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Coming into some money - pay off half of interest-only mortgage or invest so can eventually pay it off in full?

(204 Posts)
FungalToeBogeyman Sat 11-Jan-14 20:34:56

We took out an interest-only mortgage pre-recession, when our circumstances were very different and we were in a position to save towards repayment.

A few years later, DP, who was a high earner, developed mental health difficulties which affected his ability to work. Now, I'm the main earner, and my job is much more modestly paid. So while we can afford the monthly interest payments, we can't put more than a few hundred away each month towards the eventual repayment. The outstanding borrowing is £260,000.

In a few months, very luckily, I'm due to come into some money, and it will be enough to pay off nearly half the mortgage – a bit over £100,000.

What I'm wondering is, do we pay off a huge chunk of the mortgage with this money or, where the interest we pay is very low (1% over base rate), would it be better to invest it and, by the end of the mortgage term (about 20 years), have enough (with average growth of 5%) to pay it off in full?

I like the idea of seeing the overall borrowing reduce by nearly half, and knowing that when interest rates rise, we'll be able to afford the payments comfortably. However, even with nearly half the mortgage paid off, we still won't have the means to repay in full simply by saving each month, especially when interest rates rise. Nonetheless, we want to keep our settled DC here if at all possible.

My financial adviser recommends investing the money, at least initially while interest rates are still low in relation to the return we could achieve by investing, but I'd just like to get a second opinion.

What do others think? What would you do?

Thanks.

LIG1979 Sat 11-Jan-14 20:46:41

When do you remortgage? I would be concerned if I was interest only that the ltv would be high and then the interest rate you would be offered would be high. (Maybe higher than any investment potential.)

I agree that the interest could be better if you invested, but if you pay off the capital then the ltv will be lower and give you a better interest rate on remortgage. It would then mean that you could repay the mortgage quicker. It would probably be the safer option too unless you went for low risk investments which would give much lower returns.

I am not a financial expert though....

FungalToeBogeyman Sat 11-Jan-14 21:00:05

Thanks, LIG1979. In case my original post wasn't clear, we're not actually remortgaging. We have a mortgage with a good (low) interest rate that tracks base rate - base rate would have to rise by 2 or 3 percentage points for our mortgage to come up to the level of the best fixed rate mortgages currently on offer, so it doesn't make financial sense at the moment to remortgage. We intend to stick with our current mortgage.

What we're thinking of doing, when I come into the £100,000+ I mentioned, is either paying off a chunk of what we owe on the mortgage, or investing the money long-term so it can pay off the whole mortgage at the end of the term (markets/economy willing).

We have no early repayment penalties, so can pay off part or all of the mortgage at any point, and our LTV is fairly healthy already at 65%.

LIG1979 Sat 11-Jan-14 21:02:48

In which case - I think invest!

lekkerslaap Sat 11-Jan-14 21:10:33

I'd pay off the mortgage first.

Financeprincess Sun 12-Jan-14 08:20:12

I'm with lekkerslaap. Pay down your mortgage.

Reasons:

1) When interest rates rise, and they will, you will be very glad that you've knocked a lump out of the debt.

2) of course your financial adviser wants you to invest. How else does he/she make a living, if not recommending, and earning commission, on investment products? In any event, there's no guarantee that anything you put your money into will return enough to clear the mortgage at the end of the term: endowment mis-selling scandal, anybody? I'm a keen, and pretty successful, amateur investor but NO WAY would I rely on it as a means of clearing the mortgage. We're on a repayment mortgage.

3) psychologically, it's a great feeling to be reducing your mortgage.

Mabelandrose Sun 12-Jan-14 08:28:29

I would pay off the mortgage too. None if our investments have made us any significant money.

Well discount the financial advisors opinion for a start! He gets a commission if you invest and that's his salary so he needs you to!

If you pay down mortgage he gets nothing. Clearly he's more than biased! It's essential to his livelihood that you invest!

maillotjaune Sun 12-Jan-14 08:34:38

I would pay down the mortgage too. Have seen too many people see their investments shrink / barely grow at all to risk it given your other concerns about paying off capital.

