Interest only - what's the best way?

dwsjarcmcd

vwjo wrote: »

Hmmm. Offset mortgage. Just when it all becomes so clear, another option muddies the water! :-)

Sorry!! but I think it's worth considering, given the things you want to achieve.

magyar

vwjo wrote: »

Hmmm. Offset mortgage. Just when it all becomes so clear, another option muddies the water! :-)

Offset mortgage is a perfectly good option, although my preference is to go with separate mortgage and savings product - then you get the flexibility of moving one of the providers without losing a good rate.

dimbo61

hi vwjo I have had as offset mortgage for last 2 years and i think they are great.
like other posts have said the savings rate matches the mortgage rate
and it gives you a good TAX free place to save money for paying off your
mortgage or emergency funds.
ISA,s have there place in long term saving plans as well consider a mix of both. just make sure you get the best rate of return for your savings or pay off mortgage if higher interest rate GOOD LUCK

tmm_aka_tracy

I have an offset mortgage and cant recommend it highly enough. My mortgage is quite small this month, (19K) but I have access up to £65K if i need it. It can be difficult for some to manage, you need much decipline, but the way I do it is that my salary gets paid in every month, I then transfere out a set amount to cover my bills and spending money. I dont actually use the mortgage account for any other transactions. This way, any spare cash goes against the mortgage, but when I need to pay a bill (car tax for example) its all there ready for me, and has saved me £000s in interest charges.

owitemisermusa

With IO mortgages, you have to repay the capital at some point isn't it?

So then, is there any way of reducing your mortgage term?

If you make overpayments, they go towards reducing your capital right? Will the lender then automatically re-calculate your monthly payments to adjust for a potential reduction in interest charged (since you've paid some capital off?)

Ta.

Noz

owitemisermusa wrote: »

With IO mortgages, you have to repay the capital at some point isn't it?

So then, is there any way of reducing your mortgage term?

If you make overpayments, they go towards reducing your capital right? Will the lender then automatically re-calculate your monthly payments to adjust for a potential reduction in interest charged (since you've paid some capital off?)

Ta.

Depends entirely on the lender

InMyDreams

owitemisermusa wrote: »

With IO mortgages, you have to repay the capital at some point isn't it?

Yes. At the end of the term.

owitemisermusa wrote: »

So then, is there any way of reducing your mortgage term?

The term is not really relevant for an IO mortgage. For a repayment, the term is used to calculate how much of the capital you need to pay off each month in order to be clear by the end of it. With IO, the term does not effect how much mortgage interest you pay each month, and as you are not paying off the capital, there is nothing to calculate.

But the more you pay into whatever vehicle you are using to eventually pay it off, the faster that pot will grow, and the quicker it will have reached the mortgage amount at which point you can blitz the whole lot in one go, regardless of how much 'term' you have left (providing you are not still tied in). Just make sure you have enough term on your mortgage to give you the time to build up that pot.

owitemisermusa wrote: »

If you make overpayments, they go towards reducing your capital right?

Right.

owitemisermusa wrote: »

Will the lender then automatically re-calculate your monthly payments to adjust for a potential reduction in interest charged (since you've paid some capital off?).

Yes. The term will not be effected. You will not be expected to pay it off quicker, just because you have paid off some capital. However, the saving you are now making on the interest payment each month could be added each month to whatever you are doing to pay off the rest, so that pot will grow quicker and the net result should be that you will be able to pay off the mortgage quicker.

Of course if you are confident with your figures, you could just keep making payments to your IO mortgage in line with what the difference with a repayment mortgage would be, then in effect you have turned it into a repayment mortgage yourself with the added flexibility that you don't have to pay that extra each month if you can't. The rather large disadvantage (or advantage as some will see it) of doing this, is that you take on the full responsibility of keeping it all on track so that you are not left at the end of the term having to pay off a sum that you don't have. Basically a repayment plan works all this out for you and forces you to be disciplined about paying off what you owe, keeping track for you of how close you are to achieving this goal.

owitemisermusa

Very interesting information IMD, thanks.

SO all in all, would you (and others) recommend paying the difference into a savings pot (preferably high interest) and watch it grow rather than pay off the capital on a monthly basis?

Which is better in cold hard cash savings?

InMyDreams

owitemisermusa wrote: »

Very interesting information IMD, thanks.

SO all in all, would you (and others) recommend paying the difference into a savings pot (preferably high interest) and watch it grow rather than pay off the capital on a monthly basis?

Which is better in cold hard cash savings?

I wouldn't recommend anything for anyone else. I don't know your circumstances.

But what works for us is an IO mortgage and paying the difference into a savings pot, yes. This works for us (at the moment) because:

• I'm confident with my figures and happy to take the responsibility for doing this.
• Me and dh have a very similar attitude to money and spending/saving/risk. We have never rowed about money and are both very disciplined in this regard so the flexibility suits us both.
• Our mortgage rate is low (and we've just fixed for another 5 years at 4.99%).
• I am a non tax-payer (at the moment) so we can make full use of regular savers in my name. Together with the low mortgage rate, this makes the difference in interest rates between our mortgage and savings larger than for most.
• We don't have enough left over to use our cash isa entitlements in any other way, so we might as well use them for this. (We have some S&S isas too, but most of our mortgage savings pot is in cash isas and regular savers.)

It could well be that our circumstances will change, and we may change our tune. But for now this works for us.

Daz1

If you do the math right, you could make some savings or shorten your term. My only concern would be (and I speak as a total novice but have a mortgage just over a year old) that once you move into your house, despite your best intentions of saving that extra £200-00 per month, there is ALWAYS something that you seem to need that could eat into that savings amount. I have a repayment mortgage and know that I would always put off saving that extra cash until next month/year because the house needs redecorating, garden landscaping, new furniture....not to mention unforseen circumstances such as boiler breakdown etc not covered by an insurance policy. If you are disciplined enough, then fine, but it is very hard not to use extra cash on improvements instead of saving it, especially at the beginning of the mortgage because you tend to figure "I've got 20/25 years to save up anyway, so why not spend a little now and make it up later"...which can be easier said than done