FTB - Interest only or repayment mortgage?

desperadoV2

Hello all,

I'm just thinking, should I go for Interest only mortgage or repayment mortgage? My plan initally was to go with repayment mortgage but its only £200 repayment on a 160K mortgage with £650 interest each month.

So I thought, why don't I go with Interest only mortgage and put £200 a month on one of the regular savers (I saw 6% to 10% interest on regular savers account). If I go for 3 or 5 year fixed interest only mortgage and put a fixed amount towards regular savers then I could benefit from BOE interest rate increase. For example: I could go for 5.19% Fixed interest only mortgage and deposit my repayments (ie. £200- £250) with 12.5% interest each month towards my barclays regular saver.

Will this idea work? If BOE raise the interest rate from 5% to 5.5% this year, then I could benefit from it, don't I?

Am I missing something here? Am I being too optimistic? What do you think? please let me know.

Ian_W

It's an old chestnut on this board. Financially there is little difference between the ways of doing it, one way may be better in some circumstances but worse in others. For example, interest rates may be 5.5% by the middle of next year and you'll benefit but then might return to nearer 4% for the next 4yrs and it's quite possible you won't. Or it may go the other way.
Regular savers are a fairly new innovation - they may disappear as quickly, many have strings attached like having to move your current account and if they're only for 12 months the benefits can be marginal when you consider the interest lost in moving money from your main account to the saver.
I think the big difference is DISCIPLINE. With a repayment mortgage it's repaid each month - end of. With IO you need to be disciplined enough to make the savings come what may and not dip into them whatever the emergency.
Having been the proud owner of several endowments that were all coming up short towards the end of the term I know which I'd choose - but it's your call.

UK007BullDog

Interest only mortgages cost you more in the long run as you never reduce the loan amount.

However the repayment part reduced the overall loan. Over the years the interest reduces and the repayment part grows reducing the loan ever quicker.

The idea of the high saver accounts is OK but you also have to remember is how much you can pay in as a lump sum (overpayments) without being penalised for doing so.

Personally I would always go for repayment and an overpay facility to reduce the loan quicker.