Mortgages!

[Seany88]

I feel like i've been doing this subject to death recently but I just want to be absolutely clear on how I stand etc so please bear with me.

I have taken out an interest-only mortgage. Now from a mortgage calculator it says a repayment mortgage would have been x amount more/mth. So can I take this difference as the amount that is being repaid were I to take a repayment mortgage instead? Is it that simple?

I'm asking because I have the option to make overpayments of 10% each year, effectively giving me the flexibility to 'have' a repayment mortgage when I can afford it (as I understand it?). Now, with a repayment mortgage, how much of the original loan is generally 'repaid' each year? Because as I see it, I seem to have the best of both worlds, or am I missing something?

[emicen]

Believe that would be correct if the rates were the same for both mortgages. Theres also the option of products like offset mortgages where your mortgage is tied in with a savings and current account so your savings are put against your mortgage saving you interest on that rather than earning it separately and your wages get paid in to the current account and do much the same.

[scotal]

Seany88 said:

I'm asking because I have the option to make overpayments of 10% each year, effectively giving me the flexibility to 'have' a repayment mortgage when I can afford it (as I understand it?). Now, with a repayment mortgage, how much of the original loan is generally 'repaid' each year? Because as I see it, I seem to have the best of both worlds, or am I missing something?

The actual amount paid each month varies with the term of the mortgage, so in the early years of a repayment scheme, you will be paying less than you would be in the later years (i.e at first you are paying more interest and less capital, however as you chip away at the capital the interest amount gets smaller (less capital to charge interest against) and the capital amount goes up (less interest being charged). Therefore towards the end of the mortgage you are paying substanially more capital than you are interest every month.

Does your mortgage allow lump sum repayments for up to 10%, monthly overpayments or a combination of both? I'll assume that it allows monthly overpayments. In that case if you set an affordable amount each month that you can chip away at the capital with, you will have a fairly flexible repayment mortgage. When you cant afford the overpayment, you only have to pay the interest, when you can afford it, you can overpay.
The effect on your mortgage balance will depend on the "rest" tye of your mortgage. If its daily rest , or daily interest then the balance will reduce as soon as the overpayment is made, however if its annual interest, this may make no difference to the balance on which you are charged interest until your annual mortgage review (i.e the anniversary of when you took out the loan.)

The only thing that you may be missing in this is your own discipline, or lack of it, in paying off the mortgage. If you set an amount and keep to it, maybe paying a little more following pay rises or bonuses etc then all well and good. However if you lack this discipline and skip payments (lets face it spending on beer, women, cars etc is more fun than mortgage repayments) you will soon fall behind where you would be if you were comitted to the monthly payment in a repayment mortgage. laso you will have to keepan eye on how much you are aying to make sure you are on track to repay the loan, or in a position to start to make up any shortfall if you fall behind.



edit for poor typing skills

Edited by scotal on Wednesday 27th December 19:59

[M400 NBL]

Seany88 said:

I feel like i've been doing this subject to death recently but I just want to be absolutely clear on how I stand etc so please bear with me.

I have taken out an interest-only mortgage. Now from a mortgage calculator it says a repayment mortgage would have been x amount more/mth. So can I take this difference as the amount that is being repaid were I to take a repayment mortgage instead? Is it that simple?

I'm asking because I have the option to make overpayments of 10% each year, effectively giving me the flexibility to 'have' a repayment mortgage when I can afford it (as I understand it?). Now, with a repayment mortgage, how much of the original loan is generally 'repaid' each year? Because as I see it, I seem to have the best of both worlds, or am I missing something?

It's worth remembering that you will pay less capital off of the mortgage at the beginning (when the loan is at it's max) and less thereafter.

With this in mind you could reduce your overpayments over time (regardless of which mortgage product you use) but I would suggest paying as much as possible while IR's are reasonably low - or at least increasing overpayments if and when you get pay increases or bonuses.

Yes there is a stigma with regards to IO mortgages but there needn't be. I can't imagine anybody ever having a 25 year mortgage, and in doing so having to stump up the lump sum at the end of the term. Therefore you can have the best of both worlds...if you are disciplined as someone has already mentioned. I'm overpaying myself and so the nice cars are on hold. I'm not too jealous of supercar drivers, honest

[Seany88]

I understand that the ratio of interest/capital changes over time was just wanting an idea of how a repayment would compare with mine if I overpaid the difference between the two?

Or basically what percentage of a comparable repayment mortgage payment is actually reducing the capital? Is it less than 10%?

