22 Apr 2010, 8:54pm
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  • Interest only mortgage – Do you feel lucky, punk? Well, do you?

    Monevator has a good post about using an interest-only mortgage as an investment tool. You have to live somewhere, and if you have the discipline then it’s a great way to build up an investment portfolio over the term of the mortgage which will pay off the capital.

    Hey, where did I hear that before? Ah yes, as a late-twenties starry-eyed young pup in the market for his first mortgage. Abbey National’s estate agents at the time, Cornerstone, sold me a mortgage. I went in wanting a repayment mortgage, like my Mum and Dad used to have. Lovely LAUTRO saleswoman, Sue she was called, gorgeous green eyes…

    “You can do better than that. with an endowment you just pay the interest, but look at this Friends Provident with profits fund. Look at these lovely growth figures. At the end of your 25 years you’ll have twice as much in the endowment as you’ll need to pay off the capital”

    Sucker. I was had. These were the years of Gordon Gekko, Greed is Good. Beware pretty saleswomen promising the earth. I was single, so the one benefit of an endowment, the life insurance part, was worthless to me or anyone I cared about. But 100% profit in 25 years, well, that had me. That’s the takeaway message I got, I am sure somewhere in the fine print there was the usual past history is no guarantee yadda yadda. But I was lost to the green eyes and the promise of lots of moolah. I hope it was the moolah that swung it rather than the eyes…

    A few years later, the house underwater on the mortgage, Friends Provident demutualised and I got seven grand. Which, having gotten wiser, I paid down to the capital. On the principle that there were now nasty shareholders rather than cuddly mutuals so I would be ripped off and enjoy poorer with profits performance, so I better at least use it to reduce my interest payments.

    Then the letters came saying “sorry old chap, but we were a tad overoptimistic in our predictions it seems. You, mate, will be lucky to get half towards your capital, so you better raise the amount you’re putting into our rotten with profits fund to catch up. Ta-ra”. Or words to that effect. I saw red and wrote the MD of Friends Provident a stinking letter telling him their salesperson had promised me a guaranteed return. He, or rather some lowly grunt on his behalf, wrote back after a while saying “no we didn’t, but you can moan to us, then the Ombudsman if you like”

    So it was that after moving I ended up with an interest only flexible mortgage from those nice people at Birmingham Midshires. Nobody wanted to sell me a repayment mortgage in those heady days of the dotcom boom.Every year I’d pay off a lump I’d saved to reduce the capital.

    Some lengthy time later, Friends Provident settled with me to put me back in the position I would have been had if I’d taken a repayment mortgage, which was sixteen big ones they’d lost me in ten years. I paid this towards the capital of the new house. No foreign holidays, kitchen refits or cars were involved here 🙂 Having screwed up royally in the dotcom boom I learned, do not churn, sit on your hands, and continued to pay down the mortgage. From 2003 I changed tack, and started investing in a dead boring Legal & General tracker fund, using some of the money I’d otherwise be putting into the mortgage capital repayments. That did help me steal a march on the mortgage, and it 2006 I reduced the mortgage to the minimum BM would allow me to have. This was a flexible mortgage, so I could ring them up, and they would transfer to me any amount from 10k up to my overpayment into my bank account by BACS.

    People often advocate an offset mortgage, where your savings with an institution are offset against your mortgage, so if you have a mortgage of 100k and savings of 50k you only pay interest on 50k. That sounds great, except in the credit crunch. Because the small print says they can forcibly use your savings to pay down some of the mortgage. So the general rule is never hold your stash of cash with the same organisation or banking group that holds your mortgage. This happened to someone I know, which screwed them royally.

    I liked the disconnect of the flexible mortgage. Although I used shares ISAs to save my capital (effectively doing myself what Friends Provident had so miserably failed to do on my behalf) I never tackled this with the intent and savvy that Monevator proposes. But I can vouch that it works, I paid my mortgage down with about 10 years left to run. And paid the mortgage company  less than a tenner a month while I mulled over whether I wanted to discharge it. Monevator would make a good case that I shouldn’t have, I could have invested in 2008 and made a mint, and indeed could have had 11 years more use of this cash, currently at rock-bottom rates. But I don’t have his edge and ambition, and in the end I wanted my house to be truly mine.

    2007 mortgage  statement.

    2007 mortgage statement. BM didn’t get fat off my back that year 🙂

    Can’t ever argue with the relief of paying off a mortgage. Thanks for the kind words about my piece.

    Did you pay off entirely, or use the mortgage company to hold the deeds by leaving £100 on the tab or similar?

