intersest only mortgages ....verus standard .

InMyDreams

Actually, all this reminds me very much of the well known restaurant problem...

Three friends have a meal and split the £30 cost.
They each throw in a tenner, but it turns out the waiter made a mistake and the meal only cost £25, so he returns 5 pound coins to the happy friends.
To keep things simple, they take one each and leave the waiter the last two as a tip for his honesty.

So, all together, each friend has paid £9 for the meal (tenner with a pound change) and together they've left a £2 tip.
But this only adds up to £29. Who has the missing pound?

HelpWhereIcan

InMyDreams wrote:

But I'm not paying any more than HWIC! It's just that instead of paying the capital off, I'm paying into a savings account. The monthly payments are exactly the same! On repayment they are £613.49, of which the proportion of interest to capital repayment changes over the term. On IO, they are £457.50 on interest (which granted, doesn't decrease) and £155.99 into the saving account. Yes, this £155.99 doesn't increase either, but as HWIC says, "do not underestimate the compound effect" which now is working the other way.

Ultimately, both methods equate to me paying £613.49 pcm for 25 years, but with one I have £407,310 at the end of the day and with the other, £411,843

That would be asking me to allow for the fact that you earn more interest than I do on savings, but not for the fact that I pay less interest on the mortgage than you. You then have to factor in time spent, investment risk, potential taxation issues, the temptation to withdraw savings etc.

Unless you are saying that we are paying exactly the same amount of interest, just that you are earning some as well?

Look at the tables. You will see that in year 5 you are still paying £457.50 pm in interest, but that I am paying £414.33 pm, a difference of £43.17pm. To my mind, you have to make 500.67 (6%) just to keep in touch by making up for the extra interest that you are paying.

In year 15, I am paying £344.42 in interest and you are paying £457.50 still, that's now a difference of £113.07 pm that your investment needs to 'make up'. That's where you earning compound interest works for you because the interest rate required to 'break even' will not have increased due to the effect of receiving compound interest.

InMyDreams wrote:

Actually, all this reminds me very much of the well known restaurant problem...

Three friends have a meal and split the £30 cost.
They each throw in a tenner, but it turns out the waiter made a mistake and the meal only cost £25, so he returns 5 pound coins to the happy friends.
To keep things simple, they take one each and leave the waiter the last two as a tip for his honesty.

So, all together, each friend has paid £9 for the meal (tenner with a pound change) and together they've left a £2 tip.
But this only adds up to £29. Who has the missing pound?

Actually a very good illustration and close to the truth of this discussion. Remember, I have not said that it is impossible to profit using the interest only plus investment option; just that I don't think it is as simple as building up a lump sum big enough to pay off the mortgage and keeping the rest as profit.

Although it is largely an issue of semantics and I accept that many will look at it the way you do, I am not sure that I think having an extra £4533 in the bank after 25 years would be worth the additional effort, risk and interest payable on my mortgage required to build it up.

Just for balance, I actually do have part of my mortgage on interest only backed by an investment. However, I am expecting a lot more than 5.75 net on my investment and will actually be looking to get around 8% for it to be worthwhile. I have to have it invested in stock based investments and accept the risk that comes with it, but hopefully I will get the reward too.

The figure of 8% would also put our example into profit, but I suppose that's where we really differ - we both believe that it is possible to 'make' money this way, just I would want to make more to consider it worth my while.

You would be happy taking the additional risk, effort etc for a 5.75% pa return, whereas I would not accept less than 8%. Does not mean we disagree on the principle though.

James240

spam reported

tomstickland

InMyDreams wrote:

Actually, all this reminds me very much of the well known restaurant problem...

Three friends have a meal and split the £30 cost.
They each throw in a tenner, but it turns out the waiter made a mistake and the meal only cost £25, so he returns 5 pound coins to the happy friends.
To keep things simple, they take one each and leave the waiter the last two as a tip for his honesty.

So, all together, each friend has paid £9 for the meal (tenner with a pound change) and together they've left a £2 tip.
But this only adds up to £29. Who has the missing pound?

3 people pay £9 = £27 total in
Meal cost £25 + £2 tip = £27 total out

Yes I know it's an old one, but I just sat down, started writing the numbers down and that was the spontaneous answer.

Back to the mortgage question, it doesn't require any spreadsheets to work out that if you can remove money from the mortgage account where it costs x% and put it somewhere else where it makes more then you'll be better off.
If the external return is the same as the mortgage cost then it'll make no difference.

InMyDreams

HelpWhereIcan wrote:

That would be asking me to allow for the fact that you earn more interest than I do on savings, but not for the fact that I pay less interest on the mortgage than you. Look at the tables. You will see that in year 5 you are still paying £457.50 pm in interest, but that I am paying £414.33 pm, a difference of £43.17pm. To my mind, you have to make 500.67 (6%) just to keep in touch by making up for the extra interest that you are paying.