Btw my mortgage does allow lump sum repayments etc and its re-calculated instantly.

[Seany88]

I understand that the ratio of interest/capital changes over time was just wanting an idea of how a repayment would compare with mine if I overpaid the difference between the two?

Or basically what percentage of a comparable repayment mortgage payment is actually reducing the capital? Is it less than 10%?

Btw my mortgage does allow lump sum repayments etc and its re-calculated instantly.

[deva link]

Seany88 said:

I understand that the ratio of interest/capital changes over time was just wanting an idea of how a repayment would compare with mine if I overpaid the difference between the two?

Or basically what percentage of a comparable repayment mortgage payment is actually reducing the capital? Is it less than 10%?

As already explained, it's next to nothing at the beginning and a lot at the end.

Have a look at www.egg.com - their calculator draws the graphs for you.

The general idea is to pay as much of the capital off as you can as (obviously) that reduces the interest payments (or you can carry on paying the higher amounts and shorten the mortgage).

[Seany88]

So other than for those who cannot discipline themselves to overpay, is there no other benefit to a repayment mortgage? (Assuming that you will move house in 5yrs or so and not continue for the length of the mortgage)

[scotal]

Seany88 said:

So other than for those who cannot discipline themselves to overpay, is there no other benefit to a repayment mortgage? (Assuming that you will move house in 5yrs or so and not continue for the length of the mortgage)

Repayment Mortgages are designed to do "exactly what it says on the tin" You pay your mortgage every month and at the end of the mortgage, its guaranteed to be paid off.

Interest Only mortgages carry an element of risk: If your chosen repayment vehicle does not cover the mortgage at the end of the term then you have to find a way of covering this shortfall.... thats your problem..... if you neglected to put an investment vehicle in place then you better have all the money in the bank! (or have made sufficient overpaments to have repaid the loan.)

Taking your example above, if youare going to move in 5 yrs, then the guy with the I/o Mortgage will still have the original balance outstanding on his mortgage. The guy that completed on a repayment mortgage on the same day, will have lowered his mortgage balance, and therefore have a larger deposit to put towards the new home.

Usually there is no difference at all between the repayment and I/O scheme. Same rate, same period, same fees.

Dont underestimate the power of indiscipline. You may well be entirely capable of setting yourself a goal and overpaying that amount every month. There are plenty in the population who will happily say they are going to overpay and then find that they never quite get round to it. something always gets in the way.. new car, new girlfriend, night out with the lads, Christmas whatever, they never quite make that extra payment each month. Also bear in mind that the mortgage industry in the UK is fairly risk averse, they want to know that you can afford to repay your mortgage, and that they wont if at all possible have to repossess your home. its very very bad for publicity, and is all round hassle for them. Contrary to popular belief lenders would rather not have to repossess.

If when you took out the loan you received an illustration for a repamyent mortgage, and one for an I/O mortgage you will find that the I/O mortgage works out more expensive over the full term. However if you are overpaying, you should find that the costs of the Repayment mortgage and the I/o one are pretty similar.

[justinp1]

I have been in a similar situation. My last two mortgages have been interest only.

I have a good broker who scours the market for me every 2-3 years for the best deal.

My plan is that as interest only I am minimising my risk of not being able to repay and keep a roof over my head. If I have extra, I save it up and at the end of the two/three years I have that as a lump sum in reducing my capital amount.

Even if the worst comes to the worst and I dont remortgage for 25 years, and I am left with the balance, in real terms this balance could be repaid by a relatively small unsecured loan at the end of the loan period.

As the value of my house has tripled over the last 15 years, and if the next 25 years follow the same basic economics as the last that the value of houses should increase by 5 times over the next 25 years, so in real terms if you have a £150,000 mortgage then in 25 years time whis will be worth the equivalent of £30,000.

[deva link]

justinp1 said:

Even if the worst comes to the worst and I dont remortgage for 25 years, and I am left with the balance, in real terms this balance could be repaid by a relatively small unsecured loan at the end of the loan period.

As the value of my house has tripled over the last 15 years, and if the next 25 years follow the same basic economics as the last that the value of houses should increase by 5 times over the next 25 years, so in real terms if you have a £150,000 mortgage then in 25 years time whis will be worth the equivalent of £30,000.

