Interest Only v Repayment v Overpayments

Tammer

Hi,

I recently saw an (apparent) IFA complaining in an online forum that it has become more difficult to get an interest only mortgage these days. He went on to say that if you look at the cost of an interest only mortage with overpayments compared to a repayment mortgage, the former is much cheaper overall for the same end result. So, my question is this - which of these has the lowest overall cost of borrowing?

a) borrowing on a repayment mortgage basis costing £500 a month.

b) borrowing on an interest only basis costing £300 a month and paying an extra £200 a month as an overpayment.

Or do they work out to be the same so the length of the mortgage and interest paid would be the same for both??

Hope you can help.

Thrugelmir

Tammer wrote: »

Or do they work out to be the same so the length of the mortgage and interest paid would be the same for both??

Correct.

The danger in the example you gave is that the overpayments are not maintained. As the discipline of having to make the repayment every month isn't there. For every person that manages their money well there's one that doesn't. Lenders have no idea which camp a borrower falls into at the outset. So have to take the cautious view.

Annisele

I'm not 100% sure that it is correct.

If a repayment mortgage costs £500 a month, then I would suspect (depending on term) that the interest portion of the payment is significantly more than £300 per month. So, borrower a) above will have borrowed quite a bit more than borrower b) - I think the OP is comparing apples and oranges.

hcb42

interest is normally charged on a daily basis on the amount owed...

Thrugelmir

Annisele wrote: »

I'm not 100% sure that it is correct.

You would need to make total repayments of £500 per month. So as the interest charged reduced on the interest only mortgage, the overpayment would correspondingly increase.

Tammer

Hi,

Thanks for the replies.

I think what everyone's saying is that the cost should be the same if you've been paying the same monthly payment overall over the same term.

But why did the IFA think that people were being ripped off in repayment mortgages compared to interest only plus overpayments?

Thrugelmir

Tammer wrote: »

But why did the IFA think that people were being ripped off in repayment mortgages compared to interest only plus overpayments?

The advisor makes their money by selling mortgages. So has a vested interest in the products available. With far lower activity in the housing market must be difficult for some to earn a decent wage at the current time.