intersest only mortgages ....verus standard .

jamesd

Ian W, true that with a limit of about 147,000 for the loan value to cover the difference between interest only and repayment mortgage the cash ISA can't cover all mortgages. Still, the median first time buyer mortgage(XLS) amount in September was 110,500 so it'll cover a high percentage of mortgages.

For a year or two, taxable 12% for one year from A&L or 8% for two years from Lloyds TSB are useful to save the difference between interest and repayment mortgage payments to decrease the amount needed at the next remortgage. Both will beat current mortgage rates nicely for basic rate tax payers, one for higher rate.

UK government bonds aren't currently very useful for those taking out a new mortgage since their one year yield is 5.05%. Interesting mostly for those with older fixed rate mortgages.

While I have the figures handy, the median age of first time buyers fell from 31 to 29 between last year and this year, the median income that month was 34,457, LTV 90% and income multiple 3.25%, the highest it's been. More statistics are available from the Council of Mortgage Lenders.

andrewison

Thanks alot to everyone who responed ..it made it clearer over all . Again a sincere thanks .. beers are on me ...

toonfish

my personal approach has been to borrow as much as I can, interest only and worry about paying it off at a later date when the kids are older. Might not suit everyone, but it's cheaper than rent and I have benefiited by accruing a lot of equity over the years that I never would have done by renting.

InMyDreams

toonfish wrote:

my personal approach has been to borrow as much as I can, interest only and worry about paying it off at a later date when the kids are older. Might not suit everyone, but it's cheaper than rent and I have benefiited by accruing a lot of equity over the years that I never would have done by renting.

Hindsight is wonderful, isn't it?

mountainofdebt

read martins blog on this very subject.

jamesd

Here are two of Martin's recent blog posts on his and quotes from them that I think best summarise their essence:

• A Nation Hypnotised By TV Property !!!!!!? Property isn’t as safe as houses
  "Over a long-term period home ownership is very likely to be a boon to your finances. The market tends to rise over the long term (though nothing is ever guaranteed) so saving up for a deposit and getting an affordable mortgage to buy the home you live in, providing it doesn’t curtail the rest of your life, is wonderful. Yet having no spare income and eking out every last penny you can to try and own a property that you may not be able to afford in the long run can be a disaster."
• Grrrr….. If I hear ‘renting is just throwing money away’ from another interest only mortgage holder
  "I find this logic farcical ... He is considering an interest only mortgage, because a repayment mortgage is too expensive ... he’s not going to repay any of the actual debt ... Yet his quote was renting is 'throwing money away'. ... All his plan means is simply giving the mortgage company the money instead of a landlord and he’s paying 50% more than before, so there’s less room for saving and/or repaying the capital.
  
  On top of this, the mortgage will be at 95% LTV ... so as for 'I thought it was time to own my own property' well sorry, but you don’t own it - the mortgage company owns most of it ...
  
  Now of course, if house prices continue to rise he will be able to sell the property and make a profit, then again if he continues to want to own property, the price of what he needs to buy will go up too."

I'd put it as:

• If you're doing interest only because you can't afford it otherwise or because you're trying to gain from property prices, you're gambling or speculating.
• If you're doing it because it's prudent, lets you pay it off more cheaply or faster via prudent investing or saving and increases your flexibility, it can be helpful.
• Be sure you know the difference between the two and which one you're really doing.

HelpWhereIcan

Just to add my tuppence worth to the debate that has, thus far, been quite illustrated by the views of jamesd and Ian W; I would like to give some real figures to try and illustrate the difference.

IMHO, the decision rests with how willing you are to take a gamble that you could achieve a certain rate of growth by investing elsewhere.

I have taken an example of an 'average' £100,000 mortgage (calculations done before I read james's 110500 post properly and can't be bothered to re do them), over an 'average' term of 25 years on the Abbey's Flexi Lifetime tracker currently at 5.49%. No fees added to the loan.

