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Keefter

Is Interest Only The Best Way Forward?

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Not strictly a HPC topic I know but any thought would be appreciated, help me end this futile debate.

Keefter

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Not strictly a HPC topic I know but any thought would be appreciated, help me end this futile debate.

Keefter

Tell your "friend" not to buy he clearly has no concept of basic fundamentals and as such should remain living with mummy and daddy.

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Not strictly a HPC topic I know but any thought would be appreciated, help me end this futile debate.

Keefter

I aint worked it out but if interest is applied DAILY! Then I cannot see how paying in a lump sum after letting 12 months of interest accrue would be cheaper??

If you pay off on month one then the interest on the capital left is the

(initial figure - monthly payment) * IR per month

otherwise its

(initial figure + IR) - Lump Sum

So the initial figure that you pay the lump sum OFF is higher.

TB

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Not strictly a HPC topic I know but any thought would be appreciated, help me end this futile debate.

Keefter

I use IO. That way Im in control and not subject to the whim of an actuaries math (lenders deliberatley front - load interest and back - load capital). Try and repay chunks more frequently than annually on a daily calculated mortgage to really get that balance reduced.

Repayment mortgages are dying out.

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I'm not very familiar with the UK housing market. But in general terms, under no circumstances should a person get an interest-only mortgage. Does your friend know what interest-only means? It means all your payments go to paying the interest on the mortgage, none of it goes to reducing the principal. So it means you will never own the house, be it in 25 years, 50 years or 100 years, unless you're able to pay off the entire mortgage quickly AND ONLY THEN start paying the principal. No one can do that unless they win the lottery or bump off a rich relative.

Interest-only is an unadulterated scam, designed to hoodwink the financially innocent and naive. It ranks up there with Internet scams. Avoid it like the plague.

Edited by Lake

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How can anyone assume they will be in the same property for the next 25 years?

I had hoped I could avoid these sorts of response without putting 50 caveats in my post. For the sake of this post move your little brain away from CRASH CRASH CRASH DOOM DOOM GLOOM SCPETIC SCEPTIC and treat the post purely as a hypothetical one, and this hypothesis we're buy our house to live in for 25 years. If your imagination will allow.

Tell your "friend" not to buy he clearly has no concept of basic fundamentals and as such should remain living with mummy and daddy.

LOL - this post is typical of HPC. Firstly My 'Friend' is my friend, I already own my house and have done for 12 months. Secondly My friend already owns his house and hasn't lived with his parents since 1994.

Is it asking too much that someone explain teh workings of an IO mortgage V a repayment one. Obvioulsy.

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I have always wondered about interest only mortgages...

My parents bought a house for £4,400 many years ago. By the time they'd paid it off it was worth abut £100K. Had they taken out an interest only mortgage they could have lowered their repayments and paid off the capital at the end with a small personal loan taken out over a couple of years, or even with their savings. By the time they'd reached the end of the term the initial capital was peanuts due to inflation. However, for this to work you need sufficient inflation driving wages up, so it's a risky proposition. In theory you could buy a house today for £250K and, assuming the same levels of inflation that my parents experienced, would have a house after 25 years that was worth nearly £5.7m. By then wages, etc. would all have increased significantly and the £250K that you originally borrowed would be little more than a couple of months' wages.

I wouldn't want to take that risk myself though. Your payments would be 100% interest and therefore would increase more, in the event of rate rises, than the payments on a repayment mortgage. What a lot of people have done is taken out interest only mortgages so they could borrow more. What them go under first as interest rates creep up while those with repayment mortgages cling on a little longer.

I wouldn't rule out an interest only mortgage but I'd get one that allowed me to pay off chunks of capital as time went by so I could reduce the repayments as often as possible and pay it off in full as soon as possible. And I would only consider one that offered a great fixed deal for the first few years so I could take advantage of the lower 'interest only' payments in the short-term, while my income was low, but have a fighting chance of being on a better wage by the time the deal ran out so I could cope with the inevitable rise in payments that I would be hit with at that point.

Edited by Bingley Bloke

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I use IO. That way Im in control and not subject to the whim of an actuaries math (lenders deliberatley front - load interest and back - load capital). Try and repay chunks more frequently than annually on a daily calculated mortgage to really get that balance reduced.

Repayment mortgages are dying out.

