Hi,

I am a first time buyer with a deposit of £25,000 and am looking to by a property of £100K. I currently earn about £25K per year. I have been researching mortages see below two options:-

Option 1 - the ISA and interest only route

Put down a deposit £15K on variable 'interest only' 30 year mortage of £100K, interest rate is 5.3% and repayments are £357 per month.

If I leave my £10K in the my ISA account and assuming an average ISA rate of 5% for the 30 years, the compunded interest in savings means I will only need to put in around £60 a month to pay off the remaining £85K to the bank.

Total payment per month is then £417

Option 2 - Repayment Route

Alternativey, I can just put down the full £25K on a repayment mortage and the cheapest is 2 year fixed at interest rate of 4.99% with repayments of £404 plus there are £1300 of fees to pay.

Personally i think option 1 wins hands down because:-

1. The flexibility of altering payments into the ISA, higher or lower.

2. I can change from mortgage lender to mortage lender at will with little or no fees and i won't be tied in. Also because of the avoidance of these fees would save thousands of the course of the mortage. if there was a big BOE rate cut i could simply change to the best offering.

It seems so attractive that I wonder why everyone else is not doing it????

I would like an opinion as to whether option 1 is less expensive than option 2 for the term of the mortgage

Thanks Noel

Yes but no but yes !

1. Will you leave the 10k in the ISA? You may need it for something... kids, health costs, car etc. etc.

2. ' I can change from mortgage lender to mortgage lender at will with little or no fees and I won't be tied in ' .The fees aren't always apparent in these cases. What about linked Insurances and legal costs etc etc?

3. You don't include the cost of Life Insurance in option 2.

4. What happens if you develope a serious health condition in the next 30 years? How will you get cheap life cover for the mortgage insurance in option 2? Option 1 covers you from day 1 guaranteed to pay out.

5. What do you mean you don't want any Life Insurance to cover the mortgage! How do you know your future health and circumstances, see 4.

6. ISA's are not guaranteed to be worth anything, nevermind growth of 5% per year..

It's your decision as I don't know all your circumstances, job security, family, plans etc etc, but it's not as straight forward as you think.

Good luck.

My details are as follows: Aged 30 and Single, No children, have a car paid off, living at parents, in a steady job and FTB.

I had n't factored in the life assurance cover however, thanks for pointing out - I can arrange my own as i work as an insurance broker.

In addition, I note that the government are relaxing the rules about giving assistance to people with mortgages who are unemployed.It used to be you had to have less then £8K in the bank and be out of work for 9 months before they helped you paying off the interest on your mortgage with similar rules applying to income support. I am not sure what the rules are now?

I am in secure employment and not affected by the downturn, but if the worst were to happen and i had a big pot of money say £20K in an ISA to pay off my mortgage while at the same time having an interest only mortgage, would the government assist me with my payments? or would I be penalised as it is in a savings account and therefore capital not locked into a repayment mortgage? Because if you are on a repayment mortgage they normally pay the interest i am told.

(FYI not interested in taking a Payment Protection out)

Thanks noel

You seem to have that sussed Noel.

If you have savings over 16k that automatically rules you out of help with mortgage interest payments (only-nothing comes off the capital amount). This would not apply to the repayment option as in your original post as you would have used the savings as deposit.

The situation at the moment is that there is, according to circumstances (there are a few exceptions e.g. people claiming as carers), a 39 week wait with a maximum mortgage of 100k. From next April this will change to a 13 week wait with a maximum mortgage of 175k , but I'm not yet sure of any other minor changes and if the 16k limit above still applies or will differ- I expect it will stay.

Another point. If people take out Mortgage Payment Protection insurance that will be taken into account in the calculation, especially if it pays an income IN ADDITION TO the mortgage payments as some do.

I mentioned the Life Cover. I know many people don't think of it but a young chap like you could well have kids within a few years !

Take it from me that's more scary than the mortgage scenario!!

Noel,

Why not take advice from a whole of market mortgage broker who will be able to answer all the queries you are posting here and do all the paperwork for you?.

Yes that's another option open to all.

How many of them are aware of state benefits, what are their charges and did they predict the downturn in the housing market as I did last year?

I'm just far more independent than them....

Thanks for the advice - much obliged.

At the moment I am monitoring a few properties on rightmove and will pounce when they hit the right price / remain unsold for long period. I guess it will be more like the new year now.

If they are any good at their job they will know what state benefits are available and they should disclose their fees at the initial meeting. It is not a mortgage advisers job to predict the future of the housing market it is to advise on a clients mortgage needs. How are you more independent than them, I take it you are fully qualified and FSA authorised?.

That's a big IF ....

13 years qualified and 5 years in assorted state benefits...

Any jobs going ?

I would suggest that you don;t have to go down the all or nothing route - you can have part of your mortgage on interest only and part on repayment if needs be. First thing to remember is that you should have around 3 months salary in an easy access account for emergencies. Cash ISA's are worth looking at for their tax efficiencies (up to £3,600 per annum). Them consider what you need to put aside for holidays etc, effectively do a cash flow for the year (a good IFA will help you do this). That will show you what funds you need to have where and how liquid they need to be and the level of diversification (spread it around a bit!). I would also suggest having as much of your mortgage on repayment as possible - it may be even worth extending the term to have it all on repayment. There are too many clients that have been referred to me that are still on interest only when they should have gone to repayment a long time ago!!

Regarding insurance, you should consider life and critical illness and income protection as minimums, and on an increasing (RPI) basis where possible.

This may also be a good time to consider your retirement options as it can be mighty hard work saving for retirement the older you get. A 29 year old wanting to retire on £10,000 per annum at 65 would probably have to put away £184 (net of basic rate tax relief) per month (increasing by 5%pa)! Bear in mind that (apparently) a 29 year old male has a 64.7% chance of reaching 85 years old (74.1% for women). That mean that your retirement fund would need to last you 20 years or more. The above figures exclude state pensions as there is no guarantee that they will be around or available at that point.

Your best port of call would be an IFA who can discuss all of the above, as a mortgage adviser would need to outsource anything to do with pensions, savings and/or investments.

Proper Prior Planning & Preparation Prevents a Poor Retirement

Brian

Whilst I'm sure there are some good IFA's out there who are experienced in the mortgage market personally speak if its mortgage advice you are after then a whole of market mortgage broker who only advises only on mortgages will on the whole do a better job than an IFA whose core business may more than likely to be pensions, investments etc. With so many products on offer and especially in today's climate products are changing on a daily basis I find it hard to see how an adviser can be an expert on mortgages, pensions, investments, protection, etc without falling into the trap of becoming a jack of all trades but master of none.