Mortgage - repayment or interest only
Mortgage - repayment or interest only
Author
Discussion

bennyboydurham

Original Poster:

1,617 posts

190 months

Wednesday 29th June 2011
quotequote all
Chaps, a bit of advice, if you'd be so kind.

Consider this theoretical situation:

You build a self build house for around £100k on a plot you already own. With the plot, it's worth around £400k (it's a big plot in a nice spot).

You have generous parents that stand the build cost, but you need to pay them back by mortgaging the house when it's complete.

You are also wanting to start a family, and want to free up as much cash as possible to make your life easier for the next 10-20 years as you are both self employed with all the uncertainty that brings.

Do you-

Get a rock bottom rate interest only mortgage and treat the outstanding capital balance almost as an early 'equity release', knowing that should you not inherit some cash or get some other windfall you'll have to downsize when you retire to pay it off, but reap the benefits during your working life with plenty of spare cash to bring up the kids/holidays/buy a DB9/ etc?

or

Crack on with a repayment mortgage which would more than double the payment and make a few more sacrifices with your lifestyle and options now, but know that in 25 years time it'll be paid off and is yours?

The only reason I ask is that I looked at a sliding settlement figure scale and on rough figures after 10 years I'd have paid around £60,000 with the repayment mortgage but barely have scratched the surface with the capital. I'd have paid well less than half that out on the interest only mortgage to still be in roughly the same place. To me it seems that it's six of one and half a dozen of the other. Pay more now and reap the benefits in 30 years, or pay less now but make a sacrifice then. What to do?

bennyboydurham

Original Poster:

1,617 posts

190 months

Wednesday 29th June 2011
quotequote all
anonymous said:
[redacted]
I won't owe £400k. I'll owe £100k on a house worth £400k. Lots of things can happen, sure, but I'm not relying on anyone leaving me cash. I'm saying that if everything stayed the same I'd need to downsize to pay off the capital at the end. But I'll be 65 by then, I'll be ready to go die somewhere warm!

scotal

8,751 posts

295 months

Wednesday 29th June 2011
quotequote all
Look at offset?
Make overpayments as and when circumstances allow?
Stretcht he term (age dependent.)

Remember that not all lenders will consider a self build.
Many lenders will ask for a defined repayment vehicle.(although at 25% ltv you should be ok)

bennyboydurham

Original Poster:

1,617 posts

190 months

Wednesday 29th June 2011
quotequote all
anonymous said:
[redacted]
Ah if only I was in the DB9 league. I agree that £100k is small fry in the big scheme of things. Inflation's an interesting one - say in 1981 my £400k house would have cost the equivalent of say £65k, with say a 15k mortgage. So now I'd have a £400k house with an, er, £15k mortgage. Hmmmm. Can't rely on that happening again.

BoRED S2upid

20,763 posts

256 months

Wednesday 29th June 2011
quotequote all
If your Mortgage is only 25% and you own 75% of the property i'd be very tempted to stick it on interest only and enjoy life after all you could drop down dead tomorrow with a massive amount of equity in the house.

If it was the other way around and you owed £300k id be saying suck it up and pay the mortgage off for the next 50 years!

Welshbeef

49,633 posts

214 months

Wednesday 29th June 2011
quotequote all
bennyboydurham said:
Ah if only I was in the DB9 league. I agree that £100k is small fry in the big scheme of things. Inflation's an interesting one - say in 1981 my £400k house would have cost the equivalent of say £65k, with say a 15k mortgage. So now I'd have a £400k house with an, er, £15k mortgage. Hmmmm. Can't rely on that happening again.
The thing is a repayment mortgaged is an enforced savings plan - an interest only mortgage you are gambling that what you would spend on the repayment element works harder than you paying down the Debt.

However its £100k Debt.
You can get say 3% interest rate so you would be paying £250pcm in interest. While a repayment mortgage on the same interest rate is £474.

I'd recommend an Offset Interest only mortgage, you have total flexability. You can link up to 12 accounts and I'd highly recommend that you start off putting into one account call it "Capital repayment" the difference between IO and repayment. Dont be tempted to touch it just keep building it up.
Of course you would have other savings & current accounts all linked to the mortgage so you will pay less and less interest as the total net loan decreases.

