Interest only Vs Repayment

dang

"Your basically renting, but have the flexibility to pay off captial at will?"

But with the added bonus of all the equity that will have built up in ten years - i bought a house around 10 years ago for £67k i could probably sell it now for around £167k - you dont get that with renting :-)

I know it could have gone the other way,but taking a long term view - the thing they are not building more of is land,so given the right time frame property will only go one way.

BeerBelly

Totally agree with you, but still a little miffed.

So basically afer your 10 years you could remortgage to get the difference from what you paid to current market price without paying off any of the original amount?

Repayment differs because you pay slightly more each month and your paying off the loan.

So, why doesnt everyone go Interest Only and wait 15 years to pocket the difference along with lower monthly payments?

Have I got the hang of what your saying?

Am I safe to assume, in repayment mortgages you would get the difference + how much of the loan you have pay off if you were to sell/remortgage?

In these terms I can see what you mean now!!

Sorry for being a brick!

SamDude

To answer all the questions at me (in no particular order):

BeerBelly, Bingo! Flexibility to control my savings and being disciplined. It is only (hopefully) a short term arrangement until we're better off financially where we can look at a repayment deal (unless it works out better with the current method of interest only and a seperate savings stash).

A&L allow you to overpay upto £499(?) a month. They also allow you to pay 10% of the mortgage every January as a lump sum.

MarkyMarkD - I was going to wave the "I'm leaving" stick at A&L and get a better/comoetitive rate at the end of the 2 years. As you said, this would save on a whole bunch of charges and fees...

kingkano

BeerBelly wrote: »

So, why doesnt everyone go Interest Only and wait 15 years to pocket the difference along with lower monthly payments?

Because property and other investments might not necessarily go up, they could drop at anytime.

I often wonder to my friends, if the much talked about bust does come, how will the remortgage just to keep a roof over their heads??

Of course it can keep booming for a bit and you'll be laughing on your interest only.... thats the risk.

plane_boy2000

I have interest only for the same reasons of flexibility. We bought the house with 2 pre school age children and planning to have another. IO allowed us to get a bigger house with smaller mortgage payments, and now that the kids are abit older (elsest starting school in september) my partner is able to work a bit more so our income is rising as we predicted would happen after a couple of years. We are alowed to overpay our mortgage by 10% of the outstanding balance each year with no penalty and interest is calculated daily so as we have any spare cash we just overpay the mortgage. We have managed to overpay the mortgage by a couple of thousand in the last year, but have had the flexibility to make lower payments in leaner months so it has been a good choice for us (plus the house has gone up 75K in the last 2 years)

InMyDreams

My 2p because this is exactly what we have done too. (Plane boy, our situation sounds identical you yours, but our eldest is now 7. Also my increasing income is very seasonal.) Sorry it’s long, but just might help to explain the motives to the sceptics. (And to BeerBelly ;-) )

We are/were part and part on IO and repayment because it enabled us to get a larger house which we didn't (/don’t) envisage moving from whilst keeping repayments down in the early ears of our children’s lives. Initially we intended to move back to repayment once the family was complete and children were a bit bigger and family income increased. Our current mortgage deal ends in just over a year with 19 years remaining.

All was going to plan and about 18 months ago we started overpaying, although not in the truest sense as all we were doing was at best matching what a 100% repayment would have been (an extra £250/month). Then just over a year ago, once we felt we could commit to this regularly, we opened an A&L 10% regular saver instead for the money. This has just matured and returned our £3k plus £163.25 in interest (it was in my name as still a non tax-payer, just). If we ploughed this back into the mortgage the extra £163.25 would mean we are quids in. (Not by the full £163.25 as this doesn't take into account that by the end of the year the capital part of the mortgage payment would have gone up, but we're still quids in by around half that amount. I've done the maths too, but actually it's not rocket science... 10% is more than our mortgage rate, so what we've saved in interest on our payments in the regular saver is twice what we have paid in interest for still owing those £250’s to the bank.)

So now what? After all that, yes, maybe all it does amount to is a 'free' £80 or so reduction in mortgage capital. But actually, we're not going to plough it all back into the mortgage just yet. We've just opened an A&L 8.1% ISA in hubby's name (both earning the referral for that too as I referred him). The £3k will go in straight away and the £163.25 will follow on April 6th (plus referral bonus). I'm currently looking into which regular saver to start next, and anything we can save over the £250 (true overpayments) will go straight into the ISA.

Yes, the amounts are comparatively very small at this stage, but one big advantage is that we are starting to use up our ISA allowances. Hopefully in years to come we will be able to pay off even larger amounts (either direct into mortgage or offset) and we won't ever have to use the ISAs we are starting to fill up to repay the mortgage. In addition to this, if, say, over the next 15 years we were to come into any inheritance (I still have three octogenarian+ grandparents left) we put that towards it instead. We wouldn't be able to fill up past years of ISA allowances with it.

The other big advantage to us, is that we can be that much more ‘risky’ with the extra overpayments we make directly into the ISA as it can serve as our rainy day fund too as the money is still accessible. We are very disciplined anyway, but I suspect it would have to rain much harder for us to dip into our ‘mortgage reserve’ than just a regular savings account. (Mortgage pig mentality.) Yes, this also risks eating into our ISA allocation if we have to take money back out, but we’re not even close to being able to save our joint £6k allocation anyway, so that’s not a problem at the moment.

Essentially what we have ended up with is a DIY offset mortgage, but without having to accept the poorer mortgage rates that usually go with such flexibility. Don’t know how long we’ll keep it up, but when our current mortgage deal does come to an end, we’ll be switching over to 100% IO and hopefully the differences will really start to add up.

The extra we've made in equity having bought a more expensive house sooner than we would otherwise is just the icing on the cake, and if prices now plummet, it's all irrelevant anyway if we're not planning on moving.

BeerBelly

Thanks guys.

Guess I was being a little narrow minded and trying to fit it into my own situation. Definately looks like something to bear in mind though!