Repayment or interest only?

alexeix

Hi,

About to take the plunge and apply for a mortgage, but am not sure whether to go for a repayment or interest only.

I plan to keep the house for anywhere between 2 and 5 years, but unlikely to be more than that.

I remember hearing in the past, that repayment mortgages pay of the interest initially, before you start paying off the actual debt. Is that still the case?

If so, is it worth getting a repayment mortgage?

Pros and cons please...?

Any advice much appreciated.

toltec_2

I'll tell you what I did, I did this a few years ago now, spot the flaw I missed back then.

I took out an interest only mortgage with no repayment vehicle. Each month I paid at least double sometimes 3 times the required monthly payments. However should bad times hit, the money I have tucked away in my ISA would make roughly 9 months of interest only payments.

It had the advantage it was interest only simply because I couldn't afford a repayment mortgage rather just gave me more flexibility.

It had the disadvantage my unit trusts made 12%, my mortgage was less than half that, so if all that money I'd overpaid I'd put into unit trusts........ hmmm.

pjala

Repayment, it decreases the actual amount you owe over time.
There is loads of stuff on discussions about this, but if you pay off your debt when the interest rate is low, then you are paying more of your debt off.
If you wait till the interest rate is high, then you are paying more interest, and it takes longer for you to pay off your debt.

The unit trust approach is just using an investment vehicle to pay off your mortgage. They used to sell endoment policies for the same purpose, and you know what happened to them. You are effectively using a risky process to pay off the debt for a basic commodity that you must have to live, your house.

alexeix

But surely if I'm only planning to have the mortgage for say, 2-3 years, before selling the house, I won't have paid off any of the debt, on a repayment mortgage?

I suppose that's unless I get a portable mortgage?

Portable mortgages are only portable with the same lender though, yes? So you can't take a portable Nationwide mortgage to the Halifax.

Confused now...!?!

Melissa177

Hi,

I made the same calculation as you - since I was only planning to own my property for a short period, and my finances are reasonably tight, I would be better off in an interest-only mortgage.

I then calculated the difference between my interest only mortgage and a repayment mortgage - about 220 pounds per month - and now put that away in a regular savings account which is earning much more interest than I am paying on my mortgage. Alternatively, if you fancy a punt on the stock market, an index linked fund might be better (albeit riskier).

This way, if I do have a tight month financially, or an unexpected bill, and I can't put my 250 away, at least I haven't gone into mortgage arrears.

In the first 5 years of a repayment mortgage, I would have paid off 12K off my 148000 loan. I can easily save more than this in this period. Therefore I went for an interest only mortgage.

Also, a portable mortgage is something entirely different - a portable mortgage means you can move it between houses, not between lenders!

itsakidsworld

Interest only can be good if you have a strategy for the duration of the mortgage but finances are limited now. For example if you intend to stay on the housing ladder for over 20 years and move the mortgage then sure look at interest only. But allow for overpayments at stages within this period when the capital can be reduced.

If you do not trust yourself to do this within this period then go for a capital and interest mortgage. However if your finances are limited then you will have to purchase a lower costing house and try to move up the property ladder a different way.

If you are only in the property cycle for 2-4 years then I would not bother. I would rent because it is difficult times now for making money in property and in my opinion, the prices are at the top of the current cycle so need to be re-dressed.

Investment bonds and stuff are good and can work alongside a mortgage, but are complicated and carry high risk so unless you have spare cash then do not take the risk. We can all look back and say "if only I had done this" but hindsight is a gift from god and not many people have it!

jamesd

alexeix, regardless of whether you intend to make repayment payments or interest only payments, an interest only mortgage is best. It gives you the option of doing it either way without needing approval from the mortgage lender to change.

Even cash ISAs today can pay more interest than the mortgage costs, so that's often the best way to do it: interest only and save the repayment extra amount in a cash ISA. If your risk tolerance allows it, use a stocks and shares ISA instead.

pjala, endowments are no longer available and they had a problem for two common reasons: people were making lower payments than a repayment mortgage without investing the difference and the fuss in recent years was just after a big stock market fall. Nothing forces people to invest less than a repayment mortgage payment or repay with investments after a market drop: you can invest more and pay at a market high, in chunks each year.

As for the claim that you're paying different amounts off when the interest rates change: no, you aren't. The mortgage payments go up and down and the amount paid off capital stays the same. It's if you overpay when rates are high that your overpayment has a greater effect because the interest saved is higher. If you don't vary the total amount paid with interest rate changes (for a variable rate mortgage) then you would pay off more at a low interest rate.

In general you're also better off waiting for inflation to increase your income and decrease the real value of your mortgage balance before paying it off. The number value of the interest in later years will be higher but the real value will be lower. Four or five years of high inflation and interest rates would be great for everyone who has a new mortgage and can afford the payments.

plane_boy2000

I/O can be a great option for some people. We are on an IO mortgage as it allowed us to get a bigger house while our family were young. Now they are a bit older and the eldest is about to start school my partner can work more so our income is increasing, and we can afford more.

I/O has given us low payments, but allowed us to overpay more when we have the spare cash, so although we are officialy on an IO product we are allowed to pay back 10% of the capital each year without penalty - also our interest is calculated daily, so when we overpay the amount of interest drops, but we have kept the payment the same.

Melissa177

albertross wrote: »

what are you going to do after 2-5 years, buy another house?

Interest only is akin to renting, if house prices go up, you might make a few quid, if they go down, you lose.

I wish people wouldn't say that. It is not remotely true. An I/O mortgage means that you have an asset - albeit a mostly borrowed one - and that you can benefit from the rise (or sometimes fall) in equity.

Melissa177

Just to add to this and answer the other questions

albertross wrote: »

what are you going to do after 2-5 years, buy another house?

Yes - I'm planning on moving in a couple of years. Probably several times over the next decade as my salary rises or perhaps if I get married. No way am I going to afford my townhouse in Mayfair otherwise!

If you are intending to keep buying houses then at some point you are going to have to pay the capital off, putting the extra money into a savings account is unlikely to be earning more interest than you are paying on the mortgage. regular savers have limits

That is true, but at 24, I'm quite happy being on the property ladder and building some equity ready for the next jump.

Melissa177

Hmm. I read that as "I/O is akin to renting". I was arguing that it wasn't.

Now I'm confused!