Interest only - what's the best way?

magyar

Daz1 wrote: »

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

That's an important point Daz. You HAVE to be strict about this. If you have any doubts as to your ability not to spend the money, then you should get a straight repayment mortgage.

A good option in this case is one which allowed you to take a 'holiday' and not pay for a month or two.

kingkano

vwjo wrote: »

Perfect answer Magyar! Lets have another one! :beer:

That makes perfect sense now. If savings interest is higher that mortgage interest, keep saving. If the other way round, then chip away at the mortgage. Perfect.

The only possible drawback to this idea (rather than repayment) seems to be that you have to keep a close eye on your money. But I don't think that's an issue for us, we're fairly on the ball...:o

Will the mortgage chaps want to see actual evidence of the savings account being already set up?

It's not the only drawback. There are many others. The money in savings is considered a cash asset as opposed to money that has been repaid off a repayment mortgage - which isn't. This could affect any unemployment benefit/pension entitlements.

There are other considerations too - I suggest more research. One off the top of my head is making sure you have TERM life assurance rather that a mortgage life assurance (which would be decreasing).

magyar

kingkano wrote: »

It's not the only drawback. There are many others. The money in savings is considered a cash asset as opposed to money that has been repaid off a repayment mortgage - which isn't. This could affect any unemployment benefit/pension entitlements.

That's a very good point re: unemployment benefit - out of interest do you know the rules on 'how quickly you're allowed to spend the cash?'.

After all, you could make a lump sum payment off the mortgage on the day you were made redundant and then you would have no savings. Or would that be against the rules.

(Whilst the pension point is perfectly valid, I'm assuming that the mortgage would be sufficiently small by this point that the difference between interest only + savings vs. repayment would be negligible)