Most cost effective mortgage repayment method

Sardlife

Hello all,

Just reading the various threads on this site is a fabulous form of guidance in a difficult financial world, however I thought that I might ask for advice on something a little more specific to my situation.

I'm a bit ahead of the game but, my tie in with the Abbey finishes in June 2006, free after 7 years!!!!!!

Anyway, my financial predicament has improved somewhat over that time. What I would really like to do is to have my mortgage paid off in ten years.

I am 40 and I owe approximately £100,000 on a property worth circa £200,000.

My dilema is repayment or interest only.

I have approximately £1300 per month that I can set aside for a mortgage payment.

Having done a little research I have found out the following:

If I take out a ten year mortgage at 5% (Which I think is a reasonably achievable rate?), the repayments would be circa £1060.00 per month. If I then paid an overpayment of £225.00 per month (Taking me to around my £1300.00) the mortgage would be paid off after approximately 8 years.
Yippee!!

However, unless I am mistaken, hence the question, if I took out a £100,000 loan on reypayment only, my monthly repayments would be circa £417.00.
Now, if I then made the same overpayment of £225.00 per month, I would have approximately £65,000 of capital outstanding at the end of ten years.

Right, now what I do is I put the remaining £650.00 into a savings account (£417.00 + £225.00 + £650.00 = £1292.00, almost my £1300.00 again).

Even picking a fairly basic Tesco savings account I have a projected figure of circa £94,000 at the end of ten years. Thats £65,000 for the mortgage company and £29,000 for me. Even bigger yippee!!!

I realise that 24 months of my repayment amount (£1285.00) would amount to £30840.00 and so there would be little difference between the two but there must be a better and more financialy rewarding way to save than Tesco's?

Questions,
I must have got something wrong with my calculations or everybody would have an interest only mortgage?
Where should I invest the monthly saved amount to achieve the best interest rate?
I dont mind if its locked in for the entire ten years.
By the way I pay 40% tax.

Lots to consider and I know its early days but any thoughts would be gratefully recieved.

Sardlife

Hobo_2

It only works if you can get higher interest rate on your savings than you will pay on your mtg (non tax payer partner is handy), but remember your proposed saving is starting from zero (pressumed).
I may be corrected but as you are a 40% tax payer & at least 50% ltv an offset mtg might be suitable?

TheDink

Personally I would choose a repayment mortgage, ensuring that interest is calculated daily. Every overpayment you make is reducing the capital and thus reducing the interest that will be charged in future.

If you choose an interest only mortgage, the capital you have to pay off at the end remains the same and any savings you have will incur tax on the interest - you would need to earn a high rate of interest to get the same "return" as on overpaying your mortgage.

I would also be worried about not having enough in the pot at the end of the mortgage term and avoid interest only for peace of mind.

mrcow

I did similar maths to this last year when working out my early repayment strategy (I'm down from a 22 to an 11 year plan at the moment, but am hoping to get this to 5 years eventually :rolleyes: ).

I went for the repayment model as, as your post stated, once the mortgage is paid, I can use the payments that I was making to start a rapid savings process, and I'd be pretty much in the same position by the end of the period.

I personally preferred the repayment model, as we have a good flexible mortgage and it seemed much more tangible to me (we've had our fingers burned by a non performing endowment before, so once bitten twice shy I suppose).

Also, the thought of being mortgage free in 5 to 10 years, rather than 22 years appeals to me a lot (I'm 32 and expecting our second child any day, so the children will still be teenagers by the time we've hopefully paid all of this off). I worry that if we were to go down the interest only route, then life always seems to have a habit of getting in the way somehow, and the temptation to utilise the savings for other expenditure would always be there (but again it's a personal preference).

I also liked the security and flexibility the repayment model allows for, for example, if our circumstances do change and all of a sudden our salaries for example drop, then with the drastic overpayments that we've been making, it would really lighten the load. I suppose the flip side to that is that if you were on the interest only option, then you could always use your savings so far to make a lum sum repayment, so it swings in roundabouts.

Just my thoughts......for me it wasn't just a simple question of the maths I guess.

Good luck with what you choose to go with.