Over a 25 year term, the monthly payments are as follows:

Repayment: £613.49
Interest Only: £457.50
Difference: £ 155.99

Moral: Sometimes the difference is not as large as 'people' make out and you have to ask yourself if £156 pm is worth taking the additional risk of having an interest only mortgage.

Over a 25 year term, the total amounts payable are as follows:

Repayment: £184,927
Interest Only: £238,130
Difference: £ 53,203

Moral: Do not underestimate the effect of interest being charged on a reducing balance, particularly on a deal with daily interest.

Balance After 10 years:

Repayment: £75,131
Interest Only: £100,000
Difference: £ 24,869

Moral: When 'people' tell you that you only pay interest for the first 10 years; they are either lying to you or do not know what they are on about (or both).

After 10 years, the total amount of interest paid is as follows:

Repayment: £48,750
Interest Only: £54,900
Difference: £ 6,150

Moral: Do not underestimate the effect of interest being charged on a reducing balance, particularly on a deal with daily interest - again.

The way I look at it, therefore is thus:

For an investment strategy to put you in the same position as you would be with an repayment mortgage, your £155.99 pm that you invest would have to be worth:

£31,019 (£6150 + £24,869) after 10 years, and
£153,203 (£100,000 + £53,203) after 25 years.

To achieve these figures, you would need to locate an 'investment' that would return (net of any tax liability):

over 10 years : 9.6% pa
over 25 years : 8.25% pa

Admittedly, the rate required goes down as time goes on; but you still have to ask yourself what type of risk/how much hassle you would need to be willing to accept to get the return required.

It just seems that, sometimes, people forget the whole premise of the endowment mis-selling scandal - people were encouraged to take more of a risk with the repayment of their mortgage than they were willing to.

Whichever 'investment' or savings vehicle is used, the risk remains the same as it was when those endowments were mis-sold - let's not allow ourselves to be subconciously driven back to the bad old days that many swore should never return.

Just my opinion

raq

know someone who did this. Went to the max on interest only for the sake of the kids and looking at the consequences later on. They live in an excellent area and not at all worried

Rick62

Their kids are really going to thank them in 20 years - when they need their kids to keep paying their mortgage or rent for them on top of paying off their student loans and trying to buy their own properties.

jamesd

HelpWhereICan, it appears that you're counting the interest twice. The reduced balance on the repayment mortgage already includes the interest saved on it through the repayments. The 10 years of 155.99 are worth 18718.80 and you need to add that 6150 interest saved to get to the 24868(9) lower balance on the repayment mortgage.

Lets consider that the difference between the interest only and repayment mortgages is being borrowed at the mortgage interest rate each month, which is effectively what you're doing when saving or investing it. Plug the numbers into a future value calculator and you get:

Monthly amount: 155.99
Interest rate: 5.49
Number of years: 10
Future value: 24981.96
Interest "earned" (really paid on the mortgage): 6263.15
(total of just the monthly payments was 18718.80)

Use savings at 5.75% and you get:

Future value: 25340.50
Interest earned: 6621.70

6621.70 - 6263.15 = 356.55 better off

Not a lot better off with such a small difference between the borrowing rate and the savings rate. But extend this to 25 years and the difference rises to 4076, or 6.6 months of payments - paying it off six months earlier.

It's more interesting if you had taken a fixed rate at say 4.95%. Then the borrowing interest cost is 5538.65 and the gain is 1083.05. At 25 years that's 11950 better off, 19 months of the 613.49 payments saved.

Add in using cautious investments returning 7% after costs and those grow by 8438.19, less the 4.95% mortgage interest cost of 5538.65 and that's a 2899.54 improvement. At 25 years this one gets to 34517 or 56 months of the 613.49 payments saved.

All of these differences grow over time but it's not a big difference initially, particularly for the very small 0.25%interest rate difference. But even that takes six months off the mortgage term.