - the option is there to pay less during lean times. But that flexibility can be either a pro or a con, depending on how disciplined you are. It might also be more difficult to find an interest-only mortgage - lenders are a bit more wary of them these days, and will want to know how you plan to pay off the capital at the end (and a vague, non-binding, "oh we'll pay an extra bit every month" isn't going to be enough for them!)

molly22

hi
i have an IO mortgage, of £88,000 on my property (valued at £210,000) which is jointly owned by my sister and i. She has paid off her half, so i still have a little equity.

i still have 18 yrs for the mortgage to run and assume that by then my circumstances will have changed, as my sister will then be in her 90's and possibly in a home and i will have downsized to a cheaper property, thus being able to clear the mortgage.

so i feel i am ok with things as they are for at least the next 10 yrs.

am i being realistic?!!

thanks
molly

shortchanged_2

molly22 wrote: »

hi
i have an IO mortgage, of £88,000 on my property (valued at £210,000) which is jointly owned by my sister and i. She has paid off her half, so i still have a little equity.

i still have 18 yrs for the mortgage to run and assume that by then my circumstances will have changed, as my sister will then be in her 90's and possibly in a home and i will have downsized to a cheaper property, thus being able to clear the mortgage.

so i feel i am ok with things as they are for at least the next 10 yrs.

am i being realistic?!!

thanks
molly

The problem is in that 10 year period you are hoping that house prices don't rise much. If they do by a considerable amount your downsizing house may actually cost as much or more than the house you're currently in.