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Savings to be made on interest-only mortgages says EveryInvestor

06 September 2007
Do not pay rush to pay off your mortgage says personal finance and investment advisor EveryInvestor.

The company says that homeowners who pay more than the just the interest on their mortgages are missing out on the chance to use extra cash for profit. It claims that unlike credit cards and high-interest overdrafts – which should be paid off as quickly as possible – paying more than necessary on mortgages is not the most effective use of homeowners’ money.

Every Investor’s Chris Gilchrist said: “Back in the 1980s, homeowners who had used interest-only mortgages and endowment policies ended up with surpluses of 20% or more after paying off their loans. On the basis of average stockmarket performance over a 25-year term, today’s borrowers can expect to do as well or better using a low-cost self-select ISA as their savings plan.”

And, according to the company, the problems associated with low-cost endowment mortgages should not be associated with running a savings plan alongside an interest-only mortgage. This is because endowment premiums were set too low, and because holders were not advised to review their arrangements when interest rates changed.

The company is confident that, by using a straight-forward formula, borrowers can calculate how much they need to set aside each month to generate a surplus over a 25-year period.

Mr Gilchrist said: “Most people remain unaware of the power of compound interest.”

Most borrowers will not intuitively understand the principle that when interest rates fall, capital repayments on a capital-and-interest mortgage are accelerated and vice versa. This is why it is essential to review the combination of an interest-only mortgage and savings plan at regular intervals,” he added.

Find out more about interest-only mortgages and comparing mortgage deals