Interest only - how do you repay the capital?

Retired_I.F.A.

What he really means is when a client tells him they are thinking of investing the difference between repayment and interest only he gives them half the facts with his "you pay more interest with interest only mortgages" in the hope that kills the idea and they dont go elsewhere and learn that with a investment linked mortgage as long as the investment yields more than the interest rate charged you will pay less overall or the same and have a surplus at the end of the term.

It's a common ploy for those not authorised to give investment advice, also known as mortgage brokers.

elementelement

[quote/]
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)...[/quote]


Hi

I was wondering what type of mortgage this is and were you got it.
would be intrested in pursuing this type of mortgage for the time being

silvercar

Its the sort of mortgage with an overhang, so you get an amaxing good rate for a certain time then have to stay with the lender on a very much higher rate for a time.

Good for people expecting large hikes in salary or large expenses in the short term, but otherwise can work out expensive.

gil13

the 2.85% with a 3 year tie in sounds a bit like a Market Harborough fix rate, if so, it was an option that worked for some, the big "but" being the tie to their SVR (7.3%), not long ago their fees were quite reasonable (gone up a bit since). Their ERC were also quite high 7%,5,3 (this has changed a bit since). if they allow you go interest only during the tie -in period that could well be a good work around if the difference is invested and saves you the ERC. would be interested to hear if this was the case..

elementelement

yeah was going to have serious look into this approach.

i rember awhile back a search of money supermarket brought up lots of these types of mortgages, a recent search displays none of them have they all been withdrawn?

if the fees are low enough then the 1 year SVR could be offset by the two year low intrest and the saving made, if it is an portable, overpayment mortgage.
will have to sit down and do the sums if it s saves a few ££ then why not

but am i being dumb or can anyone find these types of mortages still?

UK007BullDog

Retired_I.F.A. wrote: »

It's a common ploy for those not authorised to give investment advice, also known as mortgage brokers.

Ahem, no, I think you got the wrong end of the stick. I do not advise on investments. I show them on the KFI the difference of an interest only mortgage to a repayment mortgage. That is all as TCF means to advise on the pros and cons of both types of mortgages. In the end its the customers choice what they want to do but at leas they understand the differences of I/O to repayment. It has nothing to do with investments. So don't understand where you picked up your comment.

As an IFA you should know what I am talking about, cannot understand that you don't understand what I am trying to explain. Maybe its not clear enough? All the other Mortgage Advisers will know what I am trying to explain.

I would never talk about investments as I am not authorised to do so, however if someone does want to talk about investments or pensions and more specialised protection I refer them to an IFA who in turn does not do mortgages and refers those to me. I am studying to become an IFA though hopefully by middle of next year.

homer_j_3

I think he is trying to belittle the job we do. Just ignore him, he is too busy trying to catch carp these days to even know what mortgage regulation means.

It is perfectly OK and within the rules to demonstrate the differences between IO and C&I.

Anyway, I think the confusion has come because you were talking about no further investment was to be made and the general differences. However, the OP has made a few seperate posts which would have led you to believe that they were looking at more complex strategies (when I say complex - I mean more complex than straight repayment) to making their mortgage reduce more speedily.

Anyway the only thing that I will add to the posts so far is be warned - if you have savings and you go out of work or find yourself in a position with lost income etc, it could effect your benefit rights so it may be more prudent to have sufficient protection in place too so you can maintain your repayment plan through the unexpected times.

Gorgeous_George

If you take an IO mortgage at 6% and invest the money that would make up the repayment element also at 6%, then you will earn as much interest as that which you pay over and above a rep[ayment mortgage.

e.g.,
£100K at 6% =£500 per month IO or £644.30 on repayment terms.

Invest £144.30 in a 6% paying account and you will earn £100K in 25 years. Over 25 years you will pay £150K in interest on IO or £93,290.42 on repayment.

It makes no difference if you earn interest at the same rate that you pay.

If you can average 6.5% you will earn £108,057.

Of course, that needs to be tax free but some ISAs pay that much.

GG

homer_j_3

You had the old spreadsheet out again GG?

Retired_I.F.A.

Bulldog, I apologise mate, To be honest I just saw red reading your first post.
I've heard the "you'll pay more interest with interest only" so many times in the past from building society managers, and solicitors all out to churn the business I've wrote up for themselves it just raised the old blood pressure a notch. Nothing like winning your match with 90lb of carp as I did yesteday to settle it down again though

You see what used to happen was a direct salesman/ broker/adviser /IFA whatever, would sell an endowment /pep /pension linked mortgage and a few days later the clients used to get a letter from either the BS manager or a solicitor if a policy had to be assigned saying they needed to come in and see them urgently and discuss the arrangements they had made with this salesman as you should realise you'll pay more interest with interest only. Most clients knew that and the other part of the equation that you wont repay all the capital as growth will and usually told them to get stuffed but many had time off work and made an appointment even so. Once in the BS or solicitors they would give them the bull that they were only acting in their best interest in ensuring they knew what was entailed yet their they sat with an alternative quote and proposal form all ready to be signed. This wasn't the impossibility it is today nor a rare thing but happeed almost in every case for a number of years.

The mortgage brokers of today are paid a commission for arranging the loan and commission for non investment associated insurances many of them in my opinion stitch up the client with fee agreements so if the client sees a better solution later on it's of little consequence. With that in mind and the more interest with interest only statement, maybe you can see why I was a bit narked.

Good luck with the IFA route you want to take it's not the career I'd recommend but it's far better than being a mortgage broker. How you get any business nowadays i don't know the job was made obsolete with the advent of portal sites.