Thursday, May 02, 2013

Like Spinning Plates

Apparently more than 250,000 people will be unable to repay there interest only mortgage at the end of its term. Interest only mortgage were very popular as they reduced monthly payments. In an standard repayment mortgage each payment pays the interest and a small part of the capital. Over time the proportion of your repayment covering the original borrowing increases as the size of the borrowing reduces. In the interest only scenario you only ever pay the interest on the original borrowing, and at the end of the term usually 25 years you still owe the original amount borrowed.

For example on a £100,000 borrowing at £3% over 25 years with a £995 fee added the monthly repayment would be £474 / month totalling £143,258 over the mortgage, an interest only mortgage you would pay £250 / month and £75,995 in total (plus the additional £100,000). So overall although the monthly payment is lower the overall cost of the mortgage is considerable higher £32737(around 22%).

 Proponents of interest only included, saving the money into a separate investment might be more beneficial over the long run (you can check this using Money Savings Exerts payment calculator). Also the rising value of the property would enable you do sell up downsize and pocket the difference. Interest only also makes a lot more sense on investment property as it frees capital for investments or improvements. If you have an interest only mortgage you need to decide on the best plan of action for you, but bear in mind though it might cost more a month in the long term it could save you a lot of money to switch to repayment.