A *lot* of my colleagues in 'the South' are banking on that being correct. And / or they're banking on an inheritance to pay off the mortgage. Fingers crossed

[justinp1]

deva link said:

justinp1 said:

Even if the worst comes to the worst and I dont remortgage for 25 years, and I am left with the balance, in real terms this balance could be repaid by a relatively small unsecured loan at the end of the loan period.

As the value of my house has tripled over the last 15 years, and if the next 25 years follow the same basic economics as the last that the value of houses should increase by 5 times over the next 25 years, so in real terms if you have a £150,000 mortgage then in 25 years time whis will be worth the equivalent of £30,000.

A *lot* of my colleagues in 'the South' are banking on that being correct. And / or they're banking on an inheritance to pay off the mortgage. Fingers crossed

Fingers crossed, but anything less will mean that inflation will need to drop significantly under the current and historical levels.

The good thing about the plan of 'interest only' is that you have a degree of flexibility.

I would be gutted if I went repayment and my business took a turn for the worse and would *just miss* the amount of the repayment mortgage a couple or few times and thus ruin my future credit chances and have to start hunting around for the sub-sub-prime lenders who charge a fortune for a setup fee and a high rate to cover their risk.

if you are dead set in living in the same house for 25 years, then there is the benefit of knowing it will be paid off. But, if you have any ideas of moving to increase your stake in the housing market, or use some capital for other properties, then keeping as much of your assets 'liquid' will be of huge benefit. Similarly, if I had to take out a loan for something in the future the higher interest rate on this would outweigh any potential gain of a repayment mortgage.

If your mortgage rate is say 6% on interest only and you are putting any 'extras' in an ISA you will be getting 5.5%.

Thus all you are losing out on financially is 0.5% per annum of any capital repayments you have made. In the first 2-3 years this is so little anyway that the 0.5% of that is nothing.

[Graham]

Interesting i have a 250+k house and a mort of 130. the first 2 years discount are now up and its not on the best rate as its a self cert buy to let mort currently as that was the easiest way to do it before i sold my old place.

I've been looking to re do the mort and IO looks like an option as i need to free up a little capital in the short term and that would give me some breathing space.

the idea of an IO that allows overpayments and daily interest sounds interesting, the flexibility i need at the moment as I was just going to stick the extra somewhere and change the mort again in a few years back to repayment plus the saved capital, but this sounds like a better idea

G

[scotal]

Graham
You will very shortly have mail.

[Seany88]

justinp1 said:

deva link said:

justinp1 said:

Even if the worst comes to the worst and I dont remortgage for 25 years, and I am left with the balance, in real terms this balance could be repaid by a relatively small unsecured loan at the end of the loan period.

As the value of my house has tripled over the last 15 years, and if the next 25 years follow the same basic economics as the last that the value of houses should increase by 5 times over the next 25 years, so in real terms if you have a £150,000 mortgage then in 25 years time whis will be worth the equivalent of £30,000.

A *lot* of my colleagues in 'the South' are banking on that being correct. And / or they're banking on an inheritance to pay off the mortgage. Fingers crossed

Fingers crossed, but anything less will mean that inflation will need to drop significantly under the current and historical levels.

The good thing about the plan of 'interest only' is that you have a degree of flexibility.

I would be gutted if I went repayment and my business took a turn for the worse and would *just miss* the amount of the repayment mortgage a couple or few times and thus ruin my future credit chances and have to start hunting around for the sub-sub-prime lenders who charge a fortune for a setup fee and a high rate to cover their risk.

if you are dead set in living in the same house for 25 years, then there is the benefit of knowing it will be paid off. But, if you have any ideas of moving to increase your stake in the housing market, or use some capital for other properties, then keeping as much of your assets 'liquid' will be of huge benefit. Similarly, if I had to take out a loan for something in the future the higher interest rate on this would outweigh any potential gain of a repayment mortgage.

If your mortgage rate is say 6% on interest only and you are putting any 'extras' in an ISA you will be getting 5.5%.

Thus all you are losing out on financially is 0.5% per annum of any capital repayments you have made. In the first 2-3 years this is so little anyway that the 0.5% of that is nothing.

Definitely food for thought, and really kind of puts things into perspective especially about the ISA bit. Are those figures right though? About inflation etc?

[emicen]

Thought I'd add some numbers courtesy of the offset calculator at www.if.com

- £100k mortgage on a £120k property giving 83% LTV
- Both options use a tracker mortgage at base rate + 0.74% for the term of the mortgage
- Both options term is 25 years

Repayment:
Initial payment = £632.27
Total payments = £189,632

Interest Only:
Monthly payment = £481.20
Overpayment to match repayment = £151 (calculator wont accept pennies in this field)
Total payments = £189.658

Both illustrations ignore having tied in savings or using your current account balance to offset the mortgage.

