Zzzzzzzzzzzzzzzzzzzzzzzzzz Posted January 18, 2006 Share Posted January 18, 2006 (edited) Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway. Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please! Edited January 18, 2006 by gruffydd Quote Link to comment Share on other sites More sharing options...
Jason Posted January 18, 2006 Share Posted January 18, 2006 Time to bring this thread back to life: http://www.housepricecrash.co.uk/forum/ind...showtopic=21847 Tell him to read that! Quote Link to comment Share on other sites More sharing options...
frugalista Posted January 18, 2006 Share Posted January 18, 2006 Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway. Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please! No it won't work, simply because if he puts the money in a cash account the post tax interest on the 170k will not cover the interest only mortgage payments, unless the interest rate on the mortage is less than about 3.25%. Now, if he invests the 170k in something clever, the income / capital gain from these investments might well cover the interest payments and more, which might turn out to be a good strategy. This was essentially the principle of endowment mortgages. But you would have to know what you are doing with the investment, or it could turn out worse than a repayment mortgage, as many people who were sold the endowment products found out. Whether house prices rise or fall is immaterial. frugalista Quote Link to comment Share on other sites More sharing options...
AteMoose Posted January 18, 2006 Share Posted January 18, 2006 (edited) the interest rate on the loan will be higher than the interest rate in the bank, so it wont cover the IO payments, he will had to pay more from his salary. He will also get taxed on the interest from the bank, further reducing the interest he recieves.... why would he want to do this? he will have had to supliment the morgage payments for 10 years, costing him thousands more... Two options : Buy a house have the interest payments pay his rent until house prices return to normal multiples.. Edited January 18, 2006 by moosetea Quote Link to comment Share on other sites More sharing options...
xian Posted January 18, 2006 Share Posted January 18, 2006 No it won't work, simply because if he puts the money in a cash account the post tax interest on the 170k will not cover the interest only mortgage payments, unless the interest rate on the mortage is less than about 3.25%. Now, if he invests the 170k in something clever, the income / capital gain from these investments might well cover the interest payments and more, which might turn out to be a good strategy. This was essentially the principle of endowment mortgages. But you would have to know what you are doing with the investment, or it could turn out worse than a repayment mortgage, as many people who were sold the endowment products found out. Whether house prices rise or fall is immaterial. frugalista according to my calcs, the interest after tax should just about cover the IO payments, with a little to make up if he is a 40% taxpayer. If he's a lower rate taxpayer, then he'' be able to cover it. Something in between is more likely if some of the interest on the capital pushes him into the 40% band. However, factor into that the tax deductability of interest repayments and then the sums work OK. Still clearly a rather uninformed decision though currently. You can lead a horse to water... Quote Link to comment Share on other sites More sharing options...
frugalista Posted January 18, 2006 Share Posted January 18, 2006 according to my calcs, the interest after tax should just about cover the IO payments, with a little to make up if he is a 40% taxpayer. If he's a lower rate taxpayer, then he'' be able to cover it. Something in between is more likely if some of the interest on the capital pushes him into the 40% band. However, factor into that the tax deductability of interest repayments and then the sums work OK. Still clearly a rather uninformed decision though currently. You can lead a horse to water... The interest part of the mortgage is not tax deductible if he intends to occupy the property. That was abolished years ago in the UK. Or maybe he intends to buy Swindon, Kansas, in which case the interest would be tax-deductible. I don't know if there really is a Swindon, Kansas, but there should be. frugalista Quote Link to comment Share on other sites More sharing options...
AteMoose Posted January 18, 2006 Share Posted January 18, 2006 according to my calcs, the interest after tax should just about cover the IO payments, with a little to make up if he is a 40% taxpayer. If he's a lower rate taxpayer, then he'' be able to cover it. Something in between is more likely if some of the interest on the capital pushes him into the 40% band. However, factor into that the tax deductability of interest repayments and then the sums work OK. Still clearly a rather uninformed decision though currently. You can lead a horse to water... whats the morgage/bank account combination? Quote Link to comment Share on other sites More sharing options...
xian Posted January 18, 2006 Share Posted January 18, 2006 The interest part of the mortgage is not tax deductible if he intends to occupy the property. That was abolished years ago in the UK. Or maybe he intends to buy Swindon, Kansas, in which case the interest would be tax-deductible. I don't know if there really is a Swindon, Kansas, but there should be. frugalista sorry, my mistake.... thought he was intending to BTL. However, still some tax to be offset if he chooses to let rooms (or rather no income to declare up to 4.5k or whatever it is) Quote Link to comment Share on other sites More sharing options...
