Mortgage advice

[scooterscot]

As a contractor what is the best options of the two:

flexible repayment - the capital you reduce as you go along with monthly overpayments

interest only - the capital you reduce as you go along with monthly overpayments

If your intention to to pay off some capital every month, does it make any difference which option you chose?

[Back In Business]

Can you pay off capital if you have an interest only mortgage? I thought that the clue was in the name?

[scooterscot]

Can you pay off capital if you have an interest only mortgage? I thought that the clue was in the name?

I've found a flexible one that allows you to do just that. What's the point i don't know!! Only advantage is you're not forced to pay capital off with every mortgage payment, seems daft I know.


What's best here: Is capital growth still going to outway the cash I could put in a savings account rather than burning it on interest payments?

[XLMonkey]

You are pretty much always better off to pay off the capital, rather than keeping cash in the bank (obviously, you do need a bit of cash to keep you in beer and burgers). So, a repayment mortgage, with the option to pay off the capital in lumps whenever you're feeling a bit flush.

[Sockpuppet]

Repayments are always better unless you have another need for the cash - i.e. investing and if you need a mortgage for an average house you don't have enough money to lose so investing in anything other than safe stocks not a good idea.


For example my sister had a interest only on her flat. Started @ £65k 3 years later its worth £80k.

Fine, she has 15k equity for nothing. Now if she had had a repayment she would have had 15k + the repayments of equity.

[IR35 Avoider]

Generally, the difference between a repayment and a interest-only mortgage is that with a repayment they take a certain amount on top of interest each month as a repayment, whether or not that suits your circumstances at the time.

With an interest-only, although the theory is that you pay the whole thing off in one go at some future date, in practice you can usually pay off chunks whenever you liked, even monthly. The size and timing of the the chunks is entirely at your discretion. Therefore interest-only is generally better because you have complete flexibility - you can even make exactly the same payments you would have made had you had a repayment mortgage, the only disadvantage is that you might have to do the calculation of how much that is yourself.

Even interest-only mortgages with penalties for early repayment (because you are in a special deal period) usually allow you to pay up to 10% off each year without penalty. I think there may be an industry-wide code of good practise that causes them to write this into the contracts.

In saying interest-only with ad hoc repayments is better, I'm also assuming that mortgage interest is calculated on daily balances, I think this is nearly always the case these days.

Repayment mortgages suit people with very boring cash flows (both income and expenses follow a regular pattern with no surprises, for years at a time) or people who are so undisciplined that they would never get round to paying off any bit of an interest-only mortgage if the money wasn't automatically taken from them.

Incidentally, the original way interest-only mortgages were supposed to work, was that instead of paying off the mortgage you paid into an investment (endowment policy or ISA) which is then used to pay off the whole mortgage 25 years later. This is a risky approach whose main purpose is to generate extra commission for the financial advisor who recommends it. You are better off putting these monthly/quarterly/annual investment amounts into reducing the size of the mortgage. (You should probably be investing as well, but to pay for other things, not to pay off your mortgage.) One exception to the rule that investing to pay off a mortgage doesn't make sense is investing via a pension, with a view to using the pension lump sum. The tax breaks are so good that it may be worth the extra risk. Personally I'm paying off my mortgage as well as putting the maximum allowed into a pension though.

[IR35 Avoider]

Now if she had had a repayment she would have had 15k + the repayments of equity.

She has less savings but has had the benefit of whatever she spent the money on instead. From the available facts there's no way to tell whether spending was a better option than saving would have been.

[Sockpuppet]

She has less savings but has had the benefit of whatever she spent the money on instead. From the available facts there's no way to tell whether spending was a better option than saving would have been.

Shes a girl. I would have forced her to spend the money on the mortgage instead of the crap (read: bads and shoes) that she has spent it on. She has no savings of any kind.

I see what you mean but in her and many other cases forcing people to pay repayments is a good way of making sure that they "save" some money.

[Sockpuppet]

With an interest-only, although the theory is that you pay the whole thing off in one go at some future date, in practice you can usually pay off chunks whenever you liked, even monthly. The size and timing of the the chunks is entirely at your discretion. Therefore interest-only is generally better because you have complete flexibility - you can even make exactly the same payments you would have made had you had a repayment mortgage, the only disadvantage is that you might have to do the calculation of how much that is yourself.

I like the northern rock offering.

Repayment that allows over and under payment. I've always thought that repayments offer better value as on a interest only you are paying the interest on the whole thing.

I.e. 5% on £200,000 for 25 years

With repayments you are paying

5% on £200,000 in year 1
5% on £195,000 in year 2
5% on £190,000 in year 3

So all things considered you should pay less in interest.

[lukemg]

Offset tracker from the Woolwich, every bean you have in your account has the same effect as paying that amount off your mortgage total for that day.
i.e. 60k mortgage + 5k in the bank - mortgage is treated as 55k for the day and interest charged accordingly.
Only good for people generally in credit though. Also means you can reduce the interest without tying up the money by paying chunks off, just put it into the account (or other linked accounts to keep it separate)
Essentially you get the mortgage rate as interest on the money, but no tax to pay as it reduces the loan on the house rather than paying a sum to you.
You need discipline for it to work as the cash is easy to get at.