Dogbox, I'm with you on this - IO gives you minimum basic obligatory payment each month, with the repayment of the capital left entirely in your hands. I like this arrangement because my wife doesn't work, and we can therefore put savings in her name so that the interest is tax-free. Mostly I get more in interest from savings than I pay on my discounted mortgage.

Where my scheme came unstuck is that family life, and joint accounts tended to erode the amount I was sticking in the savings account each month. I switched to a repayment mortgage last time I remortgaged simply as a form of "forced savings". However, I am still stuffing money into the savings account, and I will repay part of the capital every time I remortgage from now on.

Finance is my main driver, but psychology is the next important factor!

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Repayment mortgages are dying out.

Really, they said the same thing when endowment mortgages came about and looked what happened.

IO mortgages are the same as endowment mortgages but with a different name and no requirement to show that you have any means in place to pay off the capital at the end. IO mortgages are truly renting from the bank and that remark came from my Bank Manager in a private chat. ;)

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How can anyone assume they will be in the same property for the next 25 years?

I had hoped I could avoid these sorts of response without putting 50 caveats in my post. For the sake of this post move your little brain away from CRASH CRASH CRASH DOOM DOOM GLOOM SCPETIC SCEPTIC and treat the post purely as a hypothetical one, and this hypothesis we're buy our house to live in for 25 years. If your imagination will allow.

Eh?

I didn't mention any of that, did I?

and you're questioning my imagination?

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The problem with your friend's theory is that it is more difficult to be disciplined with saving than with mortgage commitments. What I am trying to say is that he/she is more likely to keep up with the interest + repayment if it is one payment per month. If he/she has to rely on his/her own discipline they may find it much more difficult to stick to the repayment schedule.

I used to have an interest only mortgage but after 9 years have just switched to a repayment. With hindsight, taking it out was possibly the most ridiculous thing to have done but I am now going to repay over 15 years.

Edited by Given Up

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If cash flows match exactly, then the proportions being paid off capital must be the same under IO and repayment mortgages. So no difference unless the small print on either restricts from making repayments flexibly, or applies payments and interest rates differently.

(Flexible repayment) IO may make sense if, for example, you are likely to be able to make higher payments on average but earn in lumpy amounts (commission/bonus) and do not want to be under undue monthly pressure. Again if you look hard enough you can find some other structure that offers similar freedom. None of these constructs are always applicable or never useful. You just have to know what you are doing and why, and what risks you are taking. Needless to say, most do not and/or are poorly advised.

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If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage.

I think everyone knows that houses increase in value (on past examples) by at least 100% over 10 years – so if you bought a house now for £200000 it should be worth at least £500000 by the time your mortgage is done.

My mum bought her first house for £2000 and for weeks cried at the amount of money and that she would never pay it back, 3 years later she sold it for £5000 and moved to a new house mortgage free.

Your friend could wait for 10 years to make some money or he could wait a few years renting – pay out £20000 in rent but save £100000 on the house purchase

It took me 10 years to make 100% on my house purchase last crash – I regret it because all my friends who waited made 200%

You need to look at the next 5 years and not 25 years

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If you buy a property

There's your key, you cannot buy a property with an interest only mortgage. It's a contradiction in terms.

You can only buy the property if you have some vehicle to repay the capital be it structured repayment, overpayment or something more complicated.

So the question boils down to whether you want to buy or not.

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then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage?

It depends on the difference between the interest rate on your savings (or other investment) and the interest rate of the loan. If the former is larger then you will actually be saving money. However, there's normally a spread between the lending and saving rate, which normally means you can't do this.

Also, the tax incurred on profit from investment has to be taken into account.

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Not strictly a HPC topic I know but any thought would be appreciated, help me end this futile debate.

Keefter

Few reasons why its not a good idea.

It depends on what the house is worth at the end of 25 years against the loan. With a repayment, at least he knows its paid off after 25 years and will bank whatever the house is worth.

You can't save money when you already owe money, it sounds stupid because it is stupid. Bit like most shoppers who have £1000 in savings but owe £2000 on credit cards. They don't have £1000 in savings, they have -£1000 which is growing more negative everyday.

It also depends on what the rates are during the 25 year period. If the loan hits a 9% rate in 10 years time then the payments would still have to be made against the original loan amount. Ouch.

All loans should be paid off quickly as possible, debt just holds you back.

