This is a great debate, and one I thoroughly enjoy having with friends.
A capital repayment Mortgage means you pay the capital and the interest back at the same time, so if you borrow £150,000 mortgage from the bank, by the end of your mortgage term (usually 25 years) it will be paid off in full.
An interest only mortgage means all you have done is pay off the interest, and at the end of the 25 years you still owe the bank the capital of £150,000.
So which one is the better choice, a capital repayment right? Well actually I beg to differ. Here’s why…
The average Repayment Mortgage will take you 25 years to pay off, when you actually pay it off you would have paid roughly on average 2 times the amount you borrowed! So a total of £300,000. If you take an interest only mortgage, on average in the same period you would pay the bank back roughly £200,000. So that means throughout the same 25 year period by choosing an interest only mortgage you have £100,000 still in your pocket not the banks, you’ll have an additional £100,000 to invest, opening up more financial options for you and your family.
The other issue with capital repayment mortgages are they are not set so you pay equal amounts of interest to repayments on a monthly basis. This is because mortgage companies want to make money out of you! They know you’ll switch lenders every 3-5 years in search of a better rate. This means you end up paying nearly all interest and very little capital in the early years, and It’s not until you get to the very end of your term that you really start paying off the capital.
Let’s do some maths here...
A £150,000 capital repayment mortgage (depending on rates) roughly costs £866.90 in a normal economic climate. Lets say instead of a capital repayment mortgage you take an interest only mortgage, your repayments are lower giving you more monthly disposable income. If you were to start a savings plan and save the equivalent of your Capital repayment payments £866.90 per month over 5 years you would have…
£866.90 x 12 x 5= £52,014.
With £52,014, you could use this money to buy an investment property. I’d be happy to show you how with £50,000 you can easily buy up to 5 properties. (If I can do it, so can you) Therefore over the same 25 year term you could buy up to 15 properties! If you take a repayment mortgage, most people never buy another property let alone 15.
What could these 15 properties be worth?
The total value of these 15 properties using conservative average growth figures of only 8% a year over 25 years, would be worth £11,813,649! That’s a lot of money from only one strategy.
Therefore taking a capital repayment mortgage will only tie your money up imprisoning it, which could be costing you millions. Would you prefer to own one property that’s paid off in 25 years, or 16 properties?
What about the £150,000 mortgage debt still remaining on the first property and all the debt on the other 15 properties I hear you say, Its all in inflation.
20 years ago a property could be bought for £5000. In fact my grandma bought hers for around this amount. Her house is now worth £500,000. This is all because of inflation. Inflation is the change in the buying power of your money over a period of time
Do you remember when a bag of chips cost 30p? Now they’re over £1.00!! Gone are the good old days, inflation is decreasing the value of our money. 5 years ago I could buy a lot more in Tescos than I can today, I dread to think what my shopping bill will be in 5 years time!
In 25 years time, do you honestly think your £150,000 property will still be worth £150,000, of course not!
Do you think if my gran had taken an interest only mortgage she would be able to afford the £5000 mortgage that’s due now? For sure.
So the house you buy today for £150,000 on an interest only mortgage will be worth a LOT MORE in 25 years time if inflation stays relatively like it has for the last 20 years. Your £150,000 property based on current growth figures and looking historically at what assets have grown by, would be worth around £1.2 million. The loan on it would be very small as it’s been chopped down by inflation. Question, do you think you might be able to afford to pay off the small loan of £150,000 if your property is worth £1.2 million? Thought so.
In 25years time that £150,000 mortgage debt will be worth a quarter of that value. The average inflation rate for the last 59 years has been 5.8% (www.statistics.gov.uk)
What about the other 15 you have bought because you had the additional £100,000 to play with from not taking a repayment mortgage. All of those would also be worth £1.2million each based on current growth rates, not to forget all the rental income you would have received from them throughout the 25years. These properties and rental income will help you provide the lifestyle you and your family deserve.
When the £150,000 is due, you could sell one of the 15 properties pay off your small debt and retire comfortably!
Quite breathtaking right?…. Statistics don’t lie. Do you think my gran would ever have believed her property would be worth £500,000? The figures above are all based on current growth and historical factual data. Statistically Property doubles in value every 7-10 years.
Don’t waste your hard earned cash on a repayment mortgage, when you can make the same money stretch so much further, where it could return over 12000%. Investing in property can give you the financial freedom you deserve and you might be able to do so quicker then you thought through simply choosing the right mortgage option.
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