Battling the Interest Only Mortgage!

Eating_Daisies

Thanks, I think, Jamesd! You're absolutely right that I could find a high interest savings account instead of paying off the mortgage, but that money could quite easily get used elsewhere with us! I know high interest savings might be the better financial solution but for me paying the mortgage down is so much better psychologically.

jamesd

Sorry to read that but you're right: if it'd be spent it if it didn't go on the mortgage then it's better to do something that works.

Occams_Razor_2

I'd relax on the interest only thing, its greatly misunderstood. the same way inflation erodes the value of your savings, it erodes your debt.
yes, it is a nice thing to be paying off your mortgage but its not the only thing

for example, you need to consider the time value of money, whereby the value of your 150K mortgage in 20 years time, expressed in todays money is considerably less than you think. say we take a discount rate of 4%, over 20 years (a conservative calc) then your mortgage would be around 68K in todays money. the value on your house in real notional terms is likely to have gone up as well, creating a significant spread.

so yes, its true you would end up owing circa 68K (expressed in todays money) in 20 years, but where is the actual problem? you could easily refinance that, or roll it over. and you say, what about retirement? that's 40 years away (£31K in todays money) you could easily clear that when downsizing.

most people who express fear and outrage over interest only mortgages do not really understand finance, and when you are in a better position to make capital repayments perhaps re-mortgage then? but its not really the end of the world in any case.

and of course the lower payments give you an increased buffer should things go wrong in the short term

Eating_Daisies

Thanks for the post Occam/s razor, if I'm honest I don't really understand what you're saying! I think I get the jest But as I was reading your post I thought, but what happens when we want to buy a bigger property? We wouldn't have a very good LTV even if a mortgage company would offer us a new larger mortgage. Also, as our property goes up in price so do the bigger houses that I would like to be our forever house ...

Occams_Razor_2

Eating_Daisies wrote: »

Thanks for the post Occam/s razor, if I'm honest I don't really understand what you're saying! I think I get the jest But as I was reading your post I thought, but what happens when we want to buy a bigger property? We wouldn't have a very good LTV even if a mortgage company would offer us a new larger mortgage. Also, as our property goes up in price so do the bigger houses that I would like to be our forever house ...

no problem.

your LTV gets progressively higher, as the value of your property is expressed in notional terms, whilst in real terms the value of your debt decreases.

say there is price inflation of 4% - very possible at this rate.

in 5 years time, on a house worth 200K with an interest only debt of 150K. LTV of 75%

you're property in notional terms would be worth around the 240K mark. and you're mortgage would still be expressed in the same notionals of 150K. so you're LTV is 62.5

in fact you can sell, and realise that differential.

bottom line interest only is nothing to fear, even if you have no repayment vehicle (not ideal, but for illustration) it will still decrease in real terms by the time value of money.

think of what your house cost 30 years ago. if its worth 200K now, it was probably worth 55K or something like that - maybe quite a bit less.

how disasterous would it be now, if you still owed 50K on that property? would you struggle to find someone to refinance that mortgage with? could you sell it and take away a nice capital sum?

I say not very disasterous at all.

Eating_Daisies

I'm in a pickle ... we had a nice chap come round to view the room but then said he was looking for himself & his girlfriend but we said on the ad no couples. Anyway as he was here I said look round & we'll talk about it later. But we can't decide ... well I think I have ... he'll pay a little more than hoped & he liked Harvey & said his girlfriend loved dogs ... She's in Romania & won't be back in the country til Oct (he wants to move in sooner) so we can't meet her before we say yes but she is calling me any minute ... he's got a job at Asda so said he'd share his 10% off! :rotfl: We said no to couples as we thought they might unintentionally take over the house ...

ETA: Just talked to her she sounds lovely ... just waiting for DH to say yes ...

firesidemaid

i'd say go with your gut feeling.

they seem nice people who are goodwilled and polite.

even if a 'single' person rented the room, had you considered that at some point they may want a partner or friend to stay over? had you thought how were going to manage situations like that?

Eating_Daisies

Well the nice chappy moved in yesterday ... all going OK so far!

My lovely MIL is writing us a cheque for some more money that she said she would give us, hopefully DH will pick that up by the end of the week. I had a play around with my mortgage spreadsheet and the bbc mortgage calculator, I'm hoping when I've paid the cheque in from MIL I can pay off £5k to the mortgage. This means I will be using some cash intended for other purposes but by December all that money should be put back and it means the monthly mortgage payment should be just under £300 so my extra monthly payment will be the full £50 a month - not much difference but it makes me feel better.

Also, this month I've already been paid £590 with another payday in the month (this Friday) so I will earn more than planned which is nice. So far all bills are on budget, only got the mobile bills to come out. We have overspent £10 on food this month but we had a BBQ with friends & extended family at the beginning of the month so I'm quite happy with that. We have enough food in to last us until the end of the week I might just have to start next month from next Monday ...

DH wanted us to split what we got from nice chappy for the first month so that we could have some money to enjoy. I agreed to £100 each which I thought was OK, I went to my favourite shop today that sells EVERYTHING! From crafty stuff to dog food & I've spent £50 of it already!! Still I have lots of pretty papercraft stuff to full up the 3rd bedroom a bit more!! :rotfl:

Eating_Daisies

Just written a cheque for £5,000 towards the mortgage, will post that tomorrow. This will take us under £145k but I won't update my signature til I get the letter from the mortgage company.

(Does feel good!:D:D)

Eating_Daisies

Also meant to add that I received £3 luncheon vouchers from pinecone which I used on the food shop & then put the £3 from the housekeeping into the mortgage pig - who is quite empty as I don't really have cash but I put anything I find etc in there! :money: