Interest only Vs Repayment

SamDude

Hi all,

I am looking at maybe taking out an Interest only mortgage.

As a very basic example, here are some numbers:
Interest only monthly cost: £750
Repayment monthly cost: £1000

If I am disciplined (which I am) and put the 'difference' between the interest payment and the repayment amount (= £250) into a savings type account every month, would I simply take the money out of the savings account (+the interest earned) and pay the mortgage account if/when I decide to remortgage?

What is the advantages of a repayment account if I am still putting away the money in an interest only deal?

I am looking to do this so I have a little bit of breathing space, without putting anything at risk (did I mention - I'm disciplined).

Thoughts/comments?

Thanks.

BrunoM

I believe the very-short-answer is "no", a normal savings account by itself will not make up the difference at the end of the mortgage; you need to invest instead, e.g. in an endowment, to get good enough returns, and there's therefore an element of risk.

However - someone who really knows this stuff will be along any second!

Tom_Saunders

no, because the amount owed will never reduce !!

BeerBelly

Breathing space maybe, but you will never invest any of the money you are putting in.

If its long term, guess its the same as renting!

I believe people do interest only to do properties up and sell on a short time later (developers..etc. I can see the logic in that), but not worth it in the long term for live in buyers.

SamDude

Maybe I didn't make myself clear...

If I'm starting a 2 year fixed rate deal, I'm putting away the 'difference' (eg =£250) into another savings account.

At the end of the 2 year fixed rate (when remortgaging), I would pay the money and interest from the savings account to reduce the size of the mortgage.

So I would be reducing the mortgage, but not by the same amount as if I'd had a repayment mortgage?

What savings/investments vehicles are available/recommended for people on interest only mortgages?

BeerBelly

So if you pay £5000 (money you saved) off the capital plus the mortgage exit fee and on top of that the new interest rate (after 2 years) Idont think its worth it. I can see what your saying, but dont think its that feasible.

The later stages of a repayment mortgage you are paying more captial than interest.

SamDude

I would (hopefully) move to a repayment method after the 2 year deal is up (if not, then within 5/6/7 years? until finances are a bit more managable).

I wouldn't want to stay on an interest only product until the very end...

gaetss

If you put the £250 in a saving account, this means you can afford the repayment so why not take the repayment?

The only way I can see that the interest only is better than repayment is if you find a saving account which has a higher interest rate than your mortgage (the higher also needs to be quantified).

tomstickland

Interest only + savings account is the same as repayment mortgage if the rates are the same. I've looked into the maths of it, and a repayment mortgage can be split into the initial loan which accrues interest and a savings account which accrues interest. At the end of the term the amount in the savings account equals the loan plus interest.

ds1980

of course it does. If your interest rate on the savings account is more than your mortgage then your better off simple.

Only thing is you have to make sure you put money into isa for tax efficiency and after £3k your struggling to make 5% after tax. We always pay off mortage and then reduce term of mortage every 2 years. Ie 25 years after 2 years goes to 20 years. after another 2 years goes to 15 years. Basically knocking off 10 years in only 4 years. Obviously you have increased payments but when your making good money on rentals and savings then the money you accrue over these years can then pay the additional that you were prepared to pay at the onset of the mortgage.

Interest only is fine if you want to save your not really going to be any more or worse off but you have to rely on you not needing the money you save for a car....holiday.....jimmy choo's for the guvnor.

If you can id pay repayment then if you have spare cash don't overpay save this and then use it to subsidise your increased payments if you drop it down to say 20 years after the 2 years fix is up.

thats my advice anyway

all the best

mdf14

Looking at the numbers you have quoted, I'd say go for it. You will be saving £3,000 a year (12 x £250), which keeps you within the limit you can put in an ISA, so you can avoid the tax which you'd have to pay on normal savings. NS&I do 5.8% ISA's, and this week's e-mail mentioned an even higher interest rate is on the way. As long as you can find a cheaper mortgage than 5.8% then the interest earnt will be more than the interest you would save by paying the mortgage.