interest only v repayment

Addy1

This may be a really stupid question.

Basically I thought that repayment mortages were safer in terms of the fact that you get equity more quickly.
So I told the mortgage broker to only look at repayment mortgages.
Yesterday I was speaking to my friend who has interest only and she said that on her mortgage it worked out if they were on repayment, they would have ended up paying 6k extra over 2 years (or something of that sort) and would only hav 1k equity!?

Therefore one would assume they had just lost 5k more than if they had interest only?

I know interest only allows you to overpay when you can etc but I do not understand what my friend was saying?
Perhaps someone can explain this to me?

Sorry for being dumb.

G-G_4

and the end of the day, it's all about investment.

Repayment - you will repay the mortgage and at the end of the term you will have paid it and that will be that.

Interest only - you have a repayment method. Endowment, Stocks & Shares etc. Having these means that at the end of the term you will 'hopefully' have enough to pay the capital part of the mortgage. and you MAY have some left over if your money has been invested in good upwards moving markets.

I don't see how your friend can compare them, especially not over the course of two years? Maybe someone more experienced will be able to tell you this.?

Also, at the end of her mortgage she may have a shortfall and may not have enough to pay off her mortgage. So until the mortgage has finished she cannot possibly say what she had lost or gained, as this is something that is variable based on whatever her investment is.

Hope that makes sense.

x

ThriftyBeanie

Addy1 wrote: »

Yesterday I was speaking to my friend who has interest only and she said that on her mortgage it worked out if they were on repayment, they would have ended up paying 6k extra over 2 years (or something of that sort) and would only hav 1k equity!?

If what your friend says is true, then then corollary of that is that under an interest only mortgage, she now has negative equity of £5k

Addy1

Oh OK thanks.

I think I get what you mean. So I still think that we want the repayment mortgage now, we are not really risk taking type of people!

Addy1

Re the negetive equity, I see what you mean.
That scares me more than anything about buying a house at the moment which is why we are desparate for 10% deposit. She only had 10k deposit on a £180k house. So in that case I definately want a repayment mortgage!

Although I suppose my friend may have got confused?

G-G_4

Yes, if you don't like taking risks and want to guarantee that your mortgage is repaid at the end, then capital and interest repayment will give you that guarantee.

Basically, neither one saves you money really. It's just the interest only offers a chance to make money (in theory), although you may recall all the endowment shortfall things, this is when people who thought they would make money didn't make enough and so they didn't have enough money to repay the mortgage at the end.

Without knowing exactly what they are paying, and what you are paying, it would be very difficult to work out who is saving money. Rest assured that you will have your mortgage paid at the end.

G-G_4

Also, just to add.

When you pay into a repayment mortgage you pay part capital repayment and part interest. In an interest only, you pay interest to the mortgage company, and 'capital' into an endowment / pension plan / stock and shares etc.

So really, you should have the same outlay at the end of each month, you should be paying a similar amount.. So I don't see how you friend thinks they have 'saved' money..

Unless of course, they arn't paying into an endowment etc in the hope that the house will make enough equity to repay the mortgage at the end. This is very risky and not advisable.

Addy1

Ah I think that might be what she was doing. She said it was costing her £600 per month less. Which obviously for 23 year olds seems appealing! I suppose she is in a dodgy position then with less than 10% deposit!

G-G_4

hmm.. she is if house prices fall.. if she isn't paying into a payment plan and just paying the interest, then at the end of her mortgage she will have to find £170,000 ish to pay.

Even if she leaves it 10 years before she realises, then her monthly payments will be very high..

If you don't like risk, they capital and interest is the way to go. You will see a mortgage advisor though, so you can ask them if you are unsure.. x

Gorgeous_George

I think your friend is a bit thick.



GG

Addy1

:rotfl:
I think you might be right.

Although she is a Doctor which is mildly concerning....