Re: Should I make overpayments on mortgage?

On Fri, 15 Sep 2006 09:25:07 GMT, Ronald Raygun
<no.spam@xxxxxxxxxxxxxxxxxxxxx> wrote:

Robert wrote:

Ronald Raygun wrote:
renneds wrote:

Someone once told me to not bother making overpayments on a mortgage.
Their logic was the £1000 I put in today is worth more in real terms
than £2000 saved in 25 years time.

That's nonsense. If making overpayments were "bad" in this way, then
"good" would be to underpay, or even better not to pay at all, not
even interest.

You mean an 'interest only' loan where the interest is rolled into the
capital. You'd rely on house values rising fast enough so that when
you sell the hosue the proceeds cover the debt that has, by then,
accumuated.

Sounds good to me.

It's good only if you can be confident that the house value will
in fact rise faster than the debt accumulates. The risk that it
will not is high.

It's good only if your salary also rises as fast, unless by the time
you sell the house to pay off the debt you will not then wish to buy
another house, as you will find yourself with insufficient equity to
put down as a deposit on your next house, which naturally will be
more expensive since it too will have suffered/enjoyed a value increase.

Even if you hope/expect to make a killing through house value increase,
you can also make a further killing by making payments and/or overpayments
on your loan, since the effect of reducing the debt will be to give you
that much more cash money in hand when you sell. It's equivalent, as
I and others have said here many a time, to putting all your payments
into a savings account which *earns* you interest at the loan interest
rate, and tax-free to boot.

The one advantage of interest only loans is that, if they are flexible
enough, then you can make payments that are a similar amount to a
normal repayment mortgage but with the safety net that if you are not
able to keep up repayments for some reason then the extra payments
will count towards the payments required. This could mean that you
could go a significant time without having to make payments if there
is a catastrophic event that affects your finances.

--
Peter Saxton from London
peter@xxxxxxxxxxxxxxxxx
.

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