Interest only mortgage - In a year how much do I pay off the "true interest?"

bar_1

This is what I mean, yes.

Thank you x

Stargazer_Lily wrote: »

Oh, I think I get what you mean now!

You really need to look at some illustrations to see what is happening: Using some rough figures from Charcol:

1 - interest only for 25 years:

Monthly Payment - £742

Total Cost of Loan - £339,109

2 - Repayment for 25 years

Monthly payment - £806

Total Cost of Loan - £241,800

3 - IO for 2 years, Repayment for 25 years

IO monthly payment - £742 (x 24 = £17,808)

Repayment monthly payment - £806 (x 300 = £241,800)

Total Cost of Loan = £259,608

So, by going for option 3 you're paying a bit more because for two years you are not repaying the capital.

Does that help?

Lil

Stargazer_Lily

bar_1 wrote: »

Thanks dmg24

Yes, so I would have paid off 2 years worth of interest but just at a higher rate. So if on average an interest only mortgage is paying back 200,000 interest and a repayment is paying back 100,000. Over 2 years at interest only I have paid back 16,000 interest, no capital (which would have been around 8,000 if it was a repayment mortgage). Therefore when I re-mortgage they will deduct around 8,000 interest?

Oh! Gotcha!

No - on I/O, the amount you owe will always be £115,000 so long as you make your monthly payments. You borrow £115,000 and so long as you make your monthly payments on time that is all you will ever owe. The mortgage is not "front-loaded" where the interest is worked out in advance and added to the amount you borrowed, instead the amount of interest you owe is worked out month to month and the amount you repay clears that month to month. At the end of every month you owe no more and no less than you started with.

If, after 2 years you want to change mortgage, you will still only owe £115,000.

Lil

Stargazer_Lily

dmg24 wrote: »

No, they would not deduct any interest! Sorry ...

Best thing to do, is to get a KFI for the following scenarios:

Great minds think alike!

Lil