    I’m never sure about the ‘tail’ risks in that strategy, but then I’ve never had to research as I’m still an itinerant renter! 😉

    You’re welcome, I admire your guts, and in your hands the risks are low. An ISA is a pretty good match for the capital repayment over 25 years – if you’re looking for a London pad of £500k you’ll be able to pay the capital off at current ISA rates of 10.2k a year compounding at 5% 🙂

    I paid off my mortgage entirely – the deeds and title are held electronically with the Land Registry since the Land Registration Act 2002, so there is no reason to pay the mortgage company to hold anything. Because I bought over 10 years ago before electronic registration they did have a load of paperwork which they sent me, which is fascinating history into the house, but of no legal value.

    If I had decades of work ahead I’d follow your strategy, but peace of mind won out for me. It is a good feeling to know my house and its tiny piece of England are truly mine…

    […] are cumulative and Excel indicates I can’t have paid it off yet. Well, Excel, you’re just plain wrong, pal. I even managed to get away with writing off a whole years gross salary twice due to various […]

    […] terms from that. People even warned me that there were specific factors inflating prices but I was too cocky to listen. You never hear from the people that lose money on buying houses. It happens, but people usually […]

    […] I live in a house which is cheaper than many of my colleagues on comparable earnings, but I also bought my house outright earlier in life than they will, even after some setbacks. Once you own your house, early retirement […]

    […] see what you owe on your mortgage is more than the value of your house. There is a deep knowledge you get from that experience that is hard to get any other […]

    […] What did we Brits want to do when the lights were out, I wonder? We wanted to inflate the price of our houses, and feel rich that way. Oh and we preferred not to get round to the tedious business of paying down the mortgages that went with them, preferring to stick with paying the interest only. […]

    […] mortgage lending requirements are tightening, and there are requirements that people actually pay back some of the capital rather than taking an interest-only mortgage. Doing this in a falling market is a nutty thing to […]

    […] we seem to be opting out of nasty little wrinkle of a mortgage which is that you are meant to be paying some of the capital off. It’s hard to see how this is any better than renting, with the added liability that you are […]

    […] I learned in clearing all my debts including the mortgage is that I didn’t want to be beholden to anybody. Nobody is entitled to knock on my door and […]

    […] property in it as an investment – I sold the first house I bought at a 40% nominal, probably >50% real loss. Property is a dirty word all round for me. Let’s look at what commercial property is (the […]

    […] was in my late forties when I paid the last instalment on my mortgage. Monevator, by contrast, is out there in front 10 years ahead of me As it is I’m […]

    […] There’s no money in it for her to say “you can’t afford that much” but the rule is simple. If you have to ask whether you can afford it, and the answer is “yes, if you go interest-only” then simply replace that statement with “Do you feel lucky, punk? Well, do you?” […]

    […] the case in the UK where we pay too much for our houses, and then often don’t get round to paying down the capital of the mortgage spending the nominal increase in value on cars and […]

    […] work out that way because the complexity of a with-profits endowment hid untestable assumptions and I was stupid enough to buy a product that didn’t match my circumstances. In all fairness to my parents, they told […]

    […] appears I made a mistake paying down my mortgage early rather than investing using the mortgage as a low-cost loan, which would have given me many more […]

    […] say about one of the more pernicious pieces of financial engineering over the last decade or so, the interest-only mortgage Because they have lower monthly repayments, these types of loans have in the past helped millions […]

    […] there is some hope. Even after a rotten start I discharged my mortgage in 2008, after about 20 years. It felt good, and it was about 20% short of the original term of […]

    […] company what would repayments be if interest rates doubles. It’s actually quite easy with an interest-only mortgage which is running alongside an endowment. If the interest rates double, you pay twice as much per […]

    […] so foolishly entered to in 1989 which was due to come to the end of its term in February 2014 was discharged early. There’s a case to be made that this is a vaguely stupid thing 1 to do for an early retiree […]

    […] is possible that my disposable income will be a little bit more. The working me put a lot of money into the mortgage, and a lot into spending on rubbish, and the focus needed to get out in three years still serves […]

    […] down his mortgage in his late 30s, some ten years earlier in his life cycle than I paid down mine in my late forties. 1. Paying off a mortgage early is an opportunity cost – The Accumulator sensibly decided to […]

    […] would be worth £222 in 2014 when that mortgage would have been redeemed had I not moved and paid it off early. Precisely what the endowment industry managed to do to screw this up so royally still escapes […]


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