Reypayment vs interest only mortgages?

Question

I'm hoping to buy a house soon, and have been in touch with a mortgage advisor.

He's found me a mortgage. I wanted to get a repayment mortgage because it's easy to understand: "after 25 years I will have paid off the loan, and I will own my house."

Unfortunately the "repayment" repayments are a little more than I can afford so I may be forced to get an interest only one.

The mortgage is fixed for 5 years and is fully flexible, meaning i can over-pay if I have enough money.

Now, here is the bit I don't 100% understand:

Lets say the "repayment" repayments are £900 and the "interest only" repayments are £700

At the end of my 5 year period if I wanted to "upgrade" to a repayment mortgage, but had just been paying £700 a month, will I be £12,000 short? (5 years of £200 a month short)

If so, do lenders let you pay this off and "clear the slate"?

Also, if I managed to pay £800 a month for 5 years would I only be £6,000 short?

Any additional info would help too!

Answer 1

The best mortgages are repayment ones, simple as that. And what you want is a mortgage where, if you make a payment, your balance is reduced immediately from that date (previously, any payments made during the year were treated as 'paid' at the end of the year, so you ended up paying a full year's interest. Now many mortgage providers offer you one where, if you pay on 1st April, your balance is immediately reduced from that date). That's the one you want, a flexible mortgage where you can pay off additional sums as you need it.
The maths is very confusing but - putting it plain and simple - do whatever you can to get a repayment mortgage. And pay it off with lump sumps - for birthdays and Xmas, etc., just ask for money and pay off that mortgage. I paid off a 25 year mortgage in just 12 years doing this ... boring I know, but it makes you wealthy and earlier.
Good luck

Answer 2

If you have an interest only option, you will only ever pay interest on the loan. You will need to pay the loan at some point, so that's why you will need a repayment vehicle like an ISA, Stakeholder Pension or an Endowment (or even just sell the property). Alot of people go for this as it is a cheaper option.

If you have a 25 year mortgage, and convert it from an interest only to a repayment mortgage after say, 5 years, the lender will just do the figures based on paying it back over 20 years, so the payments will be more.

Might I suggest looking at extending the mortgage term to a repayment mortgage over say, 30 or 35 years, that will be cheaper.

Your broker should reallt have explained this!

Answer 3

With Interest only, guess what, you only pay the interest. With repayment you pay the interest plus a percentage of the capital so these payments are higher.
After 5 years with Intest only you would still owe the same sum as you borrowed as you wouldn't have made any capital reductions.
You then start again ie borrow £x over as many years as you want. Dont fall into the trap of thinking you only take a mortgage over 25 years. If you can afford it go for 20 or even 15 years as the overall interst payments would be massively reduced.
Any "extra" money paid would go towards reducing the capital so the amount owed after five years would be lower.

Answer 4

In short, no you will not be £12k short. Let's say at the end of 5 years, you find a better deal at another bank, you can re-mortgage with them from scratch (on an interest only or repayment basis) for the full 100% of your original mortgage. Let's say you have put some money aside to pay off the mortgage that you keep in a savings account, you could then use this money to reduce your mortgage, or treat as normal savings, as you wish.

If you still want a repayment option, you may be able to reduce the amount you pay by increasing the term of the loan to say 30 years. However, note that the overall amount you pay back will be greater (i.e. you will pay interest for longer).

However, don't be fooled that interest only is a better deal, or a safe option. You may pay less now, but you still have a large debt to pay off at sometime in the future. Some people choose interest only because they want to try to invest the money they would have used to repay to the bank into the stock market, make massive gains and pay the mortgage off early. All sounds great, but if you risk losing your investment if the market drops. Then you cannot pay off the large debt in 25 years!

You also need more financial discipline for interest only - i.e. make sure you put some money aside each month, and don't plunder it at Xmas time! Equally, don't rely on a house market boom to pay off your mortgage - one of the economists at a large US bank thinks there will be a house price crash in 2 years.

One last point, some lenders may also wish for you to demonstrate to them that you are putting money aside (as well as having life insurance and house insurance).

So in summary, interest only is fine, if you have some financial discipline, and are not using it simply because you cannot afford repayment. If the latter is true, then you may be over-stretching yourself.

As ever, don't take my unqualified word for it, but check the above with your mortgage advisor, who should be a qualified IFA.

Good luck!

Answer 5

Interest only means you still owe the full amount after 5 years.

Repayment would mean you owe a little less after the 5 years.

Ask about a split mortgage (name changes with providers) - some is repayment and a % is interest only. You can balance monthly payments with what you can afford.

Danger about interest only, even with an overpayment option is that we (me) spend as much as we earn and never seem to get around to putting extra towards the mortgage.

Also with interest only, the provider should insist that you have a plan to repay at the end of the term.

Hope this helps - good luck

Answer 6

as i see it - an interest only mortgage is just that, you only pay the interest and still owe the full amount borrowed. most people have some other means of paying the capital at the end.

so in your scenario above, you could pay interest only for 5 years and then when you re-mortgaged you would have to borrow enough to pay off the FULL amount you borrowed, it wouldnt have reduced 1 little bit.

Answer 7

You need an offset mortage. with this you pay the normal payments but any money you have in your savings accout offset some of the interest. Family can also use their saving to offset your mortgage interest.

Answer 8

interest only calculator, http://www.choicefinance.net/calculators/interest-only-calculator.php

repayment calculator, http://www.choicefinance.net/calculators/what-if-i-pay-more-calculator.php