£13500 interest only paid - WHERE DOES IT GO?

pogster

I've just realised that I will soon have made the final payment within my 3 year homestart mortgage. The thing is I have been paying the interest only and it amounts to £13500.

I'm a bit concerned because I feel asthough I there I have not made any real impact on the mortgage. Essentially, I borrowed £84K and I have not made any impact on reducing this amount.

Does this sound right? How have I benefited from paying £13500? For example - if I wanted to move my mortgage to another bank would I still be asking for £84K. I would really appreciate your advice

Mr_helpful

Well its an interest only mortgage so you never will pay off capital. However how have you benefitted? Try to find out what your house would cost if you were renting it. Probably more so view it as cheap rent.

BARGAINHUNTER!

It sounds like you have taken out an interest only mortgage of £84k and you are only paying back the interest on it. At the end of the mortgage term you would need to still pay back £84k. You could switch to a repayment mortgage where you would be paying the interest plus some of the initial amount borrowed off. It would cost you a bit more each month, but you would be safe in the knowledge that at the end of the mortgage term you would not owe anyone anything.

In answer to your question about if you switched mortgages would you still need to take one out for £84k, then the answer is yes! The new mortgage you take out will be used to pay the old mortgage company the balance owed on the mortgage - in this case £84k as you are not paying any of the capital off.

In the days when endowment mortgages were popular, people paid the interest only on their mortgages, plus a bit extra which paid into an endowment policy, which was supposed to build up over the period of the mortgage to pay off a lump sum at the end - enough to cover the initial amount borrowed plus extra. We all know how that one turned out!! An awful lot of people found out that the endowment policy they were paying into was not predicted to pay out enough at the end to cover the initial amount borrowed - let alone any extra!

I assume as you are only paying the interest on your mortgage you have a way of paying back the £84k when the time comes?

MortgageMamma

Did you take professional advice before taking this mortgage out? Your adviser should have explained the principles of an interest only mortgage and how it works to you before you took it

hungary97_2

i take it you are with HSBC

The advantages of the home start mortgage is that you pay interest only in the first three years but your repayments are cheaper because of that. If you are looking to move your mortgage is the same level as you took it out however in three years you will have gained equity e.g (mortgage £98k price purchased £105K three years ago now worth £138K so when sell will have £30K equity/deposit) therefore although you have paid £13500 interest but have not reduced the capital you have due to a increasing market gained the equity.

For the remaing 22 (if it was a 25 year loan) years it reverts back to a repayment mortgage and you will pay slighlty more a month than you would have on a standard 25 repayment mortgage (mine is about £25 A MONTH) and you will start to pay of the capital as well as the interest. So in 25 years if you were not to change mortgage it will all be paid off.

If you would have saved the difference between a standard repayment mortgage and the homestart mortgage amount for the last three years (mine is about £150 a month) then you would have not lost out that much as
the reduction in capital of a repayment mortgage you would have received in the same three year period due to the fact that with a standard repayment mortgage your monthly mortgage payment pays more interest than capital in the first few years.

For example

100K mortgage at 6.5% interest only mortgage payment £540 pound a month (£6500 a year).

100K repayment mortgage at 6.5% mortgage £675 pounds a month

Amount saved over three years if difference saved £4,860
Capital you would have paid off if you were on repayment mortgage £5292

Hope this helps