Interest only mortgage question

Legacy_user

Morning all.

I have a straightforward (and maybe stupid) question regarding interest only mortgages. When a mortgage is taken out the person is liable to the capital and interest repayments. So say a person takes out a £12,000 mortgage over 1 year at 10%. That person is liable to pay £12,000 of capital plus £1,200 of interest. So if that person was to take out interest only, s/he pays £100 a month and has to pay £12,000 at the end of the year.

Lets say this person has been paying interest only and half way through the year s/he decides to go to a repayment mortgage. This person has already paid £600 in the 6 months. My question is - Is this persons remaining liability £12,600 (£12,000+£600 remaining interest) or does the interest start all over again when switching to the repayment and the £600 has gone down the drain?

dwsjarcmcd

The liability is £12k, with the £600 have been paid to service the debt. In reality there may be other fees payable with redeming a mortgage, but I think that answers your basic question.

David

System

So interest only mortgages do count for something as the interest paid is reducing the overall liability the person will eventually pay.

Thanks for your help

sammyjammy

I think you've misunderstood, of course it doesn't lower the liability, interest is a monthly charge payable for borrowing the money, if the interest rate stays the same and no capital is being repaid then the interest due will remain the same, if you were then to start making capital repayments then the interest would be reduced each month (negligibly) because the amount of capital still owed is less.

The amount of money repaid will be much higher on interest only as the interest is payable on the full amount every month rather than a reducing amount