Interest only at low rate, or Repayment at high rate?

gregch

There's only one way to find out... FIIIIGGGGHHHHHTTTTTTT!

Or, er, ask here.

We currently have an interest-only mortgage (with Stocks and Shares ISAs supposed to repay the capital) on a lifetime tracker at base+0.55%.

We're moving house and will need to take on additional lending. Barclays (nee Woolwich) will let us keep the interest-only mortgage we have but the additional lending has to be on a repayment basis. We were going to go for a 2 year fixed rate at 3.47%.

But we were just thinking, would it be better to cash in the ISAs to reduce the capital amount, then switch to an all-repayment mortgage?

My sums suggest there'd be a difference of "only" £150 per month at the moment, which obviously could easily be wiped out if/when rates rise and therefore the tracker element rises.

Added to which, moving to all repayment on a fixed rate might give peace of mind that we'll know exactly what the total monthly payment will be, at least for the next two years. And longer term, we know that the capital will be paid off at the end of the term.

BUT - something tells me that 3.47% is more than 0.5%+0.55%, so we're surely going to pay more than we have to, if we switch to all repayment?? I guess rates would have to rise to 3% in the next 2 years for the repayment to work out cheaper - or am I missing something??

Joe_Bloggs

Keep the IO part it is very close to free money. Probably the best deal you will ever get. Many mortgage deals these days are BOE base + 3%.
J_B.

gregch

Thanks Joe, must admit that makes sense. I negotiated that rate at the height of the market when things were very competitive! I guess the attraction of moving to all repayment (esp fixed rate) is the peace of mind. But I guess that peace of mind could well cost us money, and in any case in 2 yrs' time we'll be thrown to the mercy of the market... Maybe the solution is to hold on to the IO part but try and set aside some extra to hedge against the inevitable rate rises that'll push that part up.

JQ.

I'd probably keep the tracker rate for now but keep an eye on it and interest rates in general. You can always remortgage at a later date with a fixed rate.

TrickyDicky101

Have you checked with Barclays if you can actually make repayments against the current interest-only balance? I would be majorly surprised if they did not allow this - after all, by reducing the capital owed by yourself they free up money that they can lend out to someone else on more profitable terms to themselves.

Joe_Bloggs

I was going to add a proviso that you need to keep contributing appropriately to the funds that will eventually repay the capital. There is no guarantee that your S&S ISA will be enough. If you mention some numbers then perhaps others can say if they think you are on track with the interest only bit.

It would not be too difficult to beat your IO. mortgage rate with cash ISAs providing you were allowed to put in enough,in each tax year.

J_B

Thrugelmir

At the current time. I would invest into cash ISA's rather than S&S. At least the return is guaranteed. When interest rates normalise then the capital sum accrued could be used to reduce your mortgage balance.

The issue with S&S is that the market could drop at the point capital repayment is required. Not unusual for stock markets to move plus or minus 0 - 2% in a day.

CloudCuckooLand

Would the Stocks & Shares money improve your LTV to a point where the Fixed deals you have been offered are bettered..?

If you got offered the 2-year deal lower or a 5-year Fix at a similar figure, by having a better LTV, it could be worth consideration.

gregch

Thanks all for some helpful insights. Our IO part is £150k. We're paying £232/month total into the ISAs, current total balance approx. £40k and term will be a further 20 or 25 yrs so all being well I guess we should be OK.

Interestingly, Barclays will not accept Cash ISAs as adequate provision at the moment, only Stocks & Shares. That seemed counter-intuitive to me, for the reasons Thrugelmir mentioned, but I suspect their logic is that cash has not provided a great return recently. I guess we'll need to watch this and if possible move to something "safer" as we get closer to the end of the term.

Will also ask the question re overpaying (ie reducing the capital) on the IO part, although right now it's also about monthly affordability since the new house will need some work, which we're planning to do over the next couple of years, or as and when we can afford it!

gregch

CloudCuckooLand wrote: »

Would the Stocks & Shares money improve your LTV to a point where the Fixed deals you have been offered are bettered..?

If you got offered the 2-year deal lower or a 5-year Fix at a similar figure, by having a better LTV, it could be worth consideration.

Good point - Yes it would bring it into <70% vs <75%, so a marginally better rate on a 2 yr fixed. The c.£150/month difference is based on that (slightly) lower rate. As for 5 yrs, they're substantially higher (=too high), even at <70%.

Thrugelmir

Stock markets have performed well since the lows of 2008. Maybe an opportune moment to use the ISA funds you have accumalated to facilitate the purchase of the new property. In the process borrowing less.