Invest or Clear Mortgage Debt: Insights on £20k from £100k Interest-Only Mortgage - David Hollingworth's Perspective
Incredible! Our current mortgage's fixed rate is about to expire, and it comprises two parts – a repayment element and an interest-only element. We've got seven years left to go with £200,000 remaining on the repayment part and £100,000 left on the interest-only side. We've got some investments in the stock market worth £20,000 that we're using to tackled the interest-only part. With interest rates skyrocketing, we're wondering if we should keep making the same payments or use the £20,000 to pay off a chunk of the interest-only loan and start fresh with the remaining £80,000.
What should we do? David Hollingworth, our go-to mortgage expert, is here to guide us.
Here's the scoop: There are two ways a mortgage can be structured: capital and interest repayment, or interest-only. The capital and interest repayment method reduces the mortgage monthly, covering both interest and principal. This is the safer approach since it guarantees the mortgage will be paid off by the end of the term provided regular payments are made. The interest-only option, however, covers only the interest charged on the mortgage, requiring an alternative repayment strategy, like investments, to hopefully grow enough to pay off the balance by the end of the term.
Our current setup is a mix of both: part repayment and part interest-only. We can either keep going with the same payments, or use the £20,000 to pay off the interest-only part, lowering the monthly payment and freeing up some cash. However, if we do that, we'll need to consider a new repayment vehicle for the remaining £80,000 interest-only loan. Keep in mind the risk that this new investment may not grow enough to meet the outstanding mortgage amount, so it's essential to keep tabs on the investment regularly.
Let's weigh the options:
Paying £20,000 off the interest-only mortgage
- Reduced Monthly Commitment: By paying off the current £20,000 balance from the interest-only loan, we can expect a monthly mortgage payment reduction of approximately £67, which could be attractive with interest rates on the rise.
- Check the Current Balance: We should double-check our current balance since we've made significant progress on the mortgage at such a low rate over the last five years, resulting in less of an increase in payment than we might initially anticipate.
Investing to clear the mortgage
- Uncertain Returns: Investing to pay off an interest-only mortgage can be tricky because we can't predict the investment's performance over time. Remember to seek specialist advice about the investment itself since there's a chance we could liquidate the investment during a market downturn.
- Starting Over: If we sell the investment now to pay off the £20,000, we'd also have to start from square one in thinking about the repayment vehicle for the remaining £80,000 interest-only mortgage. Time in the market and the benefit of compounding are essential for growth expectation, but a larger concern should be the remaining time to reach our target and the necessary contributions each month to achieve it.
How could £20,000 invested grow
David Hollingworth, our mortgage savant, suggests using the Mortgage calculator to compare repayment vs interest-only to better understand the growth potential of our investments. If we invest £20,000 at an average 6% annual return over seven years, it would grow to approximately £30,407. Our monthly payments for the remaining £80,000 interest-only mortgage would be £607 to reach the target in seven years. This doesn't quite cover the balance, so it's essential to make additional monthly contributions of £607 to reach the £100,000 target.
Making the right decision involves understanding our risk tolerance, our confidence in the investment's growth, and our ability to manage the increased payments during the repayment phase. Ultimately, staying informed and actively reviewing our options will help us make the best choice for our financial future.
YOUR MORTGAGE OPTIONS
- Lower Monthly Payments: If we're cash-strapped, reducing the monthly mortgage payment by using our savings might be beneficial. This reduces our immediate cash obligations in a time of rising interest rates.
- Consider Other Investment Opportunities: Before using savings to pay down the mortgage, assess other investment options that may provide higher returns than our mortgage interest rate. If our investments outperform the mortgage interest, it might be more beneficial to keep our savings invested.
- Review Refinancing and Remortgaging Options: When our fixed rate ends, consider remortgaging to take advantage of lower interest rates, a fixed rate, or a different mortgage product.
- The current mortgage structure includes both a repayment and an interest-only element, with £200,000 remaining on the repayment part and £100,000 left on the interest-only side.
- We have some savings of £20,000 that we can consider using to pay off a chunk of the interest-only loan, potentially freeing up some cash each month.
- Financial advice suggests that using the £20,000 to pay off the interest-only part would result in a reduced monthly mortgage payment of approximately £67.
- However, if we pay off the interest-only part, we'll need to find a new repayment vehicle for the remaining £80,000.
- Investing the £20,000 to pay off the interest-only mortgage can be risky due to unpredictable investment performance over time.
- If we invest the £20,000 at an average 6% annual return over seven years, it would grow to approximately £30,407. To pay off the remaining £100,000 interest-only mortgage, we would need to make additional monthly contributions of £607.
