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

[FungalToeBogeyman]

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.

Laura £5000 rental income after tax is still a lot better than £3000 savings on interest repayments though. You don't need a letting agent for just one property, in fact are better off without as long as you have a fair rent and find decent people to rent to.

And you might make a return on your capital investment, whereas saving £3000 on interest won't give you that.

The OP has the freedom to make overpayments whenerver she likes. She could make overpayments every month if she wants. She just needs a calculator workout how much she needs to repay every month if she wants to go down that route.

I have an interest only mortgage and it has been brilliant. We have had the flexibility to only pay the interest during hard times. (Ie. when dh was unemployed) and the abliy to make over payments. Our mortage even allowed us to increase the borrowing beyond what we orginally borrowed. Flexible lifestyel mortgages were very popular in the 1990s and work well for those who are highly disiplined with budgeting. Sadly many people are not as disciplined as they hoped and have got into a mess with flexible mortgages.

Talkin I can't see your mortgage sheet anywhere could you repost it? I've searched and everything...

horsetowater
linked on this thread
www.mumsnet.com/Talk/legal_money_matters/1715581-Cost-of-credit-cards-and-mortgages-the-spreadsheets
and the budget one is a couple of pages in ...

Oh god my brain's aching already. I shall look at this when I have a good hour of focus. Thanks anyway.

:)

Your lender is only asking about repayment vehicles because they are obliged to by the govt due to dodgy lending practices in the past and people burying thier heads in the sand - they cannot force you to have one.

Those are brilliant spreadsheets talkin although I'm still a little confused about the mortgage one, it seems to conclude that an IO mortgage is at its best if paid within half the term.

One more question - been arguing with dp. In an IO mortgage you are not paying off any capital in your property. Does that mean that when you sell it you don't make any profit on that capital? Can they say 'we own it because you haven't paid off any of the capital so therefore we get the profit? Are they keeping the equity in the house for themselves?

horsetowater
the spreadsheets ARE pretty heavy - and unlike all of the others they show every month ...

the point with ANY IO is that the payment to the company each month does not pay a single penny of the capital.
You take a £100k mortgage
you pat Interest only for 25 years
you still owe £100k
and on teh last day of the mortgage you either have to sell that house for more than £100 k or have a magic savings account ....

If you have a very old IO mortgage with a really low rate like the OP then inflation is making 100K a smaller amount. We are in strange financial times of having the bank of england base rate well below the rate of inflation. At the moment the value of people's savings is being destroyed by inflation. if you are lucky enough to have an IO mortgage then the true value of your mortgage will be reduced by inflation. 100K does not buy as much as it did ten years ago.

Ten years ago you could get a mortgage that was bank of england rate +0.5. Now you are lucky to get a mortgage rate that his bank of england + 3. Taking out a new mortgage is very different to maintaining an old IO mortgage.

However one problem is that people's salaries are not increasing with inflation at the moment. In the past increases in salary with inflation meant that paying a mortgage became easier. Unfortunately lots of people have had pay cuts.

then inflation is making 100K a smaller amount
NO
NO
NO
the relative value of £100k may have dropped, but that number on the cheque will have to be written

the lack of understanding of mortgages on this thread scares me

your house is only worth the cheque you receive for it
zoople excludes all under value sales so over estimates by around 20% on values
FFS
make the balance be zero by the end of the term
all else is cloud cuckoo land

"NO
NO
NO
the relative value of £100k may have dropped, but that number on the cheque will have to be written

the lack of understanding of mortgages on this thread scares me"

In twenty years time 100k will be easier to find that it is now. The downside is that salaries are not keeping up with inflation and the employment market is getting harder than ever.

It is naivity to think that a savings account is safe. In 1975 my parents were given £100 for me. It is an amount that could have bought a decent small car at the time. My parents bunged the check in a children's account and did not keep an eye on the interest rate being paid. When I was 18 there was £300 in the account. If the money had be invested in almost any other way it would have been worth so much more.

Both shares and property are a huge risk with financial overheads. There is both stamp duty and dealing fees for both shares and property. None of us have a crystal ball and I feel the best course of action is to have a balance of investments.

You still make the profit horse to water but unless you sell your home you need a way of paying off the loan because all you've done is paid the interest.