The beneft of doing the above is IF something goes wrong and rates go up 800% your net loan is much less than it would have been and it will allow you some breathing room, whereas in the opposite situation.... the interest will rocket by 800% and what if your alternative investments are not delivering? Plus of course selling a house in a time when interest rates are rocketing upwards... probably going to take a while to sell and not for the price you would like.





GT03ROB

13,838 posts

237 months

Wednesday 29th June 2011
quotequote all
Welshbeef said:
I'd recommend an Offset Interest only mortgage, you have total flexability. You can link up to 12 accounts and I'd highly recommend that you start off putting into one account call it "Capital repayment" the difference between IO and repayment. Dont be tempted to touch it just keep building it up.
Of course you would have other savings & current accounts all linked to the mortgage so you will pay less and less interest as the total net loan decreases.
IF you have the discipline this is the way to go. Being one of Tonker's pet hates as I have an interest only mortgage I still appear to repay a fair amount each month just through offsetting.

Jobbo

13,430 posts

280 months

Wednesday 29th June 2011
quotequote all
bennyboydurham said:
The only reason I ask is that I looked at a sliding settlement figure scale and on rough figures after 10 years I'd have paid around £60,000 with the repayment mortgage but barely have scratched the surface with the capital. I'd have paid well less than half that out on the interest only mortgage to still be in roughly the same place.
If you pay capital and interest, based on 3%, loan of £100k and with a 25 year term you will have paid roughly £31-32k off the capital after 10 years. Do you really think that's barely scratching the surface?

GT03ROB

13,838 posts

237 months

Wednesday 29th June 2011
quotequote all
anonymous said:
[redacted]
yes & no. There are various breeds of offset. But you can have interest only, repayment or combination. If you are disciplined an offset on an interest only basis, will have another "savings" accoun into which you tip the repayment element. The disicpline of many won't allow that so they become the sae as an IO mortgage.

I use an offset becase I like the security of keeping a large cash sum available for any unforseen event. I use IO because I'm fairly disciplined in setting aside the cash to repay the capital, but it gives me more day to day flexibility if I need it.


scotal

8,751 posts

295 months

Wednesday 29th June 2011
quotequote all
Offset would certainly give you some options, however the OP said that he wants to keep costs to a minimum for the foreseeable future. As such, he's not going to be paying into the offset savings account. If he's not going to use the offset facility the extra interest charged simply for having it will make no sense at all.


Welshbeef

49,633 posts

214 months

Wednesday 29th June 2011
quotequote all
Jobbo said:
f you pay capital and interest, based on 3%, loan of £100k and with a 25 year term you will have paid roughly £31-32k off the capital after 10 years. Do you really think that's barely scratching the surface?
I think he's looking at it from the point of view of how much interest he will still be paying.

I.e. if it were 3% and 100k he'd pay £250pcm interest, while if it were £68k he'd be paying £170pcm interest.
Looking at it that way there isnt a huge absolute £ difference.

Still you have seen my post Im fully for clearing it off, say I as made unemployed I'd much rather "only" owing £68k v £100k.

Just checked out my Offset and YTD 2011 Ive been overpaying my Mortgage by c£2.8k pcm need to keep that up and stretch even more

pacoryan

671 posts

247 months

Wednesday 29th June 2011
quotequote all
bennyboydurham said:
Ah if only I was in the DB9 league. I agree that £100k is small fry in the big scheme of things. Inflation's an interesting one - say in 1981 my £400k house would have cost the equivalent of say £65k, with say a 15k mortgage. So now I'd have a £400k house with an, er, £15k mortgage. Hmmmm. Can't rely on that happening again.
Any particular reason why not? I'd say it was a fairly safe bet that over the next thirty years we'll have some significant inflation. In real terms your mortgage "value" is currently reducing by c.3-5% depending on your chosen measure of inflation, I'm certainly happy with that as a long-term strategy. Do you think I will give a monkey's about a £100k mortgage in 30 year's time? Not likely.