E Powell Posted January 19, 2006 Share Posted January 19, 2006 (edited) gruffydd I think your cousin has been smoking too much draw. Edited January 19, 2006 by E Powell Quote Link to comment Share on other sites More sharing options...
r thritis Posted January 19, 2006 Share Posted January 19, 2006 Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway. Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please! Take it from me Swindon aint that swish! I don't get it. Even if he's determined to buy now it would surely make more sense to buy for cash. This strategy is like taking out a loan to invest in a savings account. He's got little to lose and everything to gain by just holding on to the dosh for say, a year. Even the most bullish predictions for the market have HPI running at < 5%. In a years time, things should be clearer.... Quote Link to comment Share on other sites More sharing options...
Goat Posted January 19, 2006 Share Posted January 19, 2006 Let me get this right, he plans to borrow money at 6% so that he can earn interest on other money at 4% (pre-tax). I'm sorry, are the only buyers left in the market absolutely fxxxing mad? Quote Link to comment Share on other sites More sharing options...
no accountant Posted January 19, 2006 Share Posted January 19, 2006 All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please! It's similiar to endowment mortgage, popular in the late 80s! Quote Link to comment Share on other sites More sharing options...
OzzMosiz Posted January 19, 2006 Share Posted January 19, 2006 I have lived and worked in/around Swindon all my life, and intend to buy in Swindon (or around the area again). Trust me when I say, house prices are slowly but surely dropping in Swindon. Your cousin would be barking mad to buy now! Tell him to invest his cash. 5% interest (and 5% drop in prices in a year) will be 10% gain on his behalf! Quote Link to comment Share on other sites More sharing options...
Scooter Posted January 19, 2006 Share Posted January 19, 2006 Just had a bit of a Argy Bargy with my cousin who's just inherited 170k - wants to purchase his first house for a similar sum (down in Swish Swindon) - he's going to keep the 170k and then use the interest he earns on it to pay off the interest only mortgage and then pay off the lump sum in around 10 years with the 170k in the bank - or that's the plan anyway. Does this make financial sense????????? - if house prices rise gradually with inflation (not that they will of course) ?????? All the different types of mortgage on offer just confuse me these days. Anyway, I'm trying to get him to invest in stocks / shares instead! Ammo please! Take a different tack-encourage him and let him piss his money away. Only a cousin isn't , no one closer, so let him do it... Quote Link to comment Share on other sites More sharing options...
Zzzzzzzzzzzzzzzzzzzzzzzzzz Posted January 21, 2006 Author Share Posted January 21, 2006 He's found a house and he's planning to buy but through an OFFSET MORTGAGE????? What on god's green earth is that and does it make more sense for him to use one of those - he's saying he can put his lump sum into the Universal Building Society Offset mortgage and earn untaxed income on his savings at a level above the mortgage rate on offer - guaranteed!????????? I don't have an answer cause I don't even know what an Offset mortgage is!!!!!!!!! HELLLLPPPPPP Quote Link to comment Share on other sites More sharing options...
iLegallyBlonde Posted January 21, 2006 Share Posted January 21, 2006 (edited) He's found a house and he's planning to buy but through an OFFSET MORTGAGE????? What on god's green earth is that and does it make more sense for him to use one of those - he's saying he can put his lump sum into the Universal Building Society Offset mortgage and earn untaxed income on his savings at a level above the mortgage rate on offer - guaranteed!????????? I don't have an answer cause I don't even know what an Offset mortgage is!!!!!!!!! HELLLLPPPPPP An Ofset mortgage means that he doesn't pay interest on the part of the loan which is equal to the amount in his savings account. So if he has £170k in savings and a loan of £240k he'd only pay interest on £70k. It's still madness though I cannot believe he will earn untaxed income on his savings and NOTHING is guaranteed. Edited January 21, 2006 by terrified Quote Link to comment Share on other sites More sharing options...
Zzzzzzzzzzzzzzzzzzzzzzzzzz Posted January 21, 2006 Author Share Posted January 21, 2006 He is purchasing for 164k and has 170k to play with -------- he's saying he can pay off his mortgage and actually earn a small amount of money in the process?? Quote Link to comment Share on other sites More sharing options...
iLegallyBlonde Posted January 21, 2006 Share Posted January 21, 2006 He is purchasing for 164k and has 170k to play with -------- he's saying he can pay off his mortgage and actually earn a small amount of money in the process?? In that case yes he would earn interest on the £6k and not on the £164k mortgage however I would be surprised if it was tax free unless he doesn't earn enough to pay tax ?? Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.