Interest Only Vs Repayment

maveli

I am a bit confused here. Everyone advise to have a repayment mortgage.But isn't it better to have an interest only one and
1.> save the difference between the two into a current account with good interest
2.> Every year reduce the mortgage capital by paying from the above savings.

In the first look the above looks exactly like what a repayment mortgage does. But are we not loosing the interest we can get in the first step above.

Thanks
Maveli

skim

I suppose it depends how the interest on your mortgage is calculated
daily, monthly or yearly although I'd guess you are better off paying repayment.

maveli

I think mine is yearly. Otherwise I should see my payment reducing everymonth ?

nobblyned

You would essentially lose out by doing this method. You will pay tax on the interest from the savings account and hence have less to put towards your mortgage.

If you paid direct into the mortgage the interest would saved from the mortgage rather than credited to your savings account and hence no tax paid.

Yoyur scheme would only work if the savings interest rate minus tax was still greater than the mortgage interest rate. Don't forget to take into account the extra tax if you are a top rate payer.

nobblyned

maveli wrote: »

I think mine is yearly. Otherwise I should see my payment reducing everymonth ?

Payments will stay the same through the life of the mortgage regardless of how interest is charged, though the split between interest and capital will change with time with a repayment mortgage.

andrewmoorcroft

I have an interest only mortgage and do my own repayment - well may one day! My mortgage is the base rate for 5 years.
I have always managed to find cash ISA's that give better interest than the base rate so i make the difference (ISA - mortgage = 0.5% typical). In effect they are lending me money that i invest at a higher rate than they charge me to borrow the money! What's also fairly safe is a top 100 / all share index ISA that is likely to make 10%+ per year over a 5 year+ period. You can easily get other cash accounts that beat the base rate but the taxation mentioned in a previous post loses the profit but it will work if your partner is a non taxpayer.
What i am about to say may be unpopular but as far as i'm concerned a repayment mortgage is for those who's circumstances dont allow them to find a low rate mortgage OR cant be bothered to make the difference described above OR just dont understand etc.

ManAtHome

Biggest problem is that people don't (or can't) budget for a repayment mortgage before taking an interest-only one, so no spare cash for ISAs etc.

andrewmoorcroft

ManAtHome wrote: »

Biggest problem is that people don't (or can't) budget for a repayment mortgage before taking an interest-only one, so no spare cash for ISAs etc.

The amount that a society lends is based on the ability to pay a repayment OR interest + investment mortgage (no real difference in affordability). It's down to discpline because there is nothing to stop people not planning to pay off the capital. Shame that societies do not follow up that people are doing the investments required to pay the capital although i guess some people plan on never paying until they die when it's repossessd- (cheeky alternative to renting spose)!

Conor_3

maveli wrote: »

I am a bit confused here. Everyone advise to have a repayment mortgage.But isn't it better to have an interest only one and
1.> save the difference between the two into a current account with good interest
2.> Every year reduce the mortgage capital by paying from the above savings.

In the first look the above looks exactly like what a repayment mortgage does. But are we not loosing the interest we can get in the first step above.

Thanks
Maveli

An Interest only one is basically an endowment mortgage and we all know how they worked out.

Saving the capital portion works really well until something happens such as more kids or unemployment and all of a sudden, the temptation to dip into that large pot of money you have there becomes too much.

Jennifer_Jane

Conor wrote: »

An Interest only one is basically an endowment mortgage and we all know how they worked out.

Saving the capital portion works really well until something happens such as more kids or unemployment and all of a sudden, the temptation to dip into that large pot of money you have there becomes too much.

I don't think there is anything actually called an 'endowment' mortgage. The endowment was simply a way of having an insurance-based investment over the term of the mortgage to repay it on completion. Interest-only mortgages have got nothing to do with any investment - it's up to you to be able to repay it in due course, although the lender may require evidence that an investment is in place.

Whilst my previous mortgages have been repayment, I was still required to have an insurance product in case I died. I currently have an interest-only mortgage with no obvious means of repayment - although it should be repaid after 7 years at this year-end.

Love
Jen x

ManAtHome

andrewmoorcroft wrote: »

The amount that a society lends is based on the ability to pay a repayment OR interest + investment mortgage (no real difference in affordability).

Out of interest, do lenders (have to) assume a rate of return on investment - you could lend a more by using 10% instead of 5% for example.