How paying more saves you money?

SCUD

Hello guys...
I found some people talking about an interest-only mortgages and their fear of not being able to pay the capital when the term ends.

Some advised them to change it into repayment mortgage instead of interest-only.

How does this solve their problem? isn't the extra they are going to pay will be the same saving they would have when their interest only mortgage ends?

So if the savings are not enough then, it won't be enough now! am I right?

Thrugelmir

An interest only mortgage requires a repayment vehicle to settle the debt.

A repayment mortgage guarantees the debt will be repaid.

The risk is that the vehicle is insufficient to clear the debt.

SCUD

Thrugelmir wrote: »

An interest only mortgage requires a repayment vehicle to settle the debt.

A repayment mortgage guarantees the debt will be repaid.

The risk is that the vehicle is insufficient to clear the debt.

I'm sorry but can you explain what does vehicle here means?

I understood it as a "plan" to save money.

What if the saving was not enough? How do people solve it? do they sell the house or negotiate with the lender?

GMS

With an interest only mortgage (assuming a constant interest rate) the payment will be the same throughout. The capital borrowed will always remain outstanding.

Assume 100k at 6%. Interest only payment is £500 per month.

25 year repayment with same figures £644.30.

Total repaid I/O is £150,000 in interest plus £100,000 owed = £250,000

Total repaid repayment is £193,290.

Now the key to I/O is to get the total repaid to be less than the repayment mortgage. Each month on repayment will be less interest and more of capital so balance reduces meaning 'chipping away' at the debt.

If a repayment vehicle can produce better returns than a repayment mortgage then happy days. Total repaid will be less.

Thrugelmir

SCUD wrote: »

What if the saving was not enough? How do people solve it? do they sell the house or negotiate with the lender?

Lenders don't negotiate. As the borrower entered a contractual arrangement to repay the money.

Options available will depend on circumstances of the borrower at the time. So selling maybe the only option.

Harry_Boyle

SCUD wrote: »

Hello guys...
I found some people talking about an interest-only mortgages and their fear of not being able to pay the capital when the term ends.

Some advised them to change it into repayment mortgage instead of interest-only.

How does this solve their problem? isn't the extra they are going to pay will be the same saving they would have when their interest only mortgage ends?

So if the savings are not enough then, it won't be enough now! am I right?

If someone has a shortfall in their repayment vehicle then they can either increase the amount they pay into the vehicle or make equivalent payments directly onto the mortgage, either by overpayments or by making a portion of the mortgage 'repayment'.

If they don't have a repayment vehicle at all and they are coming up to the end of their mortgage term then they will have to sell the house. I don't have any sympathy in this sort of case, it's irresponsible people like this that has forced the 'nanny state' to withdraw IO mortgages for all of us.

michaels

Or as I always say, mortgage capital repayments are a (tax efficient) savings plan for those who are not capable of managing their own savings.

Harry_Boyle

michaels wrote: »

Or as I always say, mortgage capital repayments are a (tax efficient) savings plan for those who are not capable of managing their own savings.

My current lender (Santander) is offering what amounts to an SVR rate for existing customers on IO mortgages, regardless of the condition of their repayment vehicle or even LTV.

I'm moving to a 5 year fixed repayment mortgage with Britania (just waiting for forms to arrive), but still annoyed that I'm not being allowed to manage my own finances as I see fit. It's always the case that a few people abuse the system and the rest of us have to pay.

shortchanged_2

Harry_Boyle wrote: »

My current lender (Santander) is offering what amounts to an SVR rate for existing customers on IO mortgages, regardless of the condition of their repayment vehicle or even LTV.

I'm moving to a 5 year fixed repayment mortgage with Britania (just waiting for forms to arrive), but still annoyed that I'm not being allowed to manage my own finances as I see fit. It's always the case that a few people abuse the system and the rest of us have to pay.

Decided against the 10 year fix then?

Harry_Boyle

shortchanged wrote: »

Decided against the 10 year fix then?

Yep, the 10 year rates are nowhere near as competitive as 5 year rates and didn't seem to be very good value. There are only a few providers willing to lend over that sort of duration and they don't seem inclined to compete against each other for the business. Plus I guess the customer base is quite small for 10 year fixes, so there isn't much incentive to cut rates.

Thrugelmir

michaels wrote: »

Or as I always say, mortgage capital repayments are a (tax efficient) savings plan for those who are not capable of managing their own savings.

With savings interest rates at current levels. Then opportunity to outperform is severely restricted.

Even junk bonds are down to 6% gross yields. As investors chase returns downwards.