How does the interest on a mortgage work?

mayb_2

Just to balance it out. Recently my son arranged a mortgage, because of the need to keep the repayments as low as possible he has opted for a part repayment - part interest only over 35 years (I think). Anyway the Adviser put it this way - if you take a mortgage out for the whole of your life ay interest only - in the end it will definately be worth more than you paid for it - so you use equity release to pay off the original mortgage at the end of the term.

So - what do you make of that? I think he was also implying that the old codgers would pop their clogs before then and leave you a share of their house (fully paid for by that time) and you can use that to buy your house if you want. Time is a great thing to have on your side.

Mr_helpful

mayb wrote: »

Just to balance it out. Recently my son arranged a mortgage, because of the need to keep the repayments as low as possible he has opted for a part repayment - part interest only over 35 years (I think). Anyway the Adviser put it this way - if you take a mortgage out for the whole of your life ay interest only - in the end it will definately be worth more than you paid for it - so you use equity release to pay off the original mortgage at the end of the term.

So - what do you make of that? I think he was also implying that the old codgers would pop their clogs before then and leave you a share of their house (fully paid for by that time) and you can use that to buy your house if you want. Time is a great thing to have on your side.

Is your family a magnet for weird advice? Extending a part of mortgage to 35 from 25 yrs will make very little difference to the payments and the other part on interest only means overall he might as well rent. The amount of extra interest paid over the years will be phenomenal. If like many borrowers money is tight at the start why not do all interest only but overpay as and when posible. Who says equity release wont have suffered the same demise as the various schemes before it, like shared appreciation mortgages. I dont suppose you could post a copy of the suitability letter as I would be interested to see how this gets worded.
I just hope Im not the only adviser who thinks this strange.

mayb_2

Thank you for that Mrhelpfull - I am sure you are already aware that I take the advice of advisers with a large pinch of salt unless I understand it and agree with it and have it all in writing.

The Key Facts Document actually varied in its detail from the actual offer document we later received and the advice given above was more in the way of a chatty aside whilst the application docs were filled in. We are addressing that issue now. I do read documents in their entireity when I get them. I understand them now but without our advice my son may well have signed the paperwork without realising this.

Renting would cost at least the same amount and as some of the mortgage is part repayment this has to be a better option - you get nothing back from rent at all. The bottom line had to be affordability. It is also assumed that as a graduate he will earn more in future years and will change both his mortgage and probably his house.

Mr_helpful

Key facts do sometimes differ. i know they shouldnt but I have noticed the odd slight differences now and again.
With son being a graduate I would have thought it far better to shorten the term and do interest only with him overpaying what he can thus reducing the capital and his interest. It would also reduce the need to change the mortgage untill he moves house since remortgaging cost's quite a bit these days. If you look at the capital paid of in the first 5 years with the scheme the adviser has set up it will be minimal anyway. The stupid thing is that what the adviser has done will probably fit perfectly with FSA guidelines but then so did endowments.

mayb_2

I would say he is getting the best of both worlds when this is sorted out - affordability (fixed for 5 years) and some capital repayment. There is nothing to stop him paying some overpayments anyway as a certain percentage is allowed each year - or saving into an ISA towards making a repayment when the fixed rate period is over - or changing his mortgage totally in 5 years time if it is prudent to do so.

Key facts differ do they - hmm bit like endowment mortgages then, not what you were told at the beginning.