interest only vs. repayment - just about self discipline?

rxp

Am I missing something, or is this choice really a question of whether you can trust yourself? Assuming you find a deal that doesn't penalise overpayments, i am syruggling to see the downside to interest only. You can match the equivalent repayment amounts each month, but if you have a suddden drop in income, you could reduce your payments to interest only levels. Am i missing something here? Is there another reason why repayment is a much better idea than interest only?

Yorkie1

Repayment gives you the guarantee that you will have paid your motgage off at the end.

If you go IO, and have that sudden drop in income, then you reduce the time available to pay off the capital. Or end up not having paid it off - this forum sees quite a lot of posts from people who had intended to repay the capital but for unexpected reasons did not manage to do so. Many of them had parents who were facing having to sell up as they approached retirement.

Plus, many lenders these days do not allow you to take out an IO product without also proving the repayment vehicle is adequate. The cost of the IO plus repayment vehicle won't leave much change - or may even be more expensive - than the repayment mortgage in the first place.

dimbo61

Read on here the other day that 1.5 Million over 50,s have Interest only mortgages Now how many have repayment vehicles that will clear the mortgage before they retire????
Having to sell up and move to a smaller/cheaper place just when you want to enjoy your retirement.
For many a small pension wont go far enough but having to sell up and move into rented or over 55,s sheltered housing !

G_M

Interest only is also more expensive.

For 25 years you will be paying interest on the full borrowed amount.

If you have a repayment mortgage, then each month you are paying off (a bit of) capital. At some point (not the 12.5 year mark, but that doesn't matter) you will have paid off half the capital, so the amount of interest being charged is much less.

DVardysShadow

G_M wrote: »

Interest only is also more expensive.

For 25 years you will be paying interest on the full borrowed amount..

Unless your repayment vehicle is overpayment. Mrs Shadow and I are doing this with a mad dash to repayment in full on a smallish mortgage. As there is no penalties, overpayment limit or early redemption charges, we feel that the higher rate is not a problem

racing_blue

IO mortgages can be great products, but I agree that discipline and a maybe splash of sophistication are helpful.

G_M wrote: »

Interest only is also more expensive.

This is not necessarily true- it can be cheaper, if you can find a saving vehicle with a better rate than your lender's. Some people have turned their IO mortgages into an income stream by interest rate arbitrage like this. An interest only offset mortgage flexibility to save or offset as interest rates change.

Cariad71

Hello rxp,I'm about to embark on an interest only mortgage for the same reasons as you. I plan on overpaying, but have the flexibility to not.
I've found an amazing app for iPad/I phone called 'my mortgage'. It's brilliant.
G_M , I can't see how IO are more expensive? I know that different proportions of capital and interest get paid, but surely the 'cost' is what you actually pay?


100,000 repayment mortgage costs £585 (let's assume a rate of 5%).


100,000 interest only over 25 years is £416. So if you overpay £169 a month (i.e pay the same as you would with a repayment), your mortgage is paid in 24 years 11 months!


So I agree with you rxp, if you are strict with your payments and understand that if you lower the over payment or fail to over pay you won't own your house, you have nothing to lose.

john_white

Cariad71 wrote: »

Hello rxp,I'm about to embark on an interest only mortgage for the same reasons as you. I plan on overpaying, but have the flexibility to not.
I've found an amazing app for iPad/I phone called 'my mortgage'. It's brilliant.
G_M , I can't see how IO are more expensive? I know that different proportions of capital and interest get paid, but surely the 'cost' is what you actually pay?


100,000 repayment mortgage costs £585 (let's assume a rate of 5%).


100,000 interest only over 25 years is £416. So if you overpay £169 a month (i.e pay the same as you would with a repayment), your mortgage is paid in 24 years 11 months!


So I agree with you rxp, if you are strict with your payments and understand that if you lower the over payment or fail to over pay you won't own your house, you have nothing to lose.

No you are wrong. 300 months at £416 = £124800 of interest. £585 * 300 = £175500, so £75500 of interest.

If your overpayments reduce the loan and interest calc immediately then yes it will pay it off at the same rate as you are paying the same as the repayment! I.e. £585 so there is no benefit.

So it depends entirely on the product and when interest is calculated, overpayments may only be calculated yearly for example. Meaning you'd have a shortfall.

If you are planning on making the same £585 payment each month just get a normal repayment mortgage. Mine allows overpayments, and then under payments to the value of any overpayments as well as payment holidays.

Research each product of interest and decide how much felxibility you want.

Cariad71

john-white how am I wrong? The OP will pay EXACTLY the same each month and finish one month early. I stated that 'different proportions of capital and interest get paid'. But the OP will pay the same over all amount.

You also say ' there is no benefit'. Yet there is. The OP is asking about reducing the payment in the event of 'a sudden drop in income'. With a repayment mortgage, you don't have the facility to lower your monthly payment to just the interest. Therein lies the benefit.

Think about it. If either way you pay £585 a month, and you borrowed £100,000, and they finish at the same time, you are paying the same.
OP, make sure you get a mortgage where interest is calculated daily.

Cariad71

John_whiteNo you are wrong. 300 months at £416 = £124800 of interest. £585 * 300 = £175500, so £75500 of interest.

These figures don't take into account the overpayments. By over paying each month, you reduce the capital. In effect, it's a repayment. Check out the overpayment calculator, figures are more or less the same, except IO finishes earlier.

john_white

Cariad71 wrote: »

John_whiteNo you are wrong. 300 months at £416 = £124800 of interest. £585 * 300 = £175500, so £75500 of interest.

These figures don't take into account the overpayments. By over paying each month, you reduce the capital. In effect, it's a repayment. Check out the overpayment calculator, figures are more or less the same, except IO finishes earlier.

Thats exactly my point - if you pay £585 on a repayment or 585 on IO with an overpayment you are paying the same amount each month - hence no benefit. You may as well get a repayment mortgage, rather than run the risk of not making the overpayment which was the original question - self control.