Repayment and interest only mortgage calculator
The following mortgage calculator provides a mortgage calculation based
on a repayment mortgage and interest only mortgage.
Differences between a repayment and interest only mortgage
With the interest only mortgage none of the initial capital you borrow
is paid off. In order to pay off the initial capital that you borrow with
an interest only mortgage, you must ALSO pay into an investment
vehicle such as an endowment policy or an ISA. The results for the interest
only mortgage only shows the interest you pay and does not include payments
made into a separate investment vehicle.
With an interest only mortgage the total interest you pay over the term
of the mortgage is substantially more than with a repayment mortgage.
This is because you are not paying anything off the initial capital you
borrow with an interest only mortgage. The interest you pay every month
remains the same and does not go down with time. With an interest only
mortgage the money you pay into your investment is supposed to pay off
the initial capital you borrow.
In contrast with a repayment mortgage, each payment you make reduces
the outstanding capital by some amount, and therefore the interest you
pay during the term of the repayment mortgage reduces with time. Enabling
the Show Repayment Schedule check box in the mortgage
calculator will show breakdown of the interest and capital payments over
the term of the repayment mortgage.
If you choose an interest only mortgage you want the investment vehicle
reach at least the value of the initial capital you borrow plus
the extra interest you pay, before or at the end of the term of your mortgage.
The following example shows the reasoning more clearly.
An example for comparative purposes
If the initial capital you borrow is €100,000 and the interest rate
on your mortgage is 6% over 25 years the monthly payments on a repayment
mortgage is €644.30 and the monthly repayments on the interest only
mortgage €500.00. The difference between these monthly payments for
a repayment and interest only mortgage is €144.30.
The total interest you pay on the repayment mortgage is €93,290.42,
whereas the total interest you pay on an interest only mortgage is €150,000.
The extra interest paid back on the interest only mortgage is €56,709.58.
If you take out an interest only mortgage and you invest the monthly
difference (€144.30) you have saved into an investment vehicle, you
would want that investment vehicle to pay off the initial capital you
borrowed (€100,000) plus the extra interest you
have paid on the interest only mortgage (€56,709.58). In this example,
you would want your investment vehicle to be worth €156,709.58 (i.e.
€100,000 plus €56,709.58).
If the interest earned on the investment vehicle over the period of the
mortgage is the identical to the interest you are paying on the interest
only mortgage (i.e. 6% in this example) then you are no worse off, i.e.
your investment vehicle will be worth €156,709.58.