Interest only - how do you repay the capital?

Dick_here

Simple question for once - bit of a straw poll I guess.

For people on interest only, how and when are you intending to pay back the capital ? Endowments are now looked down upon. What savings method - if any - are you using instead ?

I'd guess a fair number of people on I/O are not putting the monthly saving compared to repayment towards any savings...

welshchocolatelover

*If* we decide to go Interest-only, it'll only be for the next 3 years (then back on to repayment). We intend to save the difference (prob around £250/month) into an ISA. If we go onto a tracker, then any fluctuations in the interest rate will determine whether we save more or less then that (i.e. if the interest rates go down, we'll save more, so long as the total amount going out each month remains the same).

For us, going Interest-Only is just a quick fix whilst I am part-time and we are forking out for childcare. But we do want a lump sum to pay off the capital at the end of the product.

ixwood

I was investing in ISAs until last summer, when I got a bit wary and pulled it all out and offset it instead.

I've just remortaged and used it to lower my mortgage and get the best rate I could.

I'm going to offset my over payments now, with a view to switching back to investing some/all of it again at some point.

Any lump sums like bonues go towards it too.

So, a mix of saving/offsetting and investing for me, with a view to overpaying it.

It's normally assumed these days that anyone IO is not repaying it at all or is stupid, but that's not always the case. In theory if you investments do well (better than the mortgage rate), IO could be a lot cheaper than a repayment. It could of course be worse, but that's the gamble.

Also, if your invested money did make good returns, there's the option to carry on investing past the point where you could pay the mortage off and actually end up with mortgage paid and a significant cash lump sum on top (Thanks for Jamesd for alerting me to that lovely little possibility).

Although, admittedly the investing climate doesn't seem too rosey currently.

UK007BullDog

Just want to throw into the mix that interest only mortgages cost more overall than a repayment mortgage over the same term. Why? Because with a repayment mortgage the amount borrowed is reduced every month, which in turn means that one then pays less interest.

On interest only the amount always stays the same which is owed. On a large mortgage it could thousands even hundred of thousands more, depending on original amount.

Ask an adviser to show you on their systems or KFI if the mortgage is repayment and interest only and look at the amount it would cost more to keep that mortgage and of course at the end one still owes the original borrowed amount.

I/O is like rent.

InMyDreams

UK007BullDog wrote: »

Just want to throw into the mix that interest only mortgages cost more overall than a repayment mortgage over the same term. Why? Because with a repayment mortgage the amount borrowed is reduced every month, which in turn means that one then pays less interest.

On interest only the amount always stays the same which is owed. On a large mortgage it could thousands even hundred of thousands more, depending on original amount.

Ask an adviser to show you on their systems or KFI if the mortgage is repayment and interest only and look at the amount it would cost more to keep that mortgage and of course at the end one still owes the original borrowed amount.

I/O is like rent.

007, I think you've misinterpreted !!!!!!'s question. He is not going to be thousands of pounds out if he pays the difference into a repayment vehicle. His question was about that vehicle, not whether he should use one at all.

!!!!!!, here's what I've done to date...

Up to spring 2006 we were on only part and part repayment/interest only to keep monthly costs down, waiting for husbands salary to increase which it did (as expected). (Our mortgage rate was 5.3% fixed.) We then worked out the difference between what a 'proper' repayment mortgage over the same term would be and what we were paying. This was about £230 per month. So we opened a 10% regular saver account (in my name as a non-tax payer) and put it in there instead, rounding it up to a neat £250. This matured last spring (just before the end of the tax year) so we moved the £3k into a mini cash ISA in hubbie's name at an amazing 8.1%, and put in the interest earned too as soon as the new tax year started (as £3k was the limit and we now had more than that so had to wait a couple of weeks for the new tax year). We continued to save £250 into a new regular saver, but only managed 8% on that one, although it is one that doesn't mature so that should work out even better for now as we are about to go into our second year with that one. It is in my name again. Anything else we've been able to throw at the mortgage we've stuck into hubbie's isa. We also had an old endowment from a previous mortgage that we cashed in and put into a S&S ISA.

We are now at the end of our 5.3% deal and when looking around, I tried to get the best mortgage deal based on our net amount owing. Turned out that this deal we can still get without paying off that saved lump sum, so have decided to remortgage for the whole amount and keep up with the savings. The only difference is that we are now switching to pure IO and will open up another regular saver for the difference. I am aware that there are not such good deals around now for saving accounts, although A&L is doing another 12% saver I believe, if you can jump through the hoops. I hope it's still around when our new mortgage completes next month.

The way I look at it is this. I don't want to take any risk over and above what a normal repayment mortgage would be. So we don't use investments for the real 'difference'. Over and above this (ie what I would call a real overpayment) we are prepared to invest with the hope of producing even better returns, but if the worst happens our mortgage will still be paid off within the original time scale. It's something that I keep reviewing as I'm sure it won't always be the case that it's possible for us to beat the mortgage rate with savings rates at no risk.

Waldir

UK007BullDog wrote: »

Just want to throw into the mix that interest only mortgages cost more overall than a repayment mortgage over the same term. Why? Because with a repayment mortgage the amount borrowed is reduced every month, which in turn means that one then pays less interest.
[...]

Sorry about that, but I can't believe a mortgage adviser could write such absurdities.

If you have a fixed amount of money every month to use for your mortgage/savings, if the savings rate is higher than the mortgage rate, then an interest-only mortgage will cost you less than a repayment mortgage.


Your illustration just shows that you allocate less money each month to repay the interest-only mortgage than the repayment mortage, without investing the extra money.




To reply to !!!!!!, we just took a 2.85% interest-only mortgage, and plan to save the maximum for 2 years using my wife-student's non-taxed saving accounts, then repay as much as possible when the rate reverts to 7% (tie-in 3 years... but only £200 fees to switch back to repayment at this time, and at the end we should save £7k compared to more standard mortgages)...

UK007BullDog

Waldir, what you quoted at the top from my post is actual fact. I show this to my customers all the time to show them all the different options open to them.

If you dont understand what I mean then go to your bank and get two KFI's, same amount , same term, same rate. And you will see in section 7 (I think its section 7, total borrowing) that over the whole term the repayment mortgage will cost less than the interest only mortgage.

This has nothing to do with any savings offsetting and so forth. I am talking about the overall cost, even if the monthly payments of an I/O mortgage is lower than a repayment mortgage. This is because the mortgage loan outstanding is not reducing over the whole term.

However if you pay off a lump sum every few years then of course it changes things. Which I am not going to bother going into as it has been well explained by InMyDreams.

Retired_I.F.A.

"I show this to my customers all the time to show them all the different options open to them."

Do you hell as like! Unless you break the law as your not authorised to do so.

owitemisermusa

Retired_I.F.A. wrote: »

Do you hell as like! Unless you break the law as your not authorised to do so.

Rather confused by the above.....

UK007BullDog

Retired_I.F.A. wrote: »

Do you hell as like! Unless you break the law as your not authorised to do so.

That is a bit harsh! You don't know me. I am an ethical adviser and pride myself that when customers leave my office they know the differences of all kinds of mortgages and how they work.

Why not? There is no rule stating one cannot do that. But to be honest I show this only to those customers who want an interest only mortgage because their mate has one or they think that is all they can afford, or they want a split. Because the rules state that you have to inform your customers and if you then show them that they can afford a repayment if the term is increased. I treated my customers to Treating Customers Fairly before the FSA even dreamed that one up.

But then you should know as an IFA.

UK007BullDog

owitemisermusa wrote: »

Rather confused by the above.....

Yeah Owitemisermusa, me too.