Mechanics of an Interest Only Mortgage

Cardinal-Red

Hi guys,

I was discussing our remortgage with my partner and we were wondering about the following use of an IO mortgage.

We're currently on a repayment mortgage and very comfortable with it. We're considering changing to IO, but continuing to pay a capital repayment. Do these mortgages typically have a % restriction on capital repayments during the year?

With ICICI now offering 6%+ savings, would it be better for us to move the capital element into a savings account?

And if you repay a capital amount, does it reduce the next months interest payment?

The reason we're considering this is to allow us the payment holiday concept as we're saving for our wedding next June and this extra amount could come in handy for us for the next 15 months or so.

Opinions please?

UK007BullDog

That is a difficult one.

IO means you will pay more interest in the long run as the debt amount does not reduce, so in the long run an IO mortgage is more expensive than a repayment mortgage. But as you want to save towards your wedding that might be an option. And after the wedding you go back to repayment and overpaying to catch up with the time lost during the IO period.

Check your offer letter if you are allowed to overpay.

CLAPTON

just bear in mind

firstly unless you can save in an ISA or are not paying tax 6% is really only 4.8% after standard rate tax

and secondly you need to consider what fees you pay to change the mortgage arrangement (twice presumably) .. these can quickly mount up.

thirdly be very careful you don't get used to the 'spare' cash and spend it unwisely... you may find it difficult to force yourselves to go back to a repayment mortgage.