Financial Planners (New), Mortgages and Loans

Having looked at a standard mortgage in the section “The Simple Example Plan”, now consider one where Fred repays the full £150,000 over 25 years (i.e. no £30,000 deposit from his parents), but where for the first ten years £100,000 is on an interest only basis, as shown below…

In this case his Cashflow, shown below, remains positive for the first ten years of his mortgage payments (n.b. his earnings are £20,000 p.a. before tax from 2010, with expenses of £8,000 p.a. excluding the mortgage), though it clearly suffers during the second 15 years, when his repayments increase.

But because he’s able to accrue some savings during the first ten years, he actually suffers less and for a shorter period than if he had started on a 100% repayment mortgage, as shown below.

In both scenarios his Net Worth never goes negative, because overall he spends less than he earns. The one shown below is for paying interest only during the first ten years (and the other looks similar).