Interest only mortgage & amortization

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taytoman

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I am in the process for borrowing 300K over 20 years for moving to a larger house. The mortgage would have a LTV ratio less than 50%.

Although I can afford a "conventional" annuity mortgage, where you pay off interest and capital together, I was considering going interest only and making regular capital repayments also to allow repayment of capital over a 20 year or less timescale, as if I had a conventional mortgage, as I consider this more flexible

My current logic (?) is that when you take out a standard mortgage, because of what I understand is called amortization, in the first few years of a normal mortgage, you pay mainly interest but very little capital, so if you have to sell for whatever reason, you are still left owing almost 300k, despite tens of thousands of euro in repayments.

Any views on this, and would competitive banks like ulster and nib offer their competitive tracker rates for this??
 
You'd be shooting yourself in the foot by making capital repayments only once every year. A regular annuity mortgage gets a capital repayment every month.

Example - €300,000 x 20 years at 5% interest.

Annuity mortgage - €1,979.87 per month; €23,758.44 per year

or

Interest-only mortgage - €1,250.00 per month; €15,000.00 per year

So you save up the difference and at the end of year one you pay a lump sum of €8,758.44 off your interest-only loan.

Our comparable annuity mortgage you'd have paid off €8,961.97 at the end of year one.

Year 2 - interest-only repayments have dropped to €1,213.51; €14,562.08 per year because you've paid off your lump sum.

So you save a bigger amount this year - €9,196.36 compared with the annuity mortgage. At the end of year 2 you have now paid your interest-only loan down to €282,045.20, being €300,000 less €8,758.44 less €9,196.36.

On the comparable annuity mortgage, by the end of year 2 your capital would be down to €281,617.55.

Gap between the two is getting wider the longer you do this exercise and will continue to do so every year.

A better solution would be an annuity mortgage on a variable rate - make lump sum repayments off that if you can and continue to pay the agreed monthly repayment.

Liam D. Ferguson
www.ferga.com
 
Thank you for a very comprehensive response!
What I had in mind was to actually pay capital off every month, not at the end of each year- does this change things?
 
If you do that, you're effectively creating an annuity mortgage. You've just got the extra hassle of making manual capital repayments every month. I can see no advantage.
 
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