ChasingSquirrels Sun 12-Jan-14 08:38:23

Pay down the mortgage and keep paying your current monthly repayments rather than reduced payments based on the lower mortgage.

cheesenpickle Sun 12-Jan-14 08:38:34

I would pay towards the mortgage. If you do this would you be able to switch to a re payment motgage- could you now possibly afford the monthly payments? If not could you calculate how much of the mortgage you could afford on repayment terms and put the rest on interest?

cheesenpickle Sun 12-Jan-14 08:40:00

I would pay towards the mortgage. If you do this would you be able to switch to a re payment motgage- could you now possibly afford the monthly payments? If not could you calculate how much of the mortgage you could afford on repayment terms and put the rest on interest?

Dressingdown1 Sun 12-Jan-14 08:45:33

Why not do both? You could use half to pay off some of the mortgage and invest half long term.

SanityClause Sun 12-Jan-14 08:46:22

Please remember that a so-called financial advisor is, in reality, a financial products salesperson.

He gets nothing from you paying off your mortgage, but will get a commission from you investing the money.

Surely the answer is to pay the windfall off your mortgage, which will reduce the repayments. See if you can then afford to change the mortgage to a repayment mortgage.

Find out what effect overpaying your mortgage will have? Will it reduce the interest payments? Or is your mortgage one where you can only reduce the repayments by making lump sum payments. (For example, we are allowed to make lump sum payments of 10% of the original loan per year, but no more.)

If you can reduce interest payments by overpaying your mortgage regularly, then do that. If not, then save the difference between the old payments and the new payments into a savings account, where it is "tied up" and, once a year, make a lump sum payment.

You really need to be speaking to your mortgage lender, and possibly to a mortgage advisor. Remember, however, that a mortgage advisor is in truth a mortgage product salesperson, and consider their advice, accordingly!

risingsunshine Sun 12-Jan-14 08:50:06

I would absolutely pay off the mortgage. Investment returns are not guaranteed, plus your monthy interest repayments will go down but if you carry on paying the same amount each month you'll be taking a bit off your capital each time.

dimsum123 Sun 12-Jan-14 08:57:27

Absolutely pay off the mortgage. It is very unlikely an investment would return 100% over 20 years.

rookiemater Sun 12-Jan-14 09:02:13

What cheesenpickle says. Pay off as much of mortgage as you can and change to repayment. I do not see the point of interest only loans - unless you have a firm investment to pay off the capital you are effectively renting the property rather than owning it.

LauraBridges Sun 12-Jan-14 17:31:43

Definitely pay it off. It's more secure. You could invest and lose the money or get very low interest which is taxed anyway. For most people paying off debt is usually the best use of any spare money. Pay off £100k and as that's just over half move to repayment for the rest which probably would be no more than you are paying on the whole sum as interest now.

Earlybird Sun 12-Jan-14 17:35:11

Another one who says pay off the mortgage. And when you're done with that, take monthly mortgage payment amount and whack it into pension/retirement saving.

tribpot Sun 12-Jan-14 17:38:51

Pay the mortgage down, definitely. You are in a very precarious position on an interest-only mortgage with no decent repayment vehicle and this is a massive opportunity to reduce that risk.

ArgyMargy Sun 12-Jan-14 17:38:59

Pay the £100k towards the mortgage, and if you can afford it, convert the mortgage to repayment. When interest rates go up (and everyone says they will go up substantially within next 2-3 yrs) you will be in a better situation.

Preciousbane Sun 12-Jan-14 17:39:49

Pay off the mortgage, investments can be fab however you can lose everything if very unlucky. Only ever invest what you can afford to lose.

sydlexic Sun 12-Jan-14 17:42:10

I am in the same position and would not pay the mortgage off. If you pay some of it the. What remains will be on a new mortgage at a higher rate and cost more.

I would invest it at as high a rate as possible.

kickassangel Sun 12-Jan-14 17:55:12

Mortgages almost always cost more than investments make. Pay off a huge amount of the lump sum and you will be saving more than half the amount you would have paid over the next 20 years, so an investment would have to more than double to give you the same advantage.

I would invest it given your mortgage interest rate is so low and you could always cash in the investments if you decide you would rather pay off some of the mortgage later. Obviously this would have its risks though as your investments might not perform as well as expected and diversification is important.

Have you considered managing the investments yourself though rather than using an adviser? It is relatively straight forward to do. I manage all the family SIPPs, ISAs and shares myself and as an example my SIPP is up 20% in the past ten months. What you could do is start a stocks and shares ISA and add up to the full allowance every year - obviously this will take a few years as you have a reasonable amount to invest. This would mean that your gains would be CGT and income tax free.

There is a lot of information out there and I wouldn't rush into any decisions.

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