Interest only mortgages

brooklynite

Hi all,

My husband and I are remortgaging our house to a Buy To Let mortgage and we would like to have as much flexibility as possible in the next few years. We're therefore thinking about going for an interest only mortgage, at a 3-year discounted rate, but overpaying as though it's a repayment mortgage, and only reducing the payments if we absolutely needed to ie. hopefully we won't need to. I am confident that we can be disciplined to keep up the overpayments.

We've never had an interest only mortgage before, and we were curious to know whether at the end of the three years after having overpaid as above, we would be better or worse off than if we'd taken out a repayment mortgage. We asked our mortgage adviser about this and he said that we would actually be better off after three years, as the interest wouldn't be 'front loaded' as it would be for a repayment mortgage.

I'm not sure I fully understand how this works. Is anyone able to explain this please, and why the interest only mortgage payments are calculated differently?

Many thanks!

SavingSteve

At face value it sounds like your mortgage advisor doesn't know his stuff. If you're talking about paying and exact amount of cash per month, equal to what you would've paid in total on a remortgage I fail to see how there would be any difference in outcome at the end, presuming the lender calculates interest daily (which most do).

Thrugelmir

You need to consider the tax implications. Your net rental income will be treated as taxable income. Reducing the interest paid will increase the tax you pay. How much? That depends on your personal circumstances and whether you are impacted by the planned changes that start taking effect from next April.

brooklynite

Thanks both!

At face value it sounds like your mortgage advisor doesn't know his stuff. If you're talking about paying and exact amount of cash per month, equal to what you would've paid in total on a remortgage I fail to see how there would be any difference in outcome at the end, presuming the lender calculates interest daily (which most do).

SavingSteve, that's what I thought! I wonder whether he was actually talking about if we overpay by more than what we'd pay on a repayment mortgage? As doing this would reduce our monthly payments?

You need to consider the tax implications. Your net rental income will be treated as taxable income. Reducing the interest paid will increase the tax you pay. How much? That depends on your personal circumstances and whether you are impacted by the planned changes that start taking effect from next April.

Thanks Thrugelmir, good point about the tax, I hadn't thought of that being affected...

TrickyDicky101

brooklynite wrote: »

SavingSteve, that's what I thought! I wonder whether he was actually talking about if we overpay by more than what we'd pay on a repayment mortgage? As doing this would reduce our monthly payments?

The moment the adviser quoted 'front loading' demonstrated he does not understand mortgage maths so I would take anything this person says in future with a pinch of salt until it can be verified by alternative, knowledgeable individuals.