Repayment / Interest only question

Dick_here

Gorgeous_George wrote: »

!!!!!!

Let me know the interest rate, term and loan amount and I will tell you how much capital you are repaying each month. If you have Excel, I'll email a spreadsheet.

GG

Thanks. I guess I'm trying to avoid us getting bogged down with figures here. If I'm clear on the principle, I'll be able to work that out myself.

Say, I owed 100k now, and in 6 years I'd owe 95k by continuing with repayment mortgage, but it had cost me 7k in extra payments (compared to interest only) to do that, why on earth would I not switch to interest only on 100k in the meantime ? Assuming that I know that in 6 years time I could definitely pay 5k off the capital of course. Do you see what I'm getting at ?

Why should I pay repayments - which amount to mostly all interest anyway in the early years of a repayment mortgage - as surely they'll amount to less than what I'd save by switching to interest only for that period and then paying a capital lump sum.

But if it is that simple, why isn't everyone doing it ?

Gorgeous_George

Ok.

£100K at 6% will cost:

(a) £500 per month on interest only or
(b) £644.30 per month on repayment

So, on (b), you pay 6 years x 12 x £144.30 more = £10,390

After 6 years you will owe:

(a) £100,000 on interest only or
(b) £87,531 on repayment

So, on repayment you will be £2,079 better off and repayment wins hands-down - unless you could invest £144.30 per month for six years and return more than £12,469 after 6 years.

Sorry, I needed to use numbers! Essentially, each month you pay a little off your mortgage. It is not lost money like interest but pays a bit back off your borrowing. Subsequent interest payments are smaller and the bit paid back, greater.

GG

InMyDreams

Knew GG could do it :T

Gorgeous_George wrote: »

unless you could invest £144.30 per month for six years and return more than £12,469 after 6 years.

GG

Or save the £144.30 per month into an account paying 6% (after tax) interest. This is not impossible. You could do this in a cash ISA or there are regular savers that pay more if you are prepared to jump trough hoops and remember to take he tax into account. But if you are just going to pay it off as a lump sum in 6 years anyway, there's little point. Of course you *could* return more by investing, but you might not. Bit scary in the current climate.

Dick_here

Thanks guys. You've proved that my 'clever' thought process was of course rubbish.

The one thing I'm still not clear on, GG, is that you seem to be saying that the capital owing reduces by £144.30 each month. If that is the case, why does the capital outstanding actually go down so little in the early years of a mortgage ? You're saying repayment is a straight line, whereas it's really a curved one. Your last paragraph agrees with what I'm getting at, but doesn't match with the figures that you quote, if you see what I mean.

InMyDreams

!!!!!!_here wrote: »

The one thing I'm still not clear on, GG, is that you seem to be saying that the capital owing reduces by £144.30 each month. If that is the case, why does the capital outstanding actually go down so little in the early years of a mortgage ? You're saying repayment is a straight line, whereas it's really a curved one. Your last paragraph agrees with what I'm getting at, but doesn't match with the figures that you quote, if you see what I mean.

No, GG quotes £144.30 as the difference between an interest only and a repayment mortgage. It is only in the first month that this is that actual amount of capital repaid on the repayment. On the second (and subsequent) month(s) of a repayment, the interest part will be slightly less (as you now owe slightly less), leaving slightly more than £144.30 of the total £644.30 payment to be capital payment. This is why after 6 years, you have paid 6 x 12 x £144.30 more than the interest only option but actually more than 6 x 12 x £144.30 will have come off the capital. (Compare to paying the 6 x 12 x £144.30 into a savings account. After 6 years there will be more than 6 x 12 x £144.30 in there because of the interest accrued on the savings.)

Dick_here

I get it, I think, thanks.

One more question though: GG said

£100K at 6% will cost:

(a) £500 per month on interest only or
(b) £644.30 per month on repayment

The £500 is clear enough, but how do we actually arrive at £644.30 ?

Badger_Lady

Now I'm piping in because I'm not sure this works...

The last time I saw my mortgage statement (repayment), the first few months were purely interest, then getting gradually more repayment further down the line. In which case:

£500 is interest only
£644 is repayment BUT 0% (or close to) of this is actually contributing to the balance to start with - I'm completely positive that in my case it wouldn't have been anywhere as high as £144 (although I understand why it should have been).

I think I was actually paying more interest in the early years of my repayment mortgage than if I'd been on an interest-only mortgage. Is that possible?

InMyDreams

!!!!!!_here wrote: »

The £500 is clear enough, but how do we actually arrive at £644.30 ?

The extra over and above the £500 will depend on how long the term is. Ie how quickly you want to pay the mortgage off. Not sure how long GG made his calculations for. The larger the difference, the more capital will be paid off, the faster the mortgage is cleared.

Badger_Lady wrote: »

£500 is interest only
£644 is repayment BUT 0% (or close to) of this is actually contributing to the balance to start with - I'm completely positive that in my case it wouldn't have been anywhere as high as £144 (although I understand why it should have been).

As the £144 depends on the length of the term, it could be that your mortgage was over a longer term. Or maybe it was only part and part repayment/interest only? Clearly it also depends on the size of the loan to start with, but I see from your sig that yours is still more than £100k, so if on full repayment, I'd be surprised if you were paying off less that £144 a month.

Badger_Lady wrote: »

I think I was actually paying more interest in the early years of my repayment mortgage than if I'd been on an interest-only mortgage. Is that possible?

Not really, unless the interest rate of the interest only was higher that the interest rate of the repayment.

Badger_Lady

InMyDreams wrote: »

As the £144 depends on the length of the term, it could be that your mortgage was over a longer term. Or maybe it was only part and part repayment/interest only? Clearly it also depends on the size of the loan to start with, but I see from your sig that yours is still more than £100k, so if on full repayment, I'd be surprised if you were paying off less that £144 a month.

I was just using your figures as an example - I've got a new IO mortgage now (combined with ISA), but I'm just curious.

My repayment mortgage was over a 25 year term, but of course I remortgaged and left after 2 years. So my question is, is it possible that I made more interest payments during that 2 year period (by paying "£644" with only a small percentage contributing to the balance) than if I'd just paid "£500" a month interest?

homer_j_3

I think what is trying to be explained is this.

100k balance (6%)
+500 interest
- 644 repayment

New balance = 99856
+499.28 interest (6% of 99856)
- 644 repayment

New balance = 99711.28
+498.56 interest (6% of 99711.28)
- 644 repayment

New Bal = 99565.84 and so on..

Now if you borrow more through addition of fees, that can sometimes make the balance look odd or if you are with some lenders, they charge their addition of fees at the SVR rate.