Interest only vs Savings

gil13

The mortgage is 125K/5.49%/10 yr fix - 21 yr term.
If Interest only payment = 573 pm / repayment style = 840 pm
Difference of 267 pm.

If the 267pm got a return of 6% over the 10 years what would the benefit be? Also is there a calculator out there that can compare these types of scenarios.

People always say if your savings/investment return is higher than the mortgage rate then its better to go with the higher rate.

macca64

You could probably work it out in a spreadsheet if your good with excel, otherwise I'm sure there are spreadsheets available if you google.

Yes you can invest if the return is higher, however you need to be disciplined to not spend the money.

Jonbvn

Assuming you have to pay tax on your savings (except for ISA's) at the basic tax rate you would have to get an AER of 6.86%. Not many a/c's offer this ATM.

gil13

Hi Jonbvn, I was thinking it would be a combination of Cash ISA and other investments such as UT/ S&S Isa's. Also wife may become non-tax payer at some point. I was just wondering on the calculation required to allow for the interest and effect of compounding etc, all a bit tricky to work out, for example the 'saving' would have to be worked out to allow for fact that it is accumulating over each month for the 10 years in terms of interest gained.

Jonbvn

Hi,

Compounding interest is quite simple to determine using a spreadsheet. Have a search on google documents for something.

bunking_off

The decision of repayment versus (interest only plus savings to repay capital at end) is identical to that of overpayment versus savings : if the net return you can get on savings is higher than the mortgage rate, you're better with savings. So, if your savings are 6% and mortgage rate 5.49%, then savings are better.

However;

- can you really get 6% on your savings net of tax. Savings ISA is comparing like-with-like with paying your mortgage. Unit trust/stocks & shares is not. Paying the mortgage is a risk free return of 5.49%. Unit trusts may return 6% on average, but could return nothing. It could actually be a negative return (think of if you'd had tech shares in 2000). The average return is higher, but so is the risk (financial theory would say that the investor is being rewarded for taking higher risks by getting a higher return). In effect, what you'd be doing is borrowing money (not repaying mortgage) to invest in the stock market. Nothing wrong with that, so long as you know what you're doing : after all a mortgage is borrowing to invest in the housing market.

- how disciplined can you be? When you get towards the end of your mortgage with a huge savings fund, can you trust yourself not to dip into it?


No guaratees, but by my maths, assuming 6% compound interest (ie monthly interest is 12th root of 6%, rather than 6%/12), after 10 years your £267 a month will be worth £43380. However, had you been repaying your mortgage it would have reduced by £42477. So, your net gain is £903.