Is Interest Only the way to go?

nrsql

The idea would be that you are hoping that wage increases will erode the mortgage payments
So you pay less in the early stges and mor in the later and end up with a cheaper mortgage.
One way is to keep the payments as the same proportion of your wages so that you both benefit and pay off the mortgage.

The comparisons with endowments above are not valid. With an endowment provision was made to pay off the mortgage but the endowments didn't perform as sold (i.e. apparently a lot of people didn't realise the performance wasn't guaranteed). That shouldn't be compared with not making any provision.

Rick62

Fine, if your salary keeps increasing faster than your obligations, if you don't want to trade up to a bigger house, fine if you or your partner don't get ill or made redundant, fine if your commitments don't increase (eg children), fine if you have a final salary pension or are also making proper pension provision.

Interest only can make sense in the early years, if it enables you to get on the property ladder or you have other debts to clear first. As a long term strategy it is very dangerous.

There are a lot of people right now who are not making adequate provision to pay off their mortgage and do not have adequate pension provision. As a result the UK is sitting on a high loan/low savings time bomb.

wolvoman

Acc72 wrote:

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 !!

I'd love to know where you could rent a £200K property for £600 per month.

nrsql

Rick62 wrote:

Fine, if your salary keeps increasing faster than your obligations, if you don't want to trade up to a bigger house, fine if you or your partner don't get ill or made redundant, fine if your commitments don't increase (eg children), fine if you have a final salary pension or are also making proper pension provision.

Interest only can make sense in the early years, if it enables you to get on the property ladder or you have other debts to clear first. As a long term strategy it is very dangerous.

There are a lot of people right now who are not making adequate provision to pay off their mortgage and do not have adequate pension provision. As a result the UK is sitting on a high loan/low savings time bomb.

Agree with all that - you need to keep reviewing the situation.
I'm just pointing out that this could well be the cheapest way to pay off a mortgage and shouldn't be disregarded.
The sums are easy - predicting what will happen is hard.

Leighthal

wolvoman wrote:

I'd love to know where you could rent a £200K property for £600 per month.

Cleethorpes:o .My late Mums bungalow was valued at 200k for IHT purposes and is currently let at 550pm.Tenants are in till next April.This situation will definetly need reviewing when the agreement is nearly up.

A side note regarding yields : Half the property is owned by my sister who would like to sell.If I buy her half out is the yield calculated using 100k (the cost for me to purchase) or at 200k (the property value)? Or are both calculations valid depending on your outlook?

jamesd

There are at least three good reasons to go for interest only:

1. The other debt. That'll be at above the mortgage interest rate. If lovetobeloaded repays that debt they will be clearly better off. If they then continue paying the money as overpayments (or into a savings pot) until the other debt would have been paid off, they end up with free equity equal to the saved interest on the other debt.

2. You can get 5.75% interest on a cash ISA from Ruffler Bank. Rate hasn't increased since the change earlier this month, did last time. This is higher than the typical mortgage rate so it makes more sense to put the money in a cash ISA than pay the money off the mortgage capital. You really can borrow from one bank and save with another bank and make a profit at the moment. This is savings, no need to take equity risk if you don't want to.

3. Flexibility. Even if you intend to make repayment mortgage payments all the time, doing it on an interest only mortgage gives you the flexibility to drop to interest only at any time without having to wonder if your mortgage lender will agree and without it showing up as a default or arrangement.

If you're happy with a bit more risk you can go for putting some of the money in an equity ISA and some in a cash ISA, the total the difference between interest only and repayment mortgage. Then you get a lot of safety from the cash portion and still room for more gain from the equity part.

Any of the saving and investing options also gives you considerably more flexibility, particularly if you use the cash part as your emergency fund.

None of this is appropriate for people who lack self-control, and might just spend all the money instead of remembering that it's for their mortgage and later life.

djm1972

Absolutely right.

If you get a flexible interest only mortgage, which allows unlimited overpayments and draw down (back up to the original advance) then you can operate it exactly as if it were a repayment mortgage, with the added benefit as mentioned in the previous post that you have an instant "emergency fund", or the flexibility to be creative in a future property deal.

All you need to do is use any of the online mortgage calculators to work out what the repayment rate would be over the same term and make that as a fixed monthly payment - not forgetting to recalculate whenever your interest rate changes based on your capital balance outstanding and remaining term.

lovetobeloaded

ali007

Very clever! I didn't realise the unsaid was so visible. I appreciate your clarity and think I will start my SOA today. Thanks for the kick up the bum!

escroooge

Unfortunately most people don't have the discipline to actualy start attacking the capital should they start interest only, they are more likely to become accustomed to a lifestyle supported by what should be their repayment/savingspot funds. An interest only start with the intention to save an offset amount is a sweet tasting illusion for the undisciplined.

ollyshaw

Acc72 wrote:

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)

Yeah I just dont get this. Why not take out 200k and invest in some stocks? They "always go up" too.

Olly