Interest-only mortgage with repayment vehicle

jb2012

Hi, if I take an interest-only mortgage rather than a repayment mortgage and instead invest the capital repayment 'portion' into a savings account rather than pay off the capital on my loan, I want to know how much better the interest rate on my savings account needs to be over the interest rate of my mortgage to make it worthwhile.

E.g. I borrow £100,000 over 25 years at 3% pa (for the sake of argument, it stays at 3% pa for the entire 25 years). With interest-only, my monthly repayments are £250 but at the end of 25 years I'll still owe £100,000. A repayment mortgage would mean monthly repayments of £474, but then I'll be debt-free by the end of the term.

However, with the interest-only option I have a spare £224 floating around each month. If I was able to invest this in a savings account at say, 4% tax-free, then logically I'd be better off after 25 years due to the 1% difference.

However, I'm not sure if I'm calculating the amount correctly and moreover don't know how to factor in what impact having to pay tax on my savings interest would be (I'm in basic rate tax band).

Essentially, is it worth the effort, assuming I could always find a savings account with a higher rate of interest than my mortgage?

Thanks

harvey115

First things first:

- Interest Only mortgage are getting extinct, the current ones are not very easy to get either
- Having a savings account as a repayment vehicle is not acceptable by the lenders

If you were to get the above working, you would always need to have a savings account paying more then your mortgage interest rate (Net). So if you are in basic rate band, 4% gross = 4% X 0.8 = 3.6% (NET).

The problem is it is usually unlikely to beat the interest rate from you mortgage with an available savings account. Unless you got a low rate mortgage deal when the rates were very low i.e. BoE + X% rates.

If I were you I would concentrate on a repayment mortgage and possibly look for an Offset mortgage if you have savings and/or have regular spare money.