Interest only Mortgages -v- Repayment Mortgages. Which works out cheaper??????

When you say interest-only, I take it you mean interest + a repayment vehicle (RV) of some sort such as an endowment. One isn't necessarily cheaper than the other. A lot depends on what growth rate you assume for the RV because this affects the premiums. A lot of people have gone for low premiums (with a high growth rate assumption) and have come unstuck when the markets fell. A repayment mortgage is guaranteed to be settled by the end of the term.

Also, given a specific premium for the RV, there is an interest rate balance point when a repayment mortgage becomes less or more expensive than an interest-only.

The main difference between them is that with interest-only you are gambling that the stockmarket won't let you down and, indeed, leave you something over at the end. Frankly, with current interest rates and an improving stockmarket it's a fair bet that an interest-only mortgage would be a good thing. But it's still a risk and would be anathema to many. It could be argued, however, that for a 40% taxpayer an interest-only mortgage linked to a personal pension could be good thinking.

Rob Graham

Totally agree. I used the word 'premium' in a generic way otherwise the whole thing could have got a bit wordy. Hopefully the OP will come back if he still has a problem

No, I don't mean that sort of balance point. I mean, if the total costs for an interest-only and a repayment mortgage are say 500 per month at an interest rate of 5%, if the interest rate changes one mortgage will cost more per month than the other by a small margin, whereas if they dropped the reverse would be true. Many people have opted for an endowment mortgage because the quotes showed it to be the cheaper option in terms of monthly payments, but the position may change if the rate changes.

Cetainly, and I mentioned pensions as one of the options.

Rob

>

I think I mean the same as you do.

The most popular RVs involve fixed monthly premiums which don't change with interest rates. Therefore when rates go up, an IOM will go up by the rate difference times the amount borrowed. On a £60k loan, if the rate goes up from 4% to 8%, the annual cost will rise by 4% of £60k, i.e. by £200 a month.

But as a first approximation, the cost of an IOM will go up only by the rate difference times the amount *still owed*, which will tend to be less than the amount borrowed. In any case, it depends on how much of the term remains. Generally a rate change will make a greater difference to the payments of an IOM than of a RM.

The balance point, where the quotations for an IOM and an RM for the same amount borrowed would be about the same, is when interest rates exactly match the assumed RV growth rate. Hence when interest rates are low/high relative to long term net growth expectations, then the IOM package quotations will be lower/higher than RM ones.

Yeah!

Rob

The way you phrase is is not really correct, there are two things to consider but they aren't repayment vs. endowment (or whatever). One aspect is a loan, and the cheapness there is just given by the interest rate, regardless of whether you make any repayments or not. On the other hand you have the question of how, or even whether, you repay the loan. In principle you don't

*have* to repay it at all, when you die the house could be sold and that will pay it back. Assuming you do want to pay it off at some point, which most people do, you have the option of paying it back gradually over time, in which case the interest will reduce as you do so, or of aiming to pay back the whole thing in one lump (or of course you could envisage paying a 20% lump every 5 years, or whatever). To do that you probably need some kind of investment plan to accumulate the lump sum(s), although you might e.g. expect to inherit money at some point which will cover part or all of it. The main point is that if you do have investments you need to compare the post-tax return you're getting with the interest rate on the mortgage, it's only worth doing that if you can get a higher return.