Is Interest Only the way to go?

dixie_dean_2

I think a lot of you have missed an important point, that by taking an interest only mortgage the OP is able to pay off other debts, presumably with higher rates of interest. I would look to do this until you are earning more or have paid off all the other debt, then switch to a repayment mortgage.

ReportInvestor

tomstickland wrote:

Well the yield for you is 13% then.

I'm defining yield as annual profit over purchase price when you bought it.

Would you take the same view of the yield in a share purchase (which like buy-to-let also produces income and capital growth?).

If you did then my 1995/6 PEP is yielding 11% rather than the 3% that is down on my fund literature.

I prefer to take an up to date view of the yield (3%) based on current capital values in order to have a realistic assessessment of the investment v alternatives.

This is the right approach, IMHO, even for a "buy and hold" investment like buy-to-let. The ts approach could easily encourage people to hold (based on past capital growth performance) even through a severe property downturn (fine if it is your long term plan but not if you are a flexible investor).

I much prefer a brutally honest approach to all my investments so that I can regularly reassess them (even though my overall investment approach is "buy and hold").

tomstickland

I can see why both might be meaningful.
Using the original purchase price is telling you how much you are making on the initial investment. I suppose the initial purchase price should be inflation scaled to today's net worth. It's still a useful number though.

Using the current value tells you how much it's making based on the current capital value. ie: the instantaneous returna and I can see whay that's useful too, since you can compare the instantaneous return of a range of current options.

ReportInvestor

Your approach works well when educating people in the virtues of "investment" v "savings".

escroooge

just a thought...

there is a mortgage endowment scandal, causing problems for some, where they have an interest only loan and use a insurance policy to pay the loan off at the end of the mortgage, many have found the insurance policy does not pay enough and this has caused problems.

Now, taking an interest only loan out is like taking out an endowment mortgage without any endowment at all (not even one that has a payout shortfall).

if a shortfall of a few £000's has caused problems for some, what will an absolute shortfall cause?

mountainofdebt

At the end of the day you have to live some where so I don't see how people can take this approach to paying off their mortgage unless they plan to down size.

If they don't then the only people who benefit are their beneficiaries.

benood

I believe that if you are sensible, proactive, and controlled an interest only loan makes good sense.

It can free up cash which can be used to pay down higher rate debt.

It is not synonymous with renting as the house is yours to do with as best suits you.

Finally you have the opportunity to build up investments which can go down as well as up (10 years in don't I know it), but over a period of 20+ years are unlikely to underperform the alternative of a repayment mortgage. Obviously not suitable for everyone but being a contrarian I think that the current phobia of endowment style products may indicate a buying opportunity.

financiallyaware

Acc72 wrote:

Looking back it is easy - just pay the interest and take advantage of the capital growth.

However, only you can decide if you believe that house prices will continue to grow at significant rates in the future.

I am surprised at the number of people who are looking at interest only mortgages - it is just the same as renting (but with additional costs and responsibilities) and you hope that the capital value will increase to give you a "profit".

At the moment you could probably buy a £200k property for £800 per month on an interest only.

But you could possibly rent the same place for say £600 per month - saving yourself £2,400 per year (not to mention initial purchase costs and stamp duty etc. (£7k ? assuming you are not selling a house) plus ongoing costs of other general repairs and maintenance - not to mention the hassle and reduced flexibility of ownership).

So ..... if you rented the £200k property, you could save up to say £20k compared to buying over the first 3 years.

If you think the value of the property would increase by more than £20k over this period then buy, if not then rent !!

Great way of looking at it!!

Although I don't agree with interest only, for a little more, you may as well pay some of the capital back, even if you don't go "full repayment"

financiallyaware

escroooge wrote:

just a thought...

there is a mortgage endowment scandal, causing problems for some, where they have an interest only loan and use a insurance policy to pay the loan off at the end of the mortgage, many have found the insurance policy does not pay enough and this has caused problems.

Now, taking an interest only loan out is like taking out an endowment mortgage without any endowment at all (not even one that has a payout shortfall).

if a shortfall of a few £000's has caused problems for some, what will an absolute shortfall cause?

Could not have put it better myself!! Anightmare waiting to happen in 20-30 yrs.

beer2006

escroooge wrote:

just a thought...

there is a mortgage endowment scandal, causing problems for some, where they have an interest only loan and use a insurance policy to pay the loan off at the end of the mortgage, many have found the insurance policy does not pay enough and this has caused problems.

Now, taking an interest only loan out is like taking out an endowment mortgage without any endowment at all (not even one that has a payout shortfall).

if a shortfall of a few £000's has caused problems for some, what will an absolute shortfall cause?

Mmm I agree as well, I wonder how many people have the control to enable them to save to pay this off. Too many will stick their head in the sand until its too late.