Interest Only v Capital & Interest

Hi,

Hoping someone can help me with understanding the calculations on an interest only v interest & capital mortgage. I have a rental property that I have an interest only mortgage on and have been repaying some capital every now and then however a friend did advise me previously that I am better off going on to a capital & interest mortgage rather than paying off the same amount in capital every month and sticking with the interest only mortgage.

Is this true? And what are the basic calculations behind this?

Thanks

interest only will only pay the interest charged to the mortgage. it will not reduce the balance outstanding. so will require a lump sum payment at end of term to clear the mortgage.
with you placing lump sums every now and again, your interest charged to your mortgage will reduce but not by much.
capital and interest is designed to have the mortgage paid in the term of the mortgage.

for interest only the simple calculation is balance * Rate /12
for capital and interest there is an excel formulae you can use to calculate the repayment =-pmt(rate/12,term,balance)
for the pmt formulae the term is in months.

Leesider32 said:

a friend did advise me previously that I am better off going on to a capital & interest mortgage rather than paying off the same amount in capital every month and sticking with the interest only mortgage.

Click to expand...

This does not make much sense, but it depends on what your friend means by "better off".

The advantage of an interest-only mortgage is that your only commitment is to pay the interest every month.
If it is a variable rate mortgage (including tracker mortgage which I suspect it is) then you can pay whatever amount of capital suits you at any time without penalty.

So let's say, you have €100k with 15 years to go at 5%.
You will pay €5,000 a year interest for 15 years and then you will have to repay the capital.

If you switch to capital and interest with a view to paying it off in full over 15 years, the repayment schedule will be as follows:


If it's an interest-only mortgage, you can voluntarily pay the principal according to the above schedule and achieve the same result.

The only downside is that if it's a fixed rate mortgage, you could face an early repayment penalty for repaying the capital early.

However, if your circumstances change, and you no longer want to repay the capital, you can stop repaying it.


If you ask the bank to switch it formally to capital and interest

The downside is that you will then have to pay the capital whether it suits you or not. If you can't afford it, then you will go into arrears.

The only advantage of formally switching it to capital and interest is that if it's a fixed interest rate, there will be no penalty for paying the capital.

Brendan Burgess said:

This does not make much sense, but it depends on what your friend means by "better off".

The advantage of an interest-only mortgage is that your only commitment is to pay the interest every month.
If it is a variable rate mortgage (including tracker mortgage which I suspect it is) then you can pay whatever amount of capital suits you at any time without penalty.

So let's say, you have €100k with 15 years to go at 5%.
You will pay €5,000 a year interest for 15 years and then you will have to repay the capital.

If you switch to capital and interest with a view to paying it off in full over 15 years, the repayment schedule will be as follows:
View attachment 9196

If it's an interest-only mortgage, you can voluntarily pay the principal according to the above schedule and achieve the same result.

The only downside is that if it's a fixed rate mortgage, you could face an early repayment penalty for repaying the capital early.

However, if your circumstances change, and you no longer want to repay the capital, you can stop repaying it.


If you ask the bank to switch it formally to capital and interest

The downside is that you will then have to pay the capital whether it suits you or not. If you can't afford it, then you will go into arrears.

The only advantage of formally switching it to capital and interest is that if it's a fixed interest rate, there will be no penalty for paying the capital.

Click to expand...

Thanks, so if I pay to the above schedule my interest payments will come down as I pay off capital? If so is this reduction in interest payments calculated on a yearly basis or does it come into effect the month after I have made a capital payment?

The interest is calculated daily. So if you pay €10,000 off today, the interest tomorrow will be lower.

Brendan