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I am looking at a mortgage to buy. We are older so need tominimise our risks. We can get a 15 yr mortgage on interest only with the right to pay of

by swimherald 14 January 2010 |

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principal over each year. (Leaves risk allowance for those months if we cannot pay more than interest only). I am advised theat if we paid off the additional 10% every year this would pay off the mortgage faster than using a repayment mortgage (i.e. paying interest and capital off together). Does anyone have experience or knowledge of this option please?

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410

manzanilla posted
you say you want to minimise your risks. There are two risks here - committing to a mortgage you cannot afford AND the risk is that you will take too many months 'off' overpaying.
If both of you are in regular jobs with steady salaries, I would go for a reayment mortgage at a level you are happy with and hope to overpay a bit in the odd month to reduce the term.
But if either of you is on an irregular salary, then an IO mortgage planning to overpay by 10% of the original capital per year will see your mortgage gone in 10 years and is sensible. If you stick to the plan. Otherwise you will end up older and with mortgage still to pay off.
manzanilla
Posted on 14 January 2010 | Love 0 loves Report
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Swarbs posted
Yes the interest only option will clear more of the balance faster and hence save you more charges. This is becasue the repayment mortgage will pay off less capital in the early years, when more of your repayments go on interest, and more in the later years. So, after 7.5 years of the repayment mortgage you will still owe more than half of what you originally borrowed. In contrast, on the variable rate mortgage you could have paid off 75% of the entire mortgage by then, saving you a lot of interest.
Posted on 14 January 2010 | Love 1 love Report
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MikeGG1 posted
The problem is that the 10% option is normally related to the outstanding balance at the start of the mortgage year, so the maximum overpayment would fall each year.
Your best option is to take a repayment mortgage for the term which would cost the maximum that you would be absolutely sure would be affordable. Then you can make overpayments each year with any surplus you have remaining after allowing for a safety margin.
You would be able to continue those original payments regardless of how small the balance becomes plus the reducing 10%. That would not be the case with an Interest only mortgage.
Mike
Posted on 14 January 2010 | Love 2 loves Report

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