[justinp1]

Seany88 said:

justinp1 said:

deva link said:

justinp1 said:

Even if the worst comes to the worst and I dont remortgage for 25 years, and I am left with the balance, in real terms this balance could be repaid by a relatively small unsecured loan at the end of the loan period.

As the value of my house has tripled over the last 15 years, and if the next 25 years follow the same basic economics as the last that the value of houses should increase by 5 times over the next 25 years, so in real terms if you have a £150,000 mortgage then in 25 years time whis will be worth the equivalent of £30,000.

A *lot* of my colleagues in 'the South' are banking on that being correct. And / or they're banking on an inheritance to pay off the mortgage. Fingers crossed

Fingers crossed, but anything less will mean that inflation will need to drop significantly under the current and historical levels.

The good thing about the plan of 'interest only' is that you have a degree of flexibility.

I would be gutted if I went repayment and my business took a turn for the worse and would *just miss* the amount of the repayment mortgage a couple or few times and thus ruin my future credit chances and have to start hunting around for the sub-sub-prime lenders who charge a fortune for a setup fee and a high rate to cover their risk.

if you are dead set in living in the same house for 25 years, then there is the benefit of knowing it will be paid off. But, if you have any ideas of moving to increase your stake in the housing market, or use some capital for other properties, then keeping as much of your assets 'liquid' will be of huge benefit. Similarly, if I had to take out a loan for something in the future the higher interest rate on this would outweigh any potential gain of a repayment mortgage.

If your mortgage rate is say 6% on interest only and you are putting any 'extras' in an ISA you will be getting 5.5%.

Thus all you are losing out on financially is 0.5% per annum of any capital repayments you have made. In the first 2-3 years this is so little anyway that the 0.5% of that is nothing.

Definitely food for thought, and really kind of puts things into perspective especially about the ISA bit. Are those figures right though? About inflation etc?

Heres a link to an inflation caluculator:

www.ft.com/yourmoney/tools/inflation

According to that if inflation is 3% over the next 25 years, £150,000 is worth in todays value £70,046.

Remember this is just the effect of inflation and does not take into account any rise in house prices in real terms. So with just this taken into account, even if you only paid the interest, you would still owe £150,000 but that would be worth approximately what £70,046 is now - If that makes sense!?

I remember seeing that house prices (including inflation) had risen by over 500% over the last 25 years. I would approximate that the next 25 years will be in the same ballpark - although of course some areas will be less, and some more.

Thus, for an example if you have a £200,000 house today with £50,000 equity and £150,000 mortgage in 25 years time if the same rise happens your house will be worth £1,000,000 with £850,000 equity and £150,000 mortgage.

Now that doesnt sound quite so bad than having the 'same amount' to pay at the end of the deal!?

[deva link]

justinp1 said:

According to that if inflation is 3% over the next 25 years, £150,000 is worth in todays value £70,046.

Remember this is just the effect of inflation and does not take into account any rise in house prices in real terms. So with just this taken into account, even if you only paid the interest, you would still owe £150,000 but that would be worth approximately what £70,046 is now - If that makes sense!?

I remember seeing that house prices (including inflation) had risen by over 500% over the last 25 years. I would approximate that the next 25 years will be in the same ballpark - although of course some areas will be less, and some more.

Thus, for an example if you have a £200,000 house today with £50,000 equity and £150,000 mortgage in 25 years time if the same rise happens your house will be worth £1,000,000 with £850,000 equity and £150,000 mortgage.

Now that doesnt sound quite so bad than having the 'same amount' to pay at the end of the deal!?

OK, you picked a random inflation rate, but you're suggesting that houses will rise 500% in 25 yrs. It's going to very interesting to see the innovative financial products that will need to be available for people earning even £100K/yr to be able to buy that £1M house.

[justinp1]

deva link said:

justinp1 said:

According to that if inflation is 3% over the next 25 years, £150,000 is worth in todays value £70,046.

Remember this is just the effect of inflation and does not take into account any rise in house prices in real terms. So with just this taken into account, even if you only paid the interest, you would still owe £150,000 but that would be worth approximately what £70,046 is now - If that makes sense!?

I remember seeing that house prices (including inflation) had risen by over 500% over the last 25 years. I would approximate that the next 25 years will be in the same ballpark - although of course some areas will be less, and some more.

