UKs biggest lender ends IO mortgages without evidence.

JonnyBravo

Goody. ten characters etc

DervProf wrote: »

OK let's move the goalposts a bit (to help in what we are discussing).

2% IR, £300K mortgage.

Let's start without any overpayments.

How much interest will be paid back on the IO mortgage ? £500/month

How much interest will be paid back on the repayment mortgage ? £500/month clearly only for the very first month as a capital sum will also be paid (an overpayment if you will!)

If IRs increase, how will it affect the amount of interest paid back on each mortgage ? Will the increase be the same for each mortgage, or will it be the same amount ?
What are you asking? Will the rates go up the same? I have no idea. Lets say yes to keep this even slightly interesting

DervProf

OK.

The total cost of the house purchase with the IO mortgage will be

£450K (300K + 150K interest).


On a repayment mortgage, the total cost of the house purchase will be

£381,468.90 (300K + 81,468.90 interest).

Now if IRs were 4%.....

IO £600K (300K + 300K)

Repayment £475,053.16 (300K + 175,053.16 interest)


Now, overpayments could be made on the IO mortgage (as RM is doing), this complicates the calculations, but the change in interest rates will mean that his overall cost will change. And the change to his overall cost is very unlikely to be exactly the same if interest rates were to rise. There is a very big difference in cost in the above (simplified example). In RM's real world case, there would also be quite a big change if his interest rates were to increase by 2%, especially early on in the life of the mortgage. And I'm not saying that in RM's real world case, an increase in IRs would be to his disadvantage, it all depends on his future overpayments.

The above example shows the large difference in the amount of interest paid, not only between the two types of mortgage, but also with the two values of interest rates.

DervProf

Ah, good morning chucky. Can you help us out here ?

_party_

JonnyBravo

DervProf wrote: »

The above example shows the large difference in the amount of interest paid, not only between the two types of mortgage, but also with the two values of interest rates.

Indeed it does.
Not really anything to do with the discussion though. RM was clearly talking about making overpayments as you go. He was also having a discussion about stripping out overpayments/repayments of capital.


As an aside, it is plainly obvious that several problems occur in your calculations.
Lets us consider just one. You focus on the total cost and not the real cost.
For example lets consider the £300k capital repayment in the IO part of your example. Where does this come from? An investment? Would £300k have been put in? Is it simply "found" at the end and if so what is its actual value due to inflation?

DervProf

RenovationMan wrote: »

DervProf wrote: »

And yet you keep dodging the chance to prove it. Surely if I am inaccurante (and by quite a long way), it will be very easy to prove?

I think that any reasonable person would agree that the maths will be quite complicated. However, I am willing to give it a go. I need some more info from you first.

I know where you are now with your mortgage. How long have you got left on the mortgage term, and what overpayments do you have planned ? I know you won't be able to give precise amounts, but guesstimates will do. Can we agree on, say, an increase in your IR by 2% ?

DervProf

RenovationMan wrote: »

We're back to DP's Money Tree.

Give it up DervProf, just admit that you were wrong. You could even try and wrap the capitulation in cotton wool and pretend you thought I was talking about interest only mortgages generally rather than my interest only mortgage specifically. Go on, son, you know it makes sense.

I bet you'd like me to, but you know I won't. I want a conclusion, no matter who is proved correct. I'm not saying to you "go on son, give up". If you are proven right, and me wrong, I shall acknowledge that and try to learn from my error. I hope I haven't made a miscalculation. I don't think I have, but let's try to find out. :beer:

chucky

DervProf wrote: »

Ah, good morning chucky. Can you help us out here ?

_party_

i could... but i see the goal posts being moved quite frequently.

i'll let JB and RR explain it to you...

DervProf

JonnyBravo wrote: »

As an aside, it is plainly obvious that several problems occur in your calculations.
Lets us consider just one. You focus on the total cost and not the real cost.
For example lets consider the £300k capital repayment in the IO part of your example. Where does this come from? An investment? Would £300k have been put in? Is it simply "found" at the end and if so what is its actual value due to inflation?

I knew this would be mentioned. Lets focus on the original statement by RM, he mentioned "Strip out the repayment part of the mortgage and both will cost the same amount."

So, we ignore the repayment part, and he says that both will cost the same amount. What we will do then, is work out if there is a difference in the cost of the interest both between an IR and a repayment mortgage. We will also do this comparison, taking a 2% interest rate increase into consideration, and seeing if the difference between the two types of mortgage stays the same or changes.

If we can all agree on one thing, can we agree on that. That is what I originally wanted to prove or disprove (personally, I think there will be differences, even taking into consideration any overpayments RM will make).

JonnyBravo

DervProf wrote: »

I bet you'd like me to, but you know I won't. I want a conclusion, no matter who is proved correct. I'm not saying to you "go on son, give up". If you are proven right, and me wrong, I shall acknowledge that and try to learn from my error. I hope I haven't made a miscalculation. I don't think I have, but let's try to find out. :beer:

The previous examples lead me to be sure you'll run an example where the repayment is cheaper. Not conclusive though and nothing to with the original discussion which you seem to be moving away from.
But I'm happy to play along.

Lets say your IO example used the £771.56/month (the diff between repayment and IO) and invested at 1% above the interest rate. Who wins then?

DervProf

RenovationMan wrote: »

DervProf wrote: »

My mortgage is 2.55% (a tracker at 2.05% over base rate). It was a 3 year deal and I have 2 years left on the tracker in May. The mortgage was for £300k and I have overpaid by £27k. When this deal ends I will be getting a new deal which may be fixed, variable, repayment or IO depending on the circumstances at that time. That mortgage will probably be a deal over a set period (3 to 5 years) and then I will renegotiate a new deal based on the economic factors at that time. Therefore you only need base your calculations on the three years that I will definitely be on this particular mortgage.

You can increase the rate by whatever you like.

Do you need any more information?

OK, I thought "aaaargh!" at first, but it might actually be easier to just work on the three years.

You will be on this mortgage deal for another 2 years. You started with £300K, and are paying IO. When did you make the overpayment, and was it a single lump sum ? I take it you are assuming that part of that 27k was saved from the money you would have been paying back on a repayment mortgage.