Interest only vs interest + capital??

Ashley_Davis

I'm in the process of buying my first home. I've been offered a 2 year fixed mortgage at 1.99%. The price of the house is £315,000 and I have a deposit of £144,000.

I have been advised by my accountant to have a interest only mortgage and then I can decide how much to pay off per month.

They've also personally recommended to not pay any of the actual loan off and rather put the savings into a high interest account and reap the benefits of a the interest and £1k interest free allowance.

In the accountants words "Personally I would not look to reduce the loan - I always prefer to maximise cash savings - but its personal choice"

I never considered this as an option and always assumed I wanted to pay it off asap to reduce interest payments.

Does anyone do this or can offer advise on whether to consider it.

ACG

If you can get a higher rate of interest on your savings then it is worth considering HOWEVER, most lenders will not do interest only Mortgages and if they do their are strict criteria you need to pass in order to be eligible.

Senior_Paper_Monitor

- you will need to demonstrate an established 'repayment vehicle' to get an interest only mortgage (your equity is insufficient to qualify for 'downsizing') and a new "high interest account" isn't going to cut the mustard.

Much more information needed to evaluate whether this is a runner (which I suspect it isn't).

mrginge

Your accountant sounds a bit clueless tbh.

andrewmp

Closest you'll get to an interest only mortgage will be an extended term mortgage, depending on how old you are. A mortgage over 40 years, for example.

HappyMJ

Senior_Paper_Monitor wrote: »

- you will need to demonstrate an established 'repayment vehicle' to get an interest only mortgage (your equity is insufficient to qualify for 'downsizing') and a new "high interest account" isn't going to cut the mustard.

Much more information needed to evaluate whether this is a runner (which I suspect it isn't).

How come a Cash ISA is acceptable but a current account that pays more interest than the Cash ISA is not acceptable?

Both methods of saving the money can be accessed with no notice.

In that case I would say Cash ISA, deposit the required amount each month then move the money out of the Cash ISA and into a high interest current account the next day to maximize the interest.

I agree with the accountant....if you can get an interest only mortgage then get one. Very high deposit levels are needed such as 50%. If you can't get an interest only mortgage then set the term as far into the future as possible so the required payments are minimized as much as possible. Depending on where you apply you could have a 40 year loan until you're 80 if pension forecasts show that you can still afford the mortgage into retirement.

If you post on the pension board they would advise you pay as much into a pension as possible which can also be considered a repayment vehicle. 25% of your pension pot can be paid free of any tax.

Verix

I can see where the accountant is coming from but personally I would rather knock down the mortgage as much as possible. All very well and good saying interest rates are low now but they won't be forever.

amnblog

If you are buying your home, advise your Accountant that you are taking a Capital Repayment mortgage.

Unless he would like to pick up the 'risk' on the advice from the Lender.

Ashley_Davis

HappyMJ wrote: »

How come a Cash ISA is acceptable but a current account that pays more interest than the Cash ISA is not acceptable?

Both methods of saving the money can be accessed with no notice.

In that case I would say Cash ISA, deposit the required amount each month then move the money out of the Cash ISA and into a high interest current account the next day to maximize the interest.

I agree with the accountant....if you can get an interest only mortgage then get one. Very high deposit levels are needed such as 50%. If you can't get an interest only mortgage then set the term as far into the future as possible so the required payments are minimized as much as possible. Depending on where you apply you could have a 40 year loan until you're 80 if pension forecasts show that you can still afford the mortgage into retirement.

If you post on the pension board they would advise you pay as much into a pension as possible which can also be considered a repayment vehicle. 25% of your pension pot can be paid free of any tax.

I have a lender willing to do an interest only on a 10 year period paying monthly interest costs of £290.

I think I understand the thinking of not paying the loan itself off and saving it instead but surely I would want to pay some off otherwise I will be paying interest over a longer period or like someone else mentioned, interest rates could go up..

So you think I should pay into a cash ISA then into a high interest current account like Santander 123. Is this correct?

HappyMJ

Ashley_Davis wrote: »

I have a lender willing to do an interest only on a 10 year period paying monthly interest costs of £290.

I think I understand the thinking of not paying the loan itself off and saving it instead but surely I would want to pay some off otherwise I will be paying interest over a longer period or like someone else mentioned, interest rates could go up..

So you think I should pay into a cash ISA then into a high interest current account like Santander 123. Is this correct?

If you can find a Cash ISA paying more than you're charged on your mortgage yes. You can between two people get more than £100,000 earning 3% and up to 6% in interest.

You don't have to leave the money in the Cash ISA. If the mortgage provider requires a standing order to pay money to the Cash ISA you can just pull the money out straight away and redirect it to the high interest paying current accounts.

You've got to keep the interest you earn. If you save it you will have more to eventually pay off your mortgage and have some left over.

Interest rates are very low so if the rate on the mortgage ever exceeds what you can earn in interest you can make an overpayment and clear down the mortgage.

tlc678910

I'm sure your advisor will be right when you calculate the figures but the people who post on here "help my mortgage term is ending and I still owe 60K" have taken an interest only mortgage.

Tlc