I have another 10 years remaining on my £100,000 repayment mortgage.
I was thinking of changing it to an interest only mortgage.
The saving in the monthly payment could then be invested (within an ISA) into e.g. VWRL or Vanguard Targeted Retirement Fund, and hopefully at the end of10 years provide more than the £100,000 needed to pay off the mortgage.
What are people thoughts on this?
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Repayment vs interest only domestic mortgage
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- Lemon Half
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Re: Repayment vs interest only domestic mortgage
veeCodger1 wrote:What are people thoughts on this?
There are at least two points.
Will the lender allow it?
Do you have a plan in place to handle the problem of the growth in your investments being insufficient to repay the mortgage.
It's an idea that works only if the rate of return on the investments, after tax and expenses, is greater than the interest rate on the loan.
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- Lemon Slice
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Re: Repayment vs interest only domestic mortgage
Personally I'm never in favour of linking Investments to a mortgage. Just seems illogical to me.
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- Lemon Quarter
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Re: Repayment vs interest only domestic mortgage
I think this subject has been well covered on the monivator website so that might be worth spending some time reviewing.
Previous posters have covered some points that I would make. Assuming you get permission, it depends on the interest rate v investment return rate.
10 years is not really that long investment wise. You have to weigh up the chances of not reaching your savings goal or the market having a sudden downturn just as you approach your end date.
Could this be extended? I wouldn't want to be a forced seller, at a loss, because you have hit a set date. Markets generally recover but it could take time, years even.
I think 30 year investment periods we nearly almost guaranteed to provide a positive return but I can't remember the chances for a 10 year period. I think there was an article on the Fidelity website years ago. It was more about time in the market rather than timing the market.
Would you also be better looking at a range of funds, ten or so, just in case you pick a dog. I would also like to fix my rate. If inflation kicks in and we get back to 8% interest rates where would that put you. I don't currently see that happening but if rates do start to rise how will you cope.
Offset mortgages could be a useful tool if you were to go down this line. What overpayment facilities exist with your current lender? If markets have risen and are too toppy to buy where and what do you do with your surplus cash.
Many would say its "risky" or better to rid yourself of a millstone. I would also look at yourself. Can you handle a 40% drop in the market almost over night or will you get scared into selling.
It's easier to say I'm OK with that when you have 1k or 10k in holdings but what about 90k with a couple of years left before deadline.
You don't have to fix on a deadline though. You could make payments over time using the income from the investments. Small to start with and increasing over time, no cliff edge or a somewhat smaller one. The offset is no compounding of that income, a big driver of returns.
You could split, first 5 years compound second 5 overpay or mix however you like.
Basically if the return on investment is better than the interest rate over the period then it works. How many sleepless nights you have along the way is down to you. Happy reading
Previous posters have covered some points that I would make. Assuming you get permission, it depends on the interest rate v investment return rate.
10 years is not really that long investment wise. You have to weigh up the chances of not reaching your savings goal or the market having a sudden downturn just as you approach your end date.
Could this be extended? I wouldn't want to be a forced seller, at a loss, because you have hit a set date. Markets generally recover but it could take time, years even.
I think 30 year investment periods we nearly almost guaranteed to provide a positive return but I can't remember the chances for a 10 year period. I think there was an article on the Fidelity website years ago. It was more about time in the market rather than timing the market.
Would you also be better looking at a range of funds, ten or so, just in case you pick a dog. I would also like to fix my rate. If inflation kicks in and we get back to 8% interest rates where would that put you. I don't currently see that happening but if rates do start to rise how will you cope.
Offset mortgages could be a useful tool if you were to go down this line. What overpayment facilities exist with your current lender? If markets have risen and are too toppy to buy where and what do you do with your surplus cash.
Many would say its "risky" or better to rid yourself of a millstone. I would also look at yourself. Can you handle a 40% drop in the market almost over night or will you get scared into selling.
It's easier to say I'm OK with that when you have 1k or 10k in holdings but what about 90k with a couple of years left before deadline.
You don't have to fix on a deadline though. You could make payments over time using the income from the investments. Small to start with and increasing over time, no cliff edge or a somewhat smaller one. The offset is no compounding of that income, a big driver of returns.
You could split, first 5 years compound second 5 overpay or mix however you like.
Basically if the return on investment is better than the interest rate over the period then it works. How many sleepless nights you have along the way is down to you. Happy reading
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