So if you buy a house for 150k with 10k equity and 140k mortgage and when you get to the end of the term you haven't overpaid (I.e. paid off the capital) then you either need to have found savings of 140k to pay back the loan or you sell your house to pay the loan. It's still your house and so if the house is now worth £250k you sell the house for 250k you pay back the mortgage loan of £140k and you keep your original 10k plus the profit on your house of 100k.

Problem is the house isn't always worth what you thought it would be and also you now don't have a home and your hundred thousand isn't going to buy you much.

IO mortgages are not good if you don't pay off the capital as you go along or have a savings/investment product that is going to mature and allow you to pay back the bank.

I think you need to be philosophical. Paying interest to a building society is similar to paying rent to a landlord. Until you have actually found a way to pay of the mortgage the house belongs to the building society.

We have an IO mortgage and we do overpay. I have a basket of various investments that I am hoping will pay off the final debt. Some investments are more high risk than others.

I think that endowment polices were a mistake because you got locked into them and there was no way of moving your captical when they failed to perform. I feel that stocks and shares and cash ISAs are a better bet.

IO only mortgages can work, but you need to really watch your investments.

littlered thanks that's the answer to the question I had. I'm getting confused with the words 'capital' and 'equity'. I feel like such an idiot when discussing things like money and tax. i haven't had a mortgage for years, paid mine off a long time ago but we need one now to make improvements and it's a bit of an eye opener.

I could never understand how everyone else I knew seemed so bloody rich all these years. Where I bought my property on 3x my income and no more, most peoples properties I know are valued at aournd 30x my income. I was forced into buying very young as rents were so high where I grew up and I knew it was the only way to live independently.

Good advice above.
So if we have lots of inflation (there was 60% over 2 years in the 70s and an awful property crash) the £100k borrowed now of course still has to be paid back but wages might have gone up 60% over those 3 years and money in a sense is worth less so a massive loan in some periods of our history became a smaller loan in a sense.

However if wages are not rising (and they aren't a present - many people have had no rises for 5 years or been moved to 4 day weeks which in effect is a reduction due to inflation) and due to inflation prices are, you are in effect having pay cuts (many people have had this recently). If you are having pay cuts the £100k becomes even harder to pay back.

If we were sure of high inflation and rising salaries as I think we were a few times since the 60s then taking out a massive mortgage as soon as you could which you knew in 10 years' time would in effect be small even if only interest only because your wage would double and prices would have doubled was wise. It is not like that at the moment.

For a few people who know they have a discipline to save (not most people) and whose income goes up and down because they are self employed or they get one massive bankers' bonus a year an interest only mortgage can be okay (and for those who otherwise could never buy anywhere of course as repayment is too expensive) as those with the bonuses etc pay off a large lump sum when they can. We paid off one mortgage entirely (although even that one was repayment) and then moved and had a 10 year mortgage only (a 10 year not a 25 year term means you are over paying from day 1 and I really liked that but it was only possible because my earnings made it possible).

For most people on modest incomes a repayment mortgage over 25 years on their house tends to be safest and forces you to be repaying regularly particularly after the first few years.

On the question about IO - if the house went up from £100k to £500k and it is interest only then when you sell it you repay the £100k and you keep the £400k profit most of it taxed at 28%. If the house is worth only £90k when you sell it then your lender keeps the proceeds and you have to find £10k from elsewhere.

First 'captial' in place of capital, now 'captical'!

Good luck tracking complex investments...

I manage and buy and sell the shares in my SIP (pension) but for most people it is better to pay your mortgage off entirely because you start investing in shares or buy to let properties unless people have a lot of money to spare.

(I don't to whom that was directed, but I cannot really see the point in pointing out people's typos)

Laurabridges
you keep the £400k profit most of it taxed at 28%
WRONG
no CGT on primary residence

Thanks again for further posts - very interesting to read others' different takes on IO mortgages, and ideas on repayment.

Like ReallyTired, I am disciplined financially - even without having loads of money to throw around. Our mortgage is our only (albeit substantial) debt.

We likewise benefit from the flexibility of an IO mortgage - had it been interest-only, we'd have to have sold up (when DH became unwell). As it stands, being able to pay off a large amount of the mortgage shortly should make paying off the remainder more manageable, even in our changed circumstances. Our lender has also said we could extend the term, so that's something to consider.

