Interest only Vs Repayment

tomstickland

I've got a repayment mortgage which is fixed at 4.29%. The recent IR rises mean that I'm better off saving than overpaying and I'll be paying off a lump sum when I remortgage.

SamDude

I've done the deed.

A&L 5.11% fixed for 2 years, Interest only.

As Tom said (thanks Tom), if interest rates continue to rise, the savings account/vehicle should earn me more interest than the mortgage would have 'benefited' me by. Therefore giving me that 'breathing space' as well as the ability to chuck the amount in if/when needed.

jonewer

Dont forget that if you take money out of an ISA you can never put it back in. I treat my ISAs as sacrosanct. If you take this option you are basically wasting £6k worth of tax-free interest goodness.

BeerBelly

Still doesnt make sense to me.

You would be marginally better off with ISA, but you still have to switch to repayment at some point.

I guess we all gamble in the hope interest rates will go down.

What if the rates are higher in 2 years time than what you could get today for repayment?

Have I missed something?

SamDude

BeerBelly wrote: »

Still doesnt make sense to me.

You would be marginally better off with ISA, but you still have to switch to repayment at some point.

I guess we all gamble in the hope interest rates will go down.

What if the rates are higher in 2 years time than what you could get today for repayment?

Have I missed something?

I've taken out a fixed rate deal (2 years). If interest rates go up, then I'm earning more interest on my savings - while my mortgate is at the same 5.11% rate.

At the end of the two years, I pay the savings into the mortgate and shop around. If I find a favourable rate, I'll change to a repayment deal.

All being equal, I won't be much worse/better off - but I will have that breathing space that I'm looking for.

BeerBelly

Im with you now.

Basically all your doing its paying interest each month then every couple of years paying directly off the lump what you have saved in your ISA?

Arent there fees for over-paying such a large amount though? i.e 6k plus interest, say 6500

I still can't see the benefit though :rotfl: In the long run theres still a lot of messing about and the fees for overpyaing and changing mortgage would eat away at any interest your ISA would have got.

You say its cheaper each month, but you are still paying out 1k a month be it 750 Mortgage and 250 Saving or 1k directly on a reapyment mortgage.

Am I being very thick or have I missed somethine (it is early and I havent had my tea yet! :-))

sciencegeek

i think what the OP has done is quite sensible considering the circumstances. If i am correct, the reason he wishes to pay interest only and save the difference (to cover the capital repayment portion) is because money is a bit tight for a while.
If you can only just cover a £1000 repayment mortgage every month why risk missing payments if you can pay £750 (interest only), set aside the £250 every month you possibly can and wait for your financial position to improve.
Alternativly, pay your £750 as normal each month and if you find you do have the 250 spare that month, pay it in straight away as well to begin eating away at the capital.

Of course if you are in a position where you can only just make a £1000 a month payment and you have no means of improving your financial position you should not have taken such a large mortgage.

BindiBahji

aass11 wrote: »

I've taken out a fixed rate deal (2 years). If interest rates go up, then I'm earning more interest on my savings - while my mortgate is at the same 5.11% rate.

At the end of the two years, I pay the savings into the mortgate and shop around. If I find a favourable rate, I'll change to a repayment deal.

All being equal, I won't be much worse/better off - but I will have that breathing space that I'm looking for.

Hopefully you've remembered to factor in the cost of remortgaging in two years time: the exit administration fees (MEAFs) to redeem your existing mortgage, the arrangement fees for the new mortgage plus any valuation and conveyancing costs.

In the short to medium term I expect interest rates to rise so your gamble may well pay off. However, I worry that the amount you save will be dwarfed by the costs of switching your mortgage in two years time.

MarkyMarkD

The OP can switch products with A&L at the end of the two years, which will mean no MEAF, no valuation or conveyancing costs. A&L let existing borrowers have the same or better products than new borrowers.

At the two year point, there would be no penalties for overpaying; alternatively the A&L fixed product quoted allows up to 10% overpayments each January in any case without penalty.

Someone in the OP's position, who wouldn't be using their ISA allowances anyway, can probably do what they propose - and end up slightly better off, whilst ISA rates are slightly better than discounted/fixed mortgage rates.

My mortgage is 100% interest only and has been ever since I bought my present house 10 years ago. It definitely maximises your flexibility and makes it easier for you to cope with short-term cashflow issues.

But it shouldn't be considered by anyone who genuinely doesn't have the necessary discipline - the thought of reaching the end of a 25 year mortgage, in your 50s or so, without any capital paid off your loan is a fairly horrible one!

BeerBelly

I meant overpaying the saved money in one go - most lenders let you overpay each month a certain amount without penatly.

Just a question, if your interest only for 10 years, have you been chipping away at the loan at all or is it just to have a place to live. Is it like being into between renting and a repayment mortgage? Your basically renting, but have the flexibility to pay off captial at will?

Not trying to course offence, just a bit of a newbie and interested in the different methods of do things!