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.

I would never rely on an investment to pay off my mortgage. Historically it is clear that the markets are volatile and you need an element of luck to do well. Fine if you can afford to lose the money, not fine if you depend on the investment to have a roof over your head.

I will never understand why anyone would take an interest only mortgage.

I would pay £70,000 of the capital change your mortgage to a repayment mortgage so that the capital is chipped off every month (and therefore the interest), keep £30,000 for a rainy day in an investment of some sort.

My mortgage is IO
it is part covered by two crappy ancient endowments (all that was available to first time buyers in the late 80's) and now my private repayment plan

I would not switch to repayment because being self employed my earnings are erratic and I like to decide the rate at which I pay off my capital

I don't see what's wrong with an IO mortgage as long as you are making enough on the increase in value of your property. You just have to know when to sell so that you are not left short.

Surely if you have 150k profit on your property and it cost you 100k on an IO you are quids in?

I don't like them in principle because they have caused an outrageous housing bubble and redistributed wealth upwards (by squeezing out the 'poor') but that doesn't mean they are financially a bad idea for those that can afford them.

horsetowater
Surely if you have 150k profit on your property and it cost you 100k on an IO you are quids in?
only if you can sell it for that amount within the dates needed to write the cheque ....

on the final day of an IO mortgage, the cheque for the whole of the capital has to be written ....

you cannot stay in the house and enjoy the rise in value

OP we have an IO mortgage (and think its fab) and when asked how we were paying it off we said we have a couple of isas (didn't even get asked how much was in them - at the time, very little) and we will overpay. Once you make a large overpayment they're unlikely to ask you the question again.

The banks would rather you didn't overpay in reality since they don't make as much profit from you (profit = the interest), they would rather you pay all the interest and then have a product which will mature at the end and enable you to pay off the debt.

the banks don't lose if you haven't got enough money to pay off the debt at the end of its term. All they have to do is repossess the house, throw you out, and sell it at a knockdown price when they get round to it. They will charge interest at a rate of their choosing between the end of term and completion of the sale, and will apply charges which not be low.

Times hane changed, squirrel, IO mortgages are hard to come by now. The government has finally twigged that IO mortgages are the root cause of the hpusing boom, if not the credit crunch itself. Rules are much tighter that they were, we had to provide real evidence of an alternative payment vehicle and a commitment. It would have cost us as much per month as a repayment. I foresee a real crash in house prices soon precisely because these mortgages have dried up.

I reckon they will go back to 90s prices, around half existing prices.

horsetowater
do I know you from the HPC forums

there will not be a house price crash because the state could not afford the housing benefit bills
but there will be - and is - deflation in house prices
they are still well down on 2008
and remember that things like zoopla do NOT reflect the reality of under values sales

I'm glad you said that about zoopla. Sometimes it's prices seem wrong to me. I like prices sold only as the test - sites like nethouseprices look up what something sold at in your road in the last 3 months or so, not the silly prices someone asked for but never got.

No I'm not on hpc forums, perhaps I should be.

By making credit harder to get, the government has already limited hp rises. People are no longer able to buy beuond their means, as a result hps have had to come down in most areas. This will contine a downward trend, perhaps not a crash, that is the wrong word. But I wouldn't be surprised if in 10 years time prices are half what they are now.

The demand is no longer there to meet the supply. People will rent instead, where they have bargaining power. The benefit cap has helped as there is no longer a demand for overpriced property.

"there will not be a house price crash because the state could not afford the housing benefit bills"

that doesn't make sense.

if you have bought a house and got into debt, you still have the house whether its value goes up or down. It is still worth the price of a house. So if you need one house, and have one house, house price inflation or reduction does not have any effect on the ability of your house to give you a home.

Laurabridges
ALL of the sold prices data is dodgy as every last one is based on the Land Registry published data set which has a list of exclusions as long as your arm
www.landregistry.gov.uk/market-trend-data/house-price-data-exclusions

pigletjohn
if house prices start to crash, lenders will reposess
so the number of people trying to rent will rise
so the housing benefit bill will rise
which the country cannot afford

"if house prices start to crash, lenders will reposess"

Nope.

If house prices crash, it will not affect your mortgage repayments. You will carry on making your payments and you will carry on living in your house. You will not become homeless and you will not have to move to a rented home. Even if you did, if you have an income, there is no particular reason why you would start getting housing benefit.

AH, but its the IO mortgages on fixed rates that will come to ends of terms, then repayments rocket (as standard rates are currently around 10 times base)
people either fall behind
or try to remortgage and cannot
thence the path to repossession lies
there is mahoosive political pressure NOT to kick people out, but lenders are businesses

read some of the debt threads ... and the fact that around 1 in 10 borrowers has made a mortgage payment with a credit card in recent years ....

Banks will repossess, then sell at a lower price to get their money back so they can invest it in something sensible. People go into the rental sector or buy something cheaper.

And that's only if people can't repay their mortgages if interest rates go up.

I have clients still paying off arrears from the mid 90's crash ...

rental sector is crippling

my mortgage is £150 a month
house down my road is for rent at £1300 per month

This thread is really interesting (and helpful)- we have an IO mortgage as it was (at the time) the only way we could afford to move into a bigger home.

DP gets a bonus every 6 mths and we put some down on the mortgage- so we are doing the right thing? I had considered now looking to remortgage and go onto repayment but reading the thread it seems it may be better to just remain on the IO whilst Interest rates are still low?

horsetowater you think there is a downward house price trend currently? Clearly you cannot be in London or the surrounding areas. Prices are increasing weekly currently.

And I don't get how you are saying there is no demand. Housing is under huge pressure. Why is there pressure on the government to build, build, build because there isn't enough housing?

Two huge new towns have been proposed.

lenders will repossess if you don't make the payments.

this has nothing to do with changes in valuation of your home.

Tiredemma
the thing to do is look at your CAPITAL payments : will they leave you where you need to be
for me its to be at zero when my IO finishes later this year
for others it will be to have enough capital in the house when they sell it to do a nice juicy deposit for their next house

I feel another spreadsheet coming on - based on the one I use for myself

I like IO because in good months I pay down shed loads of capital and in bad months none
I also use my overpayment fund as a tax free savings account : spare cash is plonked there in case I need it for a car / holiday - but my Mortgage costs less in the mean time

Tiredemma we have an IO mortgage. We overpay each month, and have done for four years as interest rates are ridiculously low. We did get an extraordinary deal. We don't envisage reverting to a repayment mortgage, just paying down on our own terms. But maybe you should check out what other deals are out there.

I can't see it will hurt paying down your mortgage debt, rather than putting your money into savings. As long as you have some savings in case you urgently need them.

Horse we took out our interest only mortgage four years ago not ages ago.

Besides IO mortgages were not the cause of the crash. Multiple factors but far bigger factor was the ridiculous multiples and the 100/110 per cent mortgages.

Tiredemma keep your interest only mortgage, there is no need to change it if you are disciplined enough to overpay, some people just like scaremongering.

littlered
when the eejit Broon allowed IO mortgages without a repayment vehicle (ie relying on house price rises to cover capital) he sowed the seed
"we have abolished boom and bust"

I despise the current lot
but I will despise him more because I saw through his stupidity in 2005 and was slagged off by left and right for saying it was a bubble (I'm not Vince Cable BTW)
Bliar was just after feathering his own nest and Broon was too thick and arrogrant to realise that his idol Maggie had it wrong