Unfortunately the short term value of the security is also depreciating, but that will change eventually. If you expect to be of limited (and defined) means in the next 20 years then you have a potential issue. Sounds like you need maximum flexibility now, so Interest Only makes sense and either an Off-set or high interest monthly savings account for the surplus to use if a) rates sky-rocket or b) you build up enough to make a meaningful repayment.

These days lenders are making it harder (often refusing point blank which seems unfair) to switch people from repayment to i-o if things get tight. Give yourself the most flexibility by starting on i-o.

Deva Link

26,934 posts

261 months

Wednesday 29th June 2011
quotequote all
GT03ROB said:
yes & no. There are various breeds of offset. But you can have interest only, repayment or combination. If you are disciplined an offset on an interest only basis, will have another "savings" accoun into which you tip the repayment element. The disicpline of many won't allow that so they become the sae as an IO mortgage.
How does that work month to month? I thought the idea of offset was that your payment remained constant but the higher your savings the more of the payment went to pay the principal.

If you're I/O, does your payment vary each month depending on your savings balance?

sinizter

3,348 posts

202 months

Wednesday 29th June 2011
quotequote all
Welshbeef said:
I'd recommend an Offset Interest only mortgage, you have total flexability. You can link up to 12 accounts
Which bank offers an offset mortgage allowing that many linked accounts ?

GT03ROB

13,838 posts

237 months

Wednesday 29th June 2011
quotequote all
Deva Link said:
GT03ROB said:
yes & no. There are various breeds of offset. But you can have interest only, repayment or combination. If you are disciplined an offset on an interest only basis, will have another "savings" accoun into which you tip the repayment element. The disicpline of many won't allow that so they become the sae as an IO mortgage.
How does that work month to month? I thought the idea of offset was that your payment remained constant but the higher your savings the more of the payment went to pay the principal.

If you're I/O, does your payment vary each month depending on your savings balance?
No my payment each month is the same. They deduct the interest based on the sum of the o/s mortgage balance & the linked accounts. My mortgage balance reduces each month. At the start of the mortgage the payment was calculated as the o/s balance at the prevailing rate ignoring the balances of the linked accounts. Hope I've clarified it, but I'm not great at explaining things!

Deva Link

26,934 posts

261 months

Wednesday 29th June 2011
quotequote all
GT03ROB said:
No my payment each month is the same. They deduct the interest based on the sum of the o/s mortgage balance & the linked accounts. My mortgage balance reduces each month. At the start of the mortgage the payment was calculated as the o/s balance at the prevailing rate ignoring the balances of the linked accounts. Hope I've clarified it, but I'm not great at explaining things!
I think so - your payment is set based on I/O but in practice you owe less than that due to savings balances so the extra is used to pay down the principal.

GT03ROB

13,838 posts

237 months

Wednesday 29th June 2011
quotequote all
Deva Link said:
I think so - your payment is set based on I/O but in practice you owe less than that due to savings balances so the extra is used to pay down the principal.
Yep.

pacoryan

671 posts

247 months

Wednesday 29th June 2011
quotequote all
anonymous said:
[redacted]
Not quite the same though is it? We are still experiencing inflation last time I checked, some time after it all went pear-shaped, with the prospect of interest rate increases in an attempt to control inflation, not a deflationary trend with interest rate reductions to try and reverse it.

Presumably you are suggesting we are now ripe for an extended period of deflation, but I'm not sure the current market signals agree, perhaps the asset values here didn't balloon to the same degree, fewer corporate insolvencies occurred and the banks didn't get the bad debts they expected and thus there was a genuine correction and we move on.

Or are you saying the real melt-down is yet to occur?

I am not an economist, and thus very happy to be informed if my musings are off-track!


Welshbeef

49,633 posts

214 months

Wednesday 29th June 2011
quotequote all
sinizter said:
Which bank offers an offset mortgage allowing that many linked accounts ?
My barclays / woolwich does.

sinizter

3,348 posts

202 months

Wednesday 29th June 2011
quotequote all
Welshbeef said:
My barclays / woolwich does.
Thanks. Will look into it when the time comes.