Interest Only Vs Repayment

benood

andrewmoorcroft wrote: »

I agree that a FTSE 100 index ISA is slightly more risky than cash, but what is a safer investment that significantly beats cash invetments? Most mortgages last more than 10 years though, and over any 20 year period the FTSE 100 would have beat the best cash investment 99% of the time. I think i'll take the 1% risk rather than take the 99% certainty that i'll beat an interest only mortgage + cash ISA. I'll definitely take the 99.9% certainty that an interest only + FTSE 100 index ISA will beat a repayment mortgage.

I'm not disagreeing that shares ISA's are the way to go, but my point is that you will need a strong will each time a crash comes around or you could lose out badly.

For the OP I think you are right that a top paying cash ISA should outperform a repayment mortage but it is marginally riskier since a repayment gives certainty your mortgage will be paid off whereas if future interest rates fell to Japanese levels your cash ISA might not.

tooney83

double post lol
iam on interest only mortgage and using a cash isa i think i feel more comfortable as i have the flexibility to repay 25% each year iam going to ask my whole family to chip in 2 pay it off asap :d

andrewmoorcroft

benood wrote: »

I'm not disagreeing that shares ISA's are the way to go, but my point is that you will need a strong will each time a crash comes around or you could lose out badly.

Of course, the worst thing you can do is back out during a crash when it's best to invest more!

benood wrote: »

For the OP I think you are right that a top paying cash ISA should outperform a repayment mortage but it is marginally riskier since a repayment gives certainty your mortgage will be paid off.

I disagree. I think you must have meant something else. If interest rates go low then both the mortgage AND cash ISA rates go low. Providing there is a difference between the 2 rates (in your favour) you will benifit.
If something happens in the future where you cannot invest at a higher rate than the mortgage, you can use your investment to repay your mortgage. REMEMBER - an interest only mortgage is the same as a repayment except you control the repayment of the capital.

benood wrote: »

if future interest rates fell to Japanese levels your cash ISA might not.

You can't have meant this. This would be a dream. I'd have a mortgage even if i didn't need one. You'd just borrow as much as you could and invest it at a higher rate than the loan.

lic

What about the above kind of mortgage, where the monthly interest payment is fixed, and when you can afford to pay more off!
loads of mortgage providers do it.
Or better still what about a current account/offset mortgage. and stooze from CC, therby offsetting the interest.

benood

andrewmoorcroft wrote: »

Of course, the worst thing you can do is back out during a crash when it's best to invest more!

Easier said than done though.

I think I lost my thread on the second part of my post looking back it's goobledigook!

andrewmoorcroft

lic wrote: »

What about the above kind of mortgage, where the monthly interest payment is fixed, and when you can afford to pay more off!
loads of mortgage providers do it.
Or better still what about a current account/offset mortgage. and stooze from CC, therby offsetting the interest.

Whether its, fixed, discounted, capped or otherwise, if you can invest at a higher rate than the bank will loan at then you're better off with an interest only.
I like the idea of the current/offset but your savings only cancel out the loan (not excced it) as described above. The problem with most offsets is that the rates are generally not as competitive as the best 'normal' ones.

guy999

How many accounts actually pay more than your mortgage rate?
Of course subjective due to your date and rate taken out.

Apart from Index-linked Savings Certificates, which according to advert pay
equivalent to 10.25% gross for higher rate taxpayers. But has to run for 3 or 5 yrs to get full benefits, paying 6.15%
Or cash isa such as Barclays 6.3%

Me and wife, just gonna fill cash isa allowance up each year, then overpay mortgage up to its 10% limit, then use monthly 8% lloyds monthly saver, if any spare now need to find high int easy access account like icesave

Cant risk volatility of shares, wouldnt sleep at night!
Any thoughts anyone?

jamesd

guy999, if you can't stand the risk of the volatility of shares, why not hold property funds that own real property and corporate bonds in your stocks and shares ISA instead of shares? You're allowed to do that and that avoids any share involvement. Since the returns are tax free like the cash ISA you're able to beat the mortgage rate with them.

BrunoM

To me, an important issue with going interest-and-ISA route would be that by doing so, I have used up my ISA allowance! 3k a year isn't much at all either - going maxi 7k ISAs is a bit better but against a typical London family mortgage you still wouldn't have any space for shorter-term savings?

jamesd

BrunoM, the repayment part of a 25 year 100,000 mortgage is 156 per month, 1872 per year, so the current 3000 cash ISA limit is enough for the repayment portion of a 160,000 mortgage. The 3600 limit for next year would cover the repayment part of a 192,000 mortgage.

Here are property value (not mortgage amount) statistics from the Council of Mortgage Lenders for the first quarter of 2007:

under	£125K-	£250-	over
		£125K	£250K	£500K	£500K
		% of	% of	% of	% of
		loans	loans	loans	loans
First time	42	49	7	1
Movers		15	55	24	6

For the same period the average loan was 123,500 at 80% LTV so it looks as though the 3000 cash ISA is enough for the repayment portion of most loans and the 3600 would cover just under 91% of first-time loans and 70% of others (80% of 250k is 200k, a bit more than 190k). Add the partner and their limit and that 3600 each is enough to overpay and reduce the mortgage term from 25 years to 16.5 years.

Or add a partner and their allowance and the ISA limits rise to being sufficient for a bit under 98% of first-time mortgages and 94% of others without overpayment.

For other saving, regular saver accounts can be helpful, as well as using the rest of the cash ISA limit and the stocks and shares ISA limit.

For people like me who want to use the whole limit on the stocks and shares portion this isn't a useful approach, so offset might be useful. Or just adding in some direct overpayments off the mortgage capital with the extra money.

Statisticians can rightly grimace at my assumptions that loan distributions aren't right at the upper end of each range and that the 80% approximation works decently. Good enough for a post here though.