I must be missing something in my repayment v interest only calc:

lazer-zxr

I'm coming up to remortgage, and wonder if I'm missing something in my calculation on Interest only v repayment.

Outside of the inherent risk around Interest only , what am I missing? it makes interest only + investment look like a no brainer?

£184k mortgage on £380 valuation. 15year 

4.2% mortgage.

Scenario 1:

Repayment £1388 per month, which is £16.6k per year, and over 15 years, this is £250k.

Scenario 2:

If I went interest only:

Mortgage interest payments £649 per month, which is £7.8k per year, and over 15 years this is £117k

I'd then have to purchase the house, which is £184k ..... so total cost to me is £117k + £184k = £301k

However, the spare monthly amount of £739 (being the difference between £1388 repayment mortgage and £649 interest payment), invested for 15 years at 4.5% compounding, I would have £190k in  savings.

So net cost to me in Scenario 2, is £190k, less my £301k cost, = £111k

So scenario 1 costs me £250k, and I have a house after 15 years.

Scenario 2 costs me £111k and I have a house after 15 years.

What am I missing here?

BarelySentientAI

If you assume that you will always make investment returns higher than the interest rate in the mortgage, and you will always invest the money that would otherwise be used for the capital repayments, then interest only will always come out ahead.

Hoenir

lazer-zxr said:

What am I missing here?

You are expecting to pay interest at 4.2% and receive interest at 4.5% over 15 years. 

lazer-zxr

Hoenir said:

lazer-zxr said:

What am I missing here?

You are expecting to pay interest at 4.2% and receive interest at 4.5% over 15 years. 

Yes, that's my assumption.
Current 5yr offer to me is 4.2%

On receipt of interest, S&P 500 ... avg 8% returns, savings accounts around 5% ..... I thought the 4.5% receipt was prudent.

amnblog

The argument Broker's used to make in the 1980's about 20 years before borrowers started taking them to Court.

In scenario 2 you are dependent on assumed mortgage, and savings rates, and taxation being favourable for the next 15 years. It also assumes you do not blow the savings on something else in the meantime which is where most 1980's borrowers fell over.

For these reasons borrowers are unlikely to allow you to go for scenario 2.

lazer-zxr

amnblog said:

The argument Broker's used to make in the 1980's about 20 years before borrowers started taking them to Court.

In scenario 2 you are dependent on assumed mortgage, and savings rates, and taxation being favourable for the next 15 years. It also assumes you do not blow the savings on something else in the meantime which is where most 1980's borrowers fell over.

Understood on the assumptions, thanks.

Phoenix72

Have you factored in tax on any interest over £500/£1000 in any tax year(dependent on tax rate)

lazer-zxr

Phoenix72 said:

Have you factored in tax on any interest over £500/£1000 in any tax year(dependent on tax rate)

I was thinking I could use an ISA wrapper (S&S probably).

Hoenir

lazer-zxr said:

Hoenir said:

lazer-zxr said:

What am I missing here?

You are expecting to pay interest at 4.2% and receive interest at 4.5% over 15 years. 

Yes, that's my assumption.
Current 5yr offer to me is 4.2%

On receipt of interest, S&P 500 ... avg 8% returns, savings accounts around 5% ..... I thought the 4.5% receipt was prudent.

If making money were that easy. Every post war generation would have become millionaires effortlessly. The next decade or so is likely to be very different to the post 2010 era. The tide is slowly turning. 

Flugelhorn

as others have mentioned about the 80s. the old endowment seemed a no brainer - we were going to have pots more money than we need to pay the mortgage!!! yeh right. fortunately we cashed ours in early and put the money in an offset (not right for everyone but suited us at the time with  cash being held back to pay tax bills).

all mortgage companies much more wary of people having IO these days 

lazer-zxr

Flugelhorn said:

all mortgage companies much more wary of people having IO these days 

.... and what's the best way of satisfying their waryness?