Interest Only Mortgage

[tillyh345]

My brother is paying an interst only mortgage but says he is paying a large amount into a bank account to pay off the balance every 12 months or so - Is this a good idea?

[boxtops]

pay off which balance? The point of an interest-only mortgage is just that - you pay only interest, you don't pay off the capital. I don't know of any mortgage which says you can only pay once a year!

[tillyh345]

Pay off the balance of mortgage? He isnt paying into the mortgage account just a savings account I think.....

[dr b]

Do you mean that he is saving money now so that when he has to start paying down the principal, he has the money in hand? That sounds prudent.

[tillyh345]

Yes I think so, he seems to think that is the best way, but I am concerned he isnt paying a full payment...but themn i am a born worrier

[BenDToy]

I think this sounds like a very good way of managing his affairs, because he can vary the amount he pays off to suit his circumstances. If you have a variable income (or expenditure) this would be ideal. It is very tempting to pay off only the interest, and for certain people that may well be OK. He sounds like he is very astute.

[boxtops]

Sounds like he's being sensible tilly - you don't have to worry on his behalf!

[sumo19]

Interest only mortgages are very risky.

When you repay the money, you are only paying for the interest. You are not repaying ANY of the money that you borrowed.

The idea is in order to pay of the capital, you pay money into an investment scheme that grows and this is designed to pay of the capital borrowed. Interest only mortgages use to be popular until the investment schemes did not provide the necessary funds to pay of the capital borrowed and people were made bankrupt due to low returns.

Is your brother aware of all of this or are you sure your brother knows what he is doing?

[scoobydooby]

But if he were to put that money towards his mortgage, rather than have it sitting in a savings account, he'd end up paying less interest in the long term. This is because the interest is calculated on the outstanding capital. He might need to change his mortgage to an 'interest and capital' rather than interest only but he should be able to state the percentages he's after. He sounds very sensible but he could save himself even more money with a little advice.

[BenDToy]

I for one am able to get better interest on savings than I am paying on my interest only mortgage. And there is a limit on how much extra I can pay off (I think it is only 20% above my scheduled monthly payment). So your brother's plan would work well for me as well. i would also point out to those who worry about interest only mortgages, my first house cost me £19k. At the time it seemed a lot of money to borrow and to pay back,. Now 25 years on and I could lift enough cash on my credit cards to pay that off (not that I would, but you get the general idea!)

[Funkf00t]

This is a first class idea.
As most mortgages calculate interest on a daily basis, he might be advised to off the balance more frequently every few months, or say every £500 - £1,000 depending on his means and the size of the mortgage.
The interest he earns on the savings fall way way short of the interest he pays on the mortgage, so every pound he pays off the mortgage this month rather than next month means his total payment next month and subsequent months would be lower. Media URL: http://www.inherits.info
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