intersest only mortgages ....verus standard .

andrewison

Could anyone advise concerning the following , what is better essentially for the 1st time buyer , I have been speaking to friends and they reckon that for a 1st time buyer , an interest only mortgage would be the best option. this would reduce the sum on what I owe on the house , as normally if I get the other type of morgage where i pay a set sum for 25 years , for the 1st 10 years or so (random guess) I am merely paying off the mortgage interest (like an up fronted interest loan) . Essentially a comparision between an interest mortgage and standard mortgages , what are the benefits and negatives I suppose.

cheers in advance

andrew

honeypop

andrewison wrote:

an interest only mortgage would be the best option. this would reduce the sum on what I owe on the house

If you are paying interest only, you are not paying ANYTHING towards reducing the amount you owe on the house, purely paying interest only (as the name suggests). At the end of the interest only period however long you go for, you will still owe the initial amount of the house.

eg: pay interest only for 10 years on a house purchased for £100,000, at the end of the 10 years you still owe £100,000 as you haven't made any repayments towards this amount, just been paying the interest.

A 'normal' repayment mortgage means you pay off some of the amount of the house and also some interest in each payment.

You can however get a part-repayment and part-interest mortgage, which we considered as FTB's, as this reduces the monthly payments but still means you are contributing some money towards the cost of the house, and not left with a massive lump sum still to pay at the end of the mortgage term.

jamesd

You can get interest only mortgages where the interest charge is below the interest rate you can get on a cash ISA. Why get a repayment mortgage when repaying saves you less interest than you lose by not putting the repayment money in a cash ISA?

If you accept some more risk, you can choose how much, talk with an IFA specialising in investments and you can get a mixture of bonds and equities and perhaps other investments in an equity ISA that are expected to make more than cash ISAs.

Even if you want to pay the repayment amount, doing it on an interest only mortgage gives you the flexibility of changing down to the interest only payment whenever you like.

Rick62

And while you are at it why not borrow some more and head down the casino, you might get lucky and be able to pay the whole lot off.

There are a number of regular posters here who think it is good financial planning to not pay down your mortgage and instead speculate on stocks etc.

If it was easy to consistantly and safely get a better return (even ignoring tax efects) then all the banks would be doing that rather than lending to us. The reason they lend to us is because we give the best return to risk investment, so the converse is the best thing we can do is pay off our loans and mortgages. I'm not saying don't invest if you enjoy it, but don't bet your house on it.

regularsaver1

It is very easy to go interest only and not set up any regular overpayments to the mortgage - you have to be strict with youself to avoid doing this

Ian_W

There again you could go interest only ... with an endowment policy.

In the 70's, 80's and 90's they were all the rage, even consumer champions Which? Magazine were saying you were a mug if you didn't go the endowment route. Can't for the life of me think why no-one does it to-day!!

The thing about a repayment mortgage is it does what it says on the tin. Any other IO with savings or investments is a gamble, might look a cert now but things can change as we saw with endowments. For years they did pay the mortgage and make a surplus - more recently they haven't.

To go back to the OPs point because you pay interest on the reducing balance more goes to interest in the early years but conversley more goes to repay capital past the half way point. I'd hazzard a guess that on a 25yr £100K mortgage you'll have paid in excess of £20K off the capital by year 10. So go IO if you wish but at some stage you gotta start repaying the capital and if you do so over a much shorter period then the payment will be higher.

jamesd

Rick62 wrote:

And while you are at it why not borrow some more and head down the casino, you might get lucky and be able to pay the whole lot off.

Ian_W wrote:

Any other IO with savings or investments is a gamble

Putting 3000 a year into an ISA or money into a savings account or buying a government bond aren't gambles. They are about as certain as it's possible to get and never fall in value (if you're buying the bonds for maturity yield).

Yes, you can choose higher risk if you like, but you're not required to. You can still make a nice profit without doing that.

Rick62 wrote:

If it was easy to consistantly and safely get a better return (even ignoring tax efects) then all the banks would be doing that rather than lending to us.

Today you can borrow mortgage money from banks and lend it to other banks and make a profit. Maybe that will change tomorrow. If it does, you can just put the money into the mortgage and be happy about the past profit.

While it's there, it's worth exploiting it, just as they normally exploit us.

tomstickland

I have been speaking to friends and they reckon that for a 1st time buyer , an interest only mortgage would be the best option. this would reduce the sum on what I owe on the house ,

Best only in terms of reducing monthly payments. Interest only is treading water whereas a repayment mortgage is making progress in clearing the capital sum.

Personally I'd not use an interest only unless you had a master plan. If it's just to reduce payments then I think you're on shaky ground.

Ian_W

_jamesd wrote:

Putting 3000 a year into an ISA or money into a savings account or buying a government bond aren't gambles. They are about as certain as it's possible to get and never fall in value (if you're buying the bonds for maturity yield).
Yes, you can choose higher risk if you like, but you're not required to. You can still make a nice profit without doing that.

For a start £3000 per year may not be enough depending on the size of the mortgage and with a taxed savings account you're likely to be out of pocket unless you can get a mortgage interest rate <4.4% - which are about as rare as hens teeth. Cash ISA's, subject to the £3K limit being enough, may see you slightly in pocket with a <5.5% mortgage rate [NS&I being the best rate cash ISA at 5.55%]. Govt bonds I don't know about - do tell what they're paying? In any event with all of these you need the discipline to ensure you pay the max each month and if it's optional there are always competing demmands.

If you go for a maxi ISA then you need to understand the risk - it's not imaginary, it's real. Anyone with a lump sum in equities or funds in 2002 will have only very recently seen the value return more or less to where it was when the market crashed. Sure savvy investors can do it that way and end up winning, never the less it is a gamble with most peoples biggest liability.

tomstickland

Actually, looking at OP's post the answer is:

-with interest only you just pay interest and at the end you still owe the same amount as you started with
-with repayment you pay interest plus an amount that over 25 years will clear the money you borrowed at the start, so you end up owing nothing. Just like a regular loan.

raq

Like a lot of views have said, purely down to yourself

Myself and husband has interest only until next year but because it is our second home and we put down £80k we where desperate to get into a good area and this was our only option ( bigger mortgage ). Also it is self-cert and we had a little bit of bad credit about 6 years ago, but all in all really happy with interest only. Next year though we are changing over to re-payment as we will be in a much better financial situation.

Your decision, but good luck