Interest only mortgage - opinions pls!

Timmne

Hi all, wonder if you could help me on this one....

A client was telling me how she paid off her mortgage by getting an interest only mortgage and paying twice the interest off each month, which was about what she would have paid if it were a repayment mortgage.

This spurred me on to have a look into it and it seems to make sense. Pay £500 off the loan amount and the interest is reduced the month after - is this how it works?

My plan is to get a £125,000 mortgage to buy our £135,000 s/o apartment (or flat!) outright. I would then pay £900 off each month which would be split between whatever the interest was and the 'extra'. This means that our mortgage would plummet by around £4k per year and rising to £5k in just a few years.

I also calculated that if we lived here for three more years then we would have paid off £15k of the mortgage and an increase in property value would also help (we're in the middle of a £3bn regeneration city; the prices must go up!).

Any thoughts please? (off to collect my onion rings from the oven with some reggae reggae sauce! )

Timmne

Shameless bump (sorry!)

ccastley

ooooh...I'd never thought of that. I've just started a thread to ask whether it would be worth changing my fixed rate mortgage to interest only and saving the amount in an ISA/high interest account and paying off annually. The consensus on that idea was that I need my head examining (though I'm still not clear why...) so I'd be interested to see what people have to say.

So to that end...

*BUMP*

AndyWallace

There's nothing wrong with Interest Only mortgages, if there were, they wouldn't be available.

The problem with most people is that whilst they may intend to repay an additional amount, they seldom do, and the temptation to use any savings is too great for most people.

If you're not living on the breadline, have plenty of income coming in to cover the payments, then you are less likely to use the 'savings' you've built up for other means. But then if that's the case, why not stay on repayment?

If you're thinking of an ISA savings plan, you should also think about an 'offset' mortgage. Ultimately, if it's maximising your interest savings that appeals to you then you should really be thinking of reducing your mortgage term.

Andy.

Timmne

Thanks Andy...

How available are flexible interest only mortgages? Also, can you borrow any more on an IO mortgage than you'd be able to on a repayment one?

Cheers again :beer:

georgehere

A mortgage is just a loan - a large one - over a long period of time.

Those lending the money, will want it back ... plus some interest. However you approach it [all other factors being equal and accounting for the time value of money] you end up paying about the same in the end.

Just paying the interest is fine ... as long as you have a plan so that in 25 years time when they ask for the borrowed amount back, you will have it available. For some people, they can rely on an inheritance or taking a lump sum from their pension. Some might gamble that their house will be worth so much that they can sell it in 25 years, pay off the amount borrowed and take what's left to buy a smaller house at the seaside. Other people will choose to save it up through other investment methods.

The repayment mortgage is a regimented and disciplined way to ensure that after 25 years you have kept paying the interest and at the same time little by little you have also paid back the borrowed amount. If you stick to interest only - you pay the least amount right now, just the interest, but you will have a large amount to pay off at the end. But that can give you the flexibility to do something else now with any money you have left over from your monthly income.

Overpaying a bit is one approach. A repayment mortgage is just that ... overpaying, but by an amount that coincides with you paying off the borrowed amount including interest over the loan period.

Different approaches suit different people of course. If you receive an annual bonus you might decide to use that each year to pay of a chunk of your borrowed amount (but equally, you could take that money each year and invest it separately elsewhere so it accumulates over time to an amount equal to the borrowed sum). If the nature of your work means you sometimes get more in some months than others, you could make an overpayment with that excess in those months (or you could take the excess and invest it elsewhere).

My point of view: you have little choice how you pay the interest - the mortgage company will demand that is paid monthly, but you can choose how you will pay the borrowed amount back ... but do not rely on good luck and good fortune too much to do it for you ... unless you are prepared to live with the consequences.

Timmne

Thanks for that! Being an accountant I don't take risks (!) so I would definitely set up a method of paying off the loan at the end of the term if not before. I get a bonus once a year and it would be nice to pay off a couple of grand to get the interest down a bit.

apparently this method of IO mortgages and paying it back with overpayments is good for people that move house every few years as it provides them with a good deposit each time - this is what I'm hoping.

Living as a young couple about to be married and live in a 2 bed flat it's inevitable we'll need to move in the next few years so I'd like to build up the best deposit before then....

Repayment mortgages are mostly interest at the beginning so that coupled with the costs of moving makes a RP mortgage not very attractive for us movers! Would you agree?

vickypink

Timmne wrote: »

Living as a young couple about to be married and live in a 2 bed flat it's inevitable we'll need to move in the next few years so I'd like to build up the best deposit before then....QUOTE]

Babies??!!

Yay!

Timmne

vickypink wrote: »

Babies??!!


Yay!

I didn't mention babies - my GF is unbearable to live with and we'll need more room to avoid each other.

(do you like my new signature?)

louisdog

I don't understand why you wouldn't just take out a repayment mortgage and overpay on that? Am I missing something?

Definitely sounds like a good idea to reduce the mortgage as much as possible so you have a bigger deposit for when you move though.

Timmne

The reason I don't want to overpay on a repayment mortgage is because the weighting on the interest is much higher on a RP - around 80% of the repayments apparently.

If I did the interest only option only 50% of the payment would be interest meaning I'm paying off at a much higher rate....