Thus, for an example if you have a £200,000 house today with £50,000 equity and £150,000 mortgage in 25 years time if the same rise happens your house will be worth £1,000,000 with £850,000 equity and £150,000 mortgage.

Now that doesnt sound quite so bad than having the 'same amount' to pay at the end of the deal!?

OK, you picked a random inflation rate, but you're suggesting that houses will rise 500% in 25 yrs. It's going to very interesting to see the innovative financial products that will need to be available for people earning even £100K/yr to be able to buy that £1M house.

I didnt pick an inflation rate at random, I picked the one the Financial Times who run the calculator specifically suggested...

As inflation is around 2.75 at the moment I dont think its too far off.

I agree, the situation will be interesting. However, what you may have not taken into account is that inflation is also a product of peoples earnings, and such the average wage does increase over time too so that whilst in real terms the average wage may not increase much, in 25 years the average wage may be £50,000 per year for example.

We already have a situation where the '4 times your salary' rule means that even a couple on the national average wage who say earn £40k between then can only borrow £160,000. That doesnt buy a huge amount in most areas, but of course there are other factors involved. People inherit houses, or at least a sum as equity and many other factors. The average cost of the houses sold is about £185,000 at the moment, above even what a couple on average earning can afford to mortgage *supposedly*.

Last year inflation was around 2.75% and house prices increased by 5.5%. Of course it doesnt take a genius to see that buying a house is becoming more and more unaffordable for 'average' earners. Where will it go? Hong Kong and Germany currently offer 99 year mortgages which supposedly will be inherited by your siblings - for those who can afford to buy. For the rest, they must rent - usually from large blue-chip companies who have invested in property.

That process has already started here - a large proportion of the newly built 'first time buyers' houses, or usually flats are sold on a 50% ownership scheme.

[Seany88]

justinp1 said:

deva link said:

justinp1 said:

According to that if inflation is 3% over the next 25 years, £150,000 is worth in todays value £70,046.

Remember this is just the effect of inflation and does not take into account any rise in house prices in real terms. So with just this taken into account, even if you only paid the interest, you would still owe £150,000 but that would be worth approximately what £70,046 is now - If that makes sense!?

I remember seeing that house prices (including inflation) had risen by over 500% over the last 25 years. I would approximate that the next 25 years will be in the same ballpark - although of course some areas will be less, and some more.

Thus, for an example if you have a £200,000 house today with £50,000 equity and £150,000 mortgage in 25 years time if the same rise happens your house will be worth £1,000,000 with £850,000 equity and £150,000 mortgage.

Now that doesnt sound quite so bad than having the 'same amount' to pay at the end of the deal!?

OK, you picked a random inflation rate, but you're suggesting that houses will rise 500% in 25 yrs. It's going to very interesting to see the innovative financial products that will need to be available for people earning even £100K/yr to be able to buy that £1M house.

I didnt pick an inflation rate at random, I picked the one the Financial Times who run the calculator specifically suggested...

As inflation is around 2.75 at the moment I dont think its too far off.

I agree, the situation will be interesting. However, what you may have not taken into account is that inflation is also a product of peoples earnings, and such the average wage does increase over time too so that whilst in real terms the average wage may not increase much, in 25 years the average wage may be £50,000 per year for example.

We already have a situation where the '4 times your salary' rule means that even a couple on the national average wage who say earn £40k between then can only borrow £160,000. That doesnt buy a huge amount in most areas, but of course there are other factors involved. People inherit houses, or at least a sum as equity and many other factors. The average cost of the houses sold is about £185,000 at the moment, above even what a couple on average earning can afford to mortgage *supposedly*.

Last year inflation was around 2.75% and house prices increased by 5.5%. Of course it doesnt take a genius to see that buying a house is becoming more and more unaffordable for 'average' earners. Where will it go? Hong Kong and Germany currently offer 99 year mortgages which supposedly will be inherited by your siblings - for those who can afford to buy. For the rest, they must rent - usually from large blue-chip companies who have invested in property.

That process has already started here - a large proportion of the newly built 'first time buyers' houses, or usually flats are sold on a 50% ownership scheme.

Justin you make very valid points in principal but isn`t it very dangerous to `risk`it like that? Do you have a back-up plan?

And so regarding overpayments you prefer to instead invest them into an ISA or such? This is an added bonus as i plan on renting the house out for a few years before i sell so then maintaining high interest payments on the mortgage relative to the rental income would be beneficial.