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How the Bank can Pay Your Mortgage
(or Why I Work for a Bank and You Don't)

At 4.75% (base rate) on the mortgage, for every thousand pounds borrowed payments are either £5.70 for a 25 year term, or £3.96 as an 'interest only' mortgage.

If you pay the £5.70 per month over two years, taking into account interest, over that time you pay off £45.82.

If, however, you pay the £3.96 per month, and put the £1.74 you save into a savings account at 8% AER, then after two years you've paid off £2.14. You have, however, now got a savings account containing £45. So you pay that £45 against the mortgage, and that means that you've paid off £47.14 - that's £1.33 more than if you'd just paid your mortgage the usual way.

These figures quickly scale up if you've got a house worth £130k - it's a saving of £172 over two years. Which is getting on for a month's payment (taking into account that the saving in interest over the next 23 years makes that £172 a lot more valuable). And if you can save a month off your mortgage every two years, then you save a whole year off it by the end of the term.

This is contingent on having a savings account that will give you 8% over a two year period. Fortunately such an account exists at Lloyds, so potentially Naomi and I could get four years between us, more if we outsourced the ownership of the account, and assuming that such accounts continue to exist.

The theory is that an interest-only mortgage is always the way to go if:
- You can make penalty-free lump sum payments
- You can get your hands on a savings account that pays more than your mortgage costs (which is a lot easier if you get a base-rate mortgage like me)
- You have the discipline to actually save the money up, rather than spend it

So in my example before, if we paid off £515 per month to cover the interest, and put £230 per month into a savings account, we'd end up having paid off £6,230 from the mortgage, versus £5960 if we were paying off the mortgage the regular way. Not bad.

Playing with money is fun :o)

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I've done a similar (albeit abreviated) calculation myself - and yes while you could save money I have a sneaking suspicion you may be tempted to spend that £172 during the two years you've saved it up. You also have to factor in the possibility that 8% (or proportionally high-above-base-rate) savings accounts may not be available moving into the long term which can affect your outcome.

True, and the tax liability cuts into the 8% a fair bit.. Still, it's a nice idea :o)

Not having interest only mortgages here...

How is it you've paid anything off at all on an interest only mortgage?

You mean the £2.14 that's been paid off? It's due to the fact that the repayments are just slightly higher than the interest, though not by much at all (2.14 out of every 1000 isn't so great)..

Hi, i'm sorry that I have to come to do this on your personal lj, but I know you're a maintainer of ask_me_anything and I wanted to bring a few things up to you, and the other maintainers.

I have been a participater and member of this community for some time, and I have really liked it, but lately, the place is turning to shit.

There are quite a few members who are jsut there to bicker. If somone asks a question, they don't answer it, but pick at other people's responses and start big battles in the thread.

The last 3 or so times I have posted a question, I have gotten more bullshit than answers and I think it's really ruining the community. If other posters are getting the same responses, then i think you guys need to crack down a bit.

It's just really frustrating to have a community called "ask_me_anything" when the members can't even answer.

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