Although some of you have said I shouldn't have to provide any evidence of a particular investment vehicle, according to the lender, I do. And I have been told over the phone that this has to be an endowment policy (no!), a particular kind of pension (which I don't have) or a stocks and shares ISA. The latter is the only option for me it would seem, so I need to set one up to satisfy the lender.

The frustrating thing is that, for our emergency/rainy day fund, I have six months' living costs in cash ISAs, which I move around to keep 'good' growth rates, and if the lender would just accept these, I'd be fine. But, even where the cash ISAs are guaranteed to grow in value, albeit slowly, they'd rather I have a stocks and shares ISA - which could fall in value. Seems a bit non-sensical to me.

Anyway, the lender is RBS. If anyone thinks I can somehow pull off making them happy with my cash ISAs, please let me know how!

In the meantime, I'm going to start a new thread on the investments board asking for advice on stocks and shares ISAs - something I know nothing about. I'll link across to it once it's up ...

Thank you all again.

Fungal
And I have been told over the phone that this has to be an endowment policy (no!), a particular kind of pension (which I don't have) or a stocks and shares ISA.
Get the name of the person who told you that (first name and surname) and then ask to be put directly through to the complaints department
they have absolutely no right to force you to buy a product

the financial ombudsman will take a VERY dim view of such advice.

DO NOT start an ISA at the moment : the market is too volatile and it will only pay out well if you hold it for over ten years
how dare they make you use up your ISA allowance on your mortgage
cheeky gits

Wow. OK TalkinPeace. My concern, though, is that if I don't set this up, they will not allow us to continue with the mortgage/may change the (currently very affordable) interest rate at the point that we make the partial repayment, or insist on switching to a repayment mortgage. I've been told that providing evidence of this product is a requirement. I've called the lender several times, and several different people have said the same thing - although interestingly, when I've asked for this in writing, I've been redirected and redirected ... And as I understand it, lenders can periodically check on the progress of IO customers' repayment plans.

I agree, now isn't the best time to invest in a stocks and shares ISA, given how well the FTSE 100 did last year; I do feel somewhat forced to put my money where it could stagnate for a while.

I wonder if RBS would be OK with evidence of my fairly healthy-looking cash ISAs and a letter explaining that I intend to invest in a stocks and shares ISA when the market isn't at a (potentially) mini peak, as it is now. What do you think? My suspicion is that they won't be too understanding and it will be a case of 'computer says no'.

Fungal
the call centre people want to put you through to a sales team
play VERY hard ball
if you have a plan in place to be at zero by the final date, and have evidence to support it
FFS a cash ISA cannot drop in value, a shares ISA can
once you force them to pass you up the food chain, you'll get sensible answers

• and if you are on the phone, make notes of start time, duration, number of people passed to, and get all names

"sorry I did not catch your surname" "was that spelt with a Y?" is the best way to trick people into spelling their real names

and if they did try to change your mortgage deal unilaterally : ie other than as part of an advertised rate, again, the ombudsman would give them a VV hard time.

When I trashed Santander with the Ombudsman, my compensation was only a few hundred pounds, but their fees to handle it were many thousands AND they got a red mark for being stupid - which ups their insurance costs

Very helpful, TalkinPeace. Thank you.

I will admit to feeling scared to rock the boat and getting a black mark against us.

Where I've left it is a request for something to be sent to me in writing stating which types of repayment vehicle the bank considers acceptable. I refuse to set anything up on the basis of a phone conversation.

They did ask me if I wanted to be put through to their 'protection' team, and I said no as I have plans in place for repayment. But they do want to see evidence of these, and they "must" be one or more of the types I explained above.

Hmm.

Many thanks again.

I suppose, so as to keep them happy, I could set up a stocks and shares ISA with a small starting amount, and only pay more into it once I feel it's a better time, market-wise.

Are you being forced to change the interest only loan? Surely if you pay the £100k off the loan the lender cannot force you at the same time to move to a higher rate of interest. Instead you just continue with the same loan but it is £100k less that is owing.

(TP clearly I meant a second home ( re CGT) as the only property anyone has talked about her buying with £100k was a buy to let so yes CGT would be charged if the £100k second property she bought went up £400k in value. If instead she paid that capital off the house - no CGT on any gain on the home which is one of the reasons I've be arguing for the capital to be paid off the home not on a buy to let to avoid CGT)