No. I accept you are paying less interest on the mortgage. You are failing to take into account the compounded interest of my savings though. The £43.17pm is made up by the compounded interest to date. In year 5, the interest on my savings is earning more than that. You are earning nothing on your capital repayments, except the reduced interest. My 'capital repayments' that I'm actually syphoning off to a savings account are earning more than you are saving.

HelpWhereIcan wrote:

You then have to factor in time spent, investment risk, potential taxation issues, the temptation to withdraw savings etc.

I probably spend much more time arguing about the pros and cons than I do actually doing it, lol. Takes minutes to open up a savings account. Takes much longer to sort out the mortgage product in the first place, and you'd have to do that anyway. Investment risk? I'm talking about savings accounts, not investments. Tax? I'm assuming we're talking interest rates after tax has been taken account of anyway. Temptation to withdraw? Well, yes, I'll give you that one. Depends on your attitudes.

HelpWhereIcan wrote:

Unless you are saying that we are paying exactly the same amount of interest, just that you are earning some as well?

No, you are paying less interest. But I am making more than the difference with the interest on the savings. In the first few years it won't make much difference, but compound away...

HelpWhereIcan wrote:

Although it is largely an issue of semantics and I accept that many will look at it the way you do, I am not sure that I think having an extra £4533 in the bank after 25 years would be worth the additional effort, risk and interest payable on my mortgage required to build it up.

Nothing to do with semantics. It's to do with numbers. Yes, the more effort and risk you are prepared to make/take, the bigger the potential savings. But the numbers you have quoted don't require effort or risk. And in your original post with the calculations in, you tried to imply that this extra £4533 somehow constituted a net loss. That's what I'm disagreeing with. Not whether it's worth it in the end, or the right way to manage your finances for everyone.

HelpWhereIcan wrote:

Just for balance, I actually do have part of my mortgage on interest only backed by an investment. However, I am expecting a lot more than 5.75 net on my investment and will actually be looking to get around 8% for it to be worthwhile. I have to have it invested in stock based investments and accept the risk that comes with it, but hopefully I will get the reward too.

Good luck. I'm not in the position to be taking such risks at the moment. Not with my house anyway. That's why I'm not relying on an endowment to pay off my mortgage.

Our position (for balance): 3 small children, one (reasonable) salary, only 5 years into our mortgage, but we have the advantage that as I'm not earning a salary, any savings over our isa limits can just go tax free in my name. Mortgage is still part and part, but as soon as our current deal ends we'll be going IO. Currently paying the extra payments into regular savers in my name (no tax) to kick start savings. When they mature we will move what we can into isas. And actually, we are paying more than the difference between IO and interest repayment, (like overpayments for someone on a repayment) but that just means that the difference are even more exagerated. All arguments would still apply evenif we weren't.

HelpWhereIcan wrote:

The figure of 8% would also put our example into profit, but I suppose that's where we really differ - we both believe that it is possible to 'make' money this way, just I would want to make more to consider it worth my while.

I agree with you here. But you will 'make money' if your saving rate is more than your mortgage rate. It doesn't have to be considerably more, but clearly, the key is the bigger difference between rates, the more you will make/save/whatever you want to call it. You can get a LITTLE more, effortlessly and risk free. If you want a LOT more, then yes, more effort/risk required.

HelpWhereIcan wrote:

You would be happy taking the additional risk, effort etc for a 5.75% pa return, whereas I would not accept less than 8%. Does not mean we disagree on the principle though.

But in your example, you tried to claim that I would be WORSE of if the difference in rates was just 0.26%. I accept that for an overall extra £4K over 25 years, you have to judge whether it's worth it, but you (and more worryingly given his sig, Ian W) were trying to say that I would actually be financially worse off (at least that's what I understood by being accused of 'funny moneysaving' ;-) ). Actually, the difference in my rates is 4.7% for the money being paid in this year. Once the regular saver matures, this difference will go drastically down, but not to 0.26%. And of course that extra I've made this year will continue to be compounded by whatever rate I can get over the next 20. And each year I will kick start my payments with regular savers before transfering them to other savings account. Yes, a bit more faff, but so early on in my mortgage, well worth it to offset even another £100 of the capital of my mortgage, essentially 'for free'.

UK007BullDog

Just a quick note:

Repayment is always best even if you are a FTB. Everything else is risk taking and speculation.

If you cannot do repayment then try to do so in the next few years.

There might not be a housing crash but if there is going to be one all of those who have bought in the last 5 years might risk going into negative equity.

Listening to friends is good, but when it comes to finances its best to speak to a professional(s).

regularsaver1

What sort of savings account are you using? a basic normal one or an investment one with risk but potential for a higher return?