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I'm not very familiar with the UK housing market. But in general terms, under no circumstances should a person get an interest-only mortgage. Does your friend know what interest-only means? It means all your payments go to paying the interest on the mortgage, none of it goes to reducing the principal. So it means you will never own the house, be it in 25 years, 50 years or 100 years, unless you're able to pay off the entire mortgage quickly AND ONLY THEN start paying the principal. No one can do that unless they win the lottery or bump off a rich relative.

Interest-only is an unadulterated scam, designed to hoodwink the financially innocent and naive. It ranks up there with Internet scams. Avoid it like the plague.

Are you sure you are not talking about Endowment mortgages ;). Surely no one takes on an interest only mortgage without knowing what its means. These folks are either hoping inflation or capital gains rub out the need for evenual repayment(relatively speaking of course).

Edited by abroad

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Not strictly a HPC topic I know but any thought would be appreciated, help me end this futile debate.

Keefter

Keefter I think you're friend is unbelievably naive if he thinks that IO is the best method for him to purchase a prop to live in - then hope that after 25yrs he will have the means to pay off the capital or that the value of the house will have appreciated significantly thus allowing him room for manouvre, and possibly restructure his finances. Apart from the inherent risk in such a venture, he is overlooking one major issue - the amount of interest that he would repay on an IO mortgage will be significantly more than a capital repayment. If you are interested in a full explanation there is a huge thread on thisismoney.co.uk where the pro's and cons are very well explained. The simple answer is NO it will not work out cheaper or indeed the same - significantly more expensive - compounded interest is the key my friend.

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You hardly pay any capital off on a repayment mortgage in the first five years....its front loaded with interest anyhow. IO providing you put some aside each year to draw down the capital is ok, less risky as your monthly payments are much less than repayment. IO only is not going away bears so get used to it. I think Dogbox had it right when he mentioned a while ago that we are going down the american route, people think in what the cost per month is for their lifestyle rather than thinking about paying off the mortgage.

Edited by mercsl

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Guest Charlie The Tramp

A £200k repayment mortgage at an average 5.5% over 25 years you would repay a total of £372,744.

A £200k IO mortgage at an average 5.5% over 25 years you would pay total interest of £274,998 add on the £200k of the original loan and the total cost becomes £474,998.

The IO mortgage has cost you an extra £102,554.

BTW 25 years passes quicker than you think.

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Right now that I have your attention, I'm sure one of teh clever folk that frequent this forum can answer this question.

If you buy a property with the assumption that you will be staying in it for the next 25 years. Would ity be cheaper in the long run to get an interest only mortgage and then each month save the difference between that repayment and a normal repayment mortgage. then at the end of each year pay the saved amount off the capital of the mortage? Or would this work out exactly the same as if you took a repayment mortgage? My friend is buying and is convinced this will work out cheaper.. I'm sure it must be at least the same or everyone would do it.

Only if you are getting a higher rate of interest on your savings than you are paying on your mortgage (which is unlikely). Also you pay tax on your savings income (assuming you are a tax payer) wheras the interest you 'save' by paying off part of the capital each month is effectively tax free.

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Guest muttley

people think in what the cost per month is for their lifestyle rather than thinking about paying off the mortgage.

A very good argument for renting rather than buying.FTBs take note.

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I'm afraid to say this but what the hell

This probably isn't the place to get good mortgage advice. I had the greatest respect for HPC and it's members until it started censoring it's own forums to what appears to be only bearish posts.

Very, very sad and the forum will now have have no credibility IMO.

Trolls appear in every Forum it's a price on freedom of speech.

I am still a HPC supporter just don't agree with this way.

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I can't believe anyone would consider an Interest Only mortgage. It's utter madness. Don't do it.

Of course, the banks will love you. You will be paying them loads of interest for years. If you don't have the necessary cash in 25 years time, probably around the same time you retire, you will have to sell up and move to a house on a council estate as you will own absolutely nothing. If you die, I suppose you could hand the debt onto your kids.

You got to remember about lenders. Their mission is to squeeze every last drop of cash out of you until you're squirming and then some more; then when you're almost in the gutter they'll let of the pressure a bit just so you can keep going longer so they can squeeze a bit more. Their attitude is that the onus is on you to defend yourself.

Incidentally what does happen if you die owing thousands on a house ? Maybe someone can enlighten me. Does the debt transfer to next of kin - hope you have a life insurance policy.

Neil

Edited by Neilr9

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  • 336 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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