repayment and intrest only mortgage- switching

tali

i understand differences between repayment and intrest only mortgages- no explanations needed , what confuses me is when you switch from one to the other- the problem being the outstanding amount due on the intrest mortgage.
What if you have a 100k mortgage and you keep swapping beteen the 2 over the 25 year term - due you still owe the original 100k at the end ?
I asked a friend ,what if you started with intrest only mortgage , say , 100k and then for majority of mortgage changed to repayment - he claimed you would still owe the original mortgage amount of 100k - wheras i assumed the repayment would have paid most of it off
i hope im making sense(its the outstanding amount due on the intrest mortgage that bamboozles me)

UK007BullDog

Any part of the mortgage you repay will be paid. Any part you have not repaid and is interest only is not paid.

However if you have a £100.000 repayment mortgage and then after a few years switch to interest only on £95.000 then that is what you would own. Then in a few years later you swich back to repayment it would continue paying the amount of £95.000 back. However the monthly payments would be higher than if you had carried on without switching as the term is shorter:


Interest in this example is the same otherwise it gets too complicated, and I only made the figures up to help in the understanding hence the flat round figures:

Year 1 - 5 of 25 Years (25 Years to pay off the mortgage)
£100K - £90K
Repayment of £500 per month

Year 6 - 10 of 25 Years
£90K - £90K
Interest only of £200 per month

Year 11 - 15 of 25 Years (14 years to pay off the mortgage)
£90K - £65K
Repayment of £800 per month

I hope this makes sense.

The shorter the overall term the more you have to pay to make up for the years where you did not pay any capital back.

You also would want to ensure the mortgage is paid off before retirement at age 65. I always say paying interest is like paying rent. You pay it but you are not actually benefitting from it as the loan amount never reduces. Because the loan amount does not reduce you pay more interest overall than if you had a repayment mortgage.

tali

thanks v helpful ,im getting hang of it , however ,the "shorter mortgage term -14 years" which you have explicitly mentioned is a tad confusing as it appears to "disregard" the intrest only payments

moneyskip

tali wrote: »

I asked a friend ,what if you started with intrest only mortgage , say , 100k and then for majority of mortgage changed to repayment - he claimed you would still owe the original mortgage amount of 100k - wheras i assumed the repayment would have paid most of it off

Your friend appears to be wrong. If you borrow £100k on interest-only basis then you continue to owe the lender £100k regardless of how many interest payments you make. However, if at some point you switch to a repayment basis, your monthly payments will then be recalculated so they're enough to clear the entire 100k debt over the number of years left.

tali wrote: »

thanks v helpful ,im getting hang of it , however ,the "shorter mortgage term -14 years" which you have explicitly mentioned is a tad confusing as it appears to "disregard" the intrest only payments

Interest-only payments make no difference to the total amount still owed to the lender - in UK007BullDog' example, you still owe £90k after making interest-only payments for 5 years. However, doing so means that you've 5 years less to repay the entire debt - assuming that you still want to do so within 25 years of originally borrowing the money.