Interest only mortgage?

[Lubyloo]

I have just applied to remortgage today (lifetime tracker base rate + 0.89% with no fees or early redemption penalties which seemed a good deal).

Can anyone tell me if I am better off with a repayment mortgage or an interest only mortgage? Our aim is to pay off the mortgage as quickly as possible. By my calculations if we take out an interest only mortgage but overpay by £300 per month then at the end of year one we will have reduced the balance by £3600 won't we? This will surely reduce the balance more quickly than a repayment mortgage where the payments in the early years are going towards the interest. Is there a flaw in my plan or is this a good idea?

You have to check how much you are allowed to overpay. There are restrictions.

In theory, it sounds like a good plan.

it will only pay of your interest - and i am not 100% sure with int only mortgages if you can overpay?? repayment is always better.

an offset mortgage maybe

It's hurting my brain too!! The mortgage is fully flexible - I can make unlimited overpayments. We have an old endowment in place so we could use that if we miscalculated and found ourselves with a balance remaining at the end of the term.

I think the interest is calculated daily but I will check and read the KFI carefully.

I really don't know what to do!

Speak to the folks who are sellign the mortgage!

Think repayment is always better unless
a) you suspect that you will be strapped for cash at some point soon so opportunity for paying less per month is important
b) you have access to another product (saving scheme/endowment/shares) etc. whose value is expected to rise faster than the interest rate you will be charged in the mortgage

Squeakypop - I did speak to the lad I did the application with but he just said "It's a very complicated calculation that I can't do"

If you can overpay to an unlimited extent, and the interest is calculated daily, then you are better off with the interest only mortgage.
This is not because the repayment mortgage won't get paid off as quickly. It's because an interest only will give you more flexibility. If you have a couple of lean months, then you won't have as much money to find.
It does require a fair bit of dedication and willpower to overpay an interest only mortgage to the extent that you state. The advantage of a repayment is that all the willpower is sorted out automatically for you! I obviously can't tell you whether you have that willpower!

I've definitely got that willpower MrsTittlemouse! I'm very disciplined with money but not so disciplined when it comes to chocolate.

I will just set up a standing order so that the money goes straight out each month. I will still only be paying the same amount I am paying on my current mortgage and I am reducing the term by 3.5 years.

Funnily enough, when DH and I find a house that we love enough to tie ourselves to it for a vast amount of money, I've suggested the same to him. The idea will be that we'll set up a standing order for the mortgage, but add on an additional £50 a month. The ealier in the mortgage that you overpay, the greater the impact on the length of the mortgage (but then I'm sure that you already did that calculation!).

Just a thought - will you get the same terms and conditions for an interest-only? Just because I know that a lot of lenders have withdrawn them, or made them very hard to get.

I've also done those calculations for a dream house!

This house is definitely not our dream house and we had planned for this to be our last year here. However with the credit crunch etc we have decided to sit tight. I want to reduce our mortgage balance as much as we can to enable us to have as much equity as possible so we can move to a bigger place once the situation with the housing market is a little clearer.

The T&Cs seem to be the same whether I do interest only or repayment.

morethan1, good explanation clear and now i understand, thanks
thank heavens we have repayment one

The OP is going to massively overpay the mortgage though, so that she is treating it effectively as a repayment.
Agree that most people with an interest only have no vehicle for paying off the capital part and may as well be renting. Except that renting is safer in a falling market (like the one we have now).

Just asked DH - he is a fund manager for a bank and has his head screwed on when it comes to financial products as he spends whole day playing the market - he said he would never ever take out an interest only mortgage as - YOU ARE ONLY PAYING OFF THE INTEREST EVEN IF YOU OVERPAY!!!

You will still have to at some point pay of the mony that you have borrowed - ok without interest but if you have enough to pay off some of that loan each month you will end up paying less interest on it as the total amount goes down.

two voices of reason and knowledge An interest only mortgage is just like renting unless you are hoping for huge capital gains to enable you to downsize at some point.The bad thing is that your landlords the bank do nothing re maintenance so you are paying all that and they still own it unless of course you have a sure fire repayment vehicle.

I used to make regular (ish) payments onto my 100 % interest only mortgage telling them I wanted it to be applied to the capital which it was. We do have an endowment to back it up and have remortgaged so it is now part repayment (and will do again shortly).

You need to be really cautious going down this route - can you say that you will always have an extra £300 a month every month for the next 20 odd years? What if you get made redundant and have to miss a couple of months - how long will it take to catch up?

I'm not sure what they are called, but we are looking at a mortgage which is linked to your current account and interst is applied daily. Seems like a really good product.

We do the same on our mortgage. The overpayments do pay off the capital so you are better off in many situations doing this (if you are disciplined) than having a repayment mortgage.

If the interest on your 100,000 mortgage is 1000 and you also overpay by 1000 then the capital reduces to 99,000 so then you are paying interest on a smaller amount.

Our mortgage is online and we can see the capital owed reducing month by month and also since we owe a smaller amount of capital every month our interest only mortgage payment decreases every month so we also use the saving to further overpay on the mortgage.

Repayment mortgages are NOT always the best option. They often cost a lot more in the long run, particularly if they are not portable. You pay off very little capital in the early years of the mortgage.

The disclaimer being that of course interest only mortgages are NOT a good option if you only have the money to cover the interest and nothing more.

Ah, I see.

Morethan1- I have spoken to my new mortgage lender again and they have confirmed that any overpayments will reduce the mortgage balance. Interest is calculated daily so I really can't see a catch. Is there one if it is reducing the balance?

Even overpaying by £300 a month will cost less than we have been paying on our mortgage for the last 3 years so I am not worried about not being able to meet the repayments.