UK Interest Only Mortgage Calculation

Divide the rate they quote (not the APR) by 12. Simple!

Eg 175k at 5% is 175000*0.05/12 = 729.17 per month

Just compare their interest rates/returns. For accuracy (to account for compounding), annualise the rates.

If the investment interest rate/return is higher than the mortgage rate then you're better off with the investment, otherwise you're better off with the mortgage.

To annualise the mortgage rate (to account for compounding), you need to raise the monthly interest factor to the power of 12, and subtract 1.

Eg if the rate is 5%, then that's really a monthly rate of 0.4167%, which is a monthly factor of 1.004167, which ^12 is 1.05117, an annualised rate of 5.117%. (This will be different from the APR as that includes fees etc).

In message , Andy Pandy writes

If there were no fees and the interest was applied and paid monthly so that there was no compounding then the APR and the annualised rate would be 5%.

No. Even for an interest-only loan, a nominal annual rate of 6% which is applied and paid as 0.5% monthly, will *not* correspond to an APR of 6%, because paying £500 a month (on a £100k loan) costs you more than paying £6000 once a year, because you could have diverted the £500pm from your income stream into a deposit account (especially one of those "regular saver" ones with the temptingly high interest rates), and then if you withdrew the £6000 for your annual payment, you'd still have the deposit interest left over.

You can't really say "there is no compounding" even when the balance remains the same from month to month, because APR rules *assume* there is compounding.

You simply multiply the loan debt by the nominal annual interest rate to get the annual interest due, and then divide by 12 to get the monthly interest due. Truth be told, some lenders might, instead of dividing by 12, divide by 365 and multiply by the number of days since the last payment, but it will (near as makes no real difference) average out the same.

Why would you choose to make regular transfers from the investment vehicle to the loan account? There are two possibilities: Either the investment performs better (after tax) than the loan interest rate, or it doesn't. In the latter case you'd be better off with a repayment loan.

Remember that "investing in" your repayment loan is automatically tax free, and the equivalent rate of return *is* the loan interest rate.

You have re-discovered the endowment mortgage, which is a pairing of an IO loan with a market investment (or actually it's a tripleting of those two with a life insurance policy), except you've cut out the insurance element and are opting for DIY investment instead. That's perfectly OK provided you're happy with the risk associated with whatever vehicle you choose. It's unlikely that cash ISAs, on the whole, will outperform lending rates in the long term, though shares ISAs might, if you pick them well.

Well, perhaps if you showed us a sample calculation which gets the wrong answer, we can tell you where you're going wrong.

At 175k, 300 months, at 5%/12 per month, an IO loan will cost you

I you were to invest £1023-£729 per month in an investment vehicle returning 5%/12 per month (compounding monthly) tax free, for 300 months, the value of the investment after the 300th payment will be £294 * ((1+.05/12)^300 - 1) / (0.05/12) which is (as if by magic) exactly £175k. Well, actually it's about £80 more, but that's because £294 is slightly exaggerated due to rounding.

Not for periods less than a year it doesnt.

Nope. The fact that the interest is paid monthly and so doesn't itself compound is irrelevant. If you are comparing an ISA with a mortgage then you need to compare the annualised mortgage rate as worked out above with the ISA's AER (if cash) or the annual return on the investment.

Thank you very much for all your responses, they will probably take me a day or two to digest!

Graeme.

R>

Yes it does.

In message , Ronald Raygun writes

No it doesnt.

"John Boyle" wrote

My turn: YES, it does!