From: Ronald Raygun 
Subject: Re: Mortgage question... go to interest only for a while?
Newsgroups: uk.finance
Date: Fri, 25 Feb 2005 11:21:19 GMT

Tim wrote:

> "Sammy" wrote
>> Because the debt will grow by the compound interest you are deferring...
> 
> Now you are sounding daft.
> 
> Under "interest-only", the debt stays exactly the
> *same*, because there is *no* interest being "deferred".
> [The interest is the only thing being paid, hence "interest-only".]

Sammy was actually quite right.  The debt *does* grow exponentially,
but this should have been qualified by calling it a "relative" debt,
i.e. what grows exponentially is the *shortfall* between making the
normal repayments and paying only interest.

If the OP pays £200 less each month, then 2 years down the line his
debt will be the same as it is now, but if he instead continues to
pay those £200pm, it will be less by an amount equal to £200 growing
exponentially for 24 months, plus £200 growing for 23 months, etc.

Essentially, by "saving" £200pm now, he's incubating a hornet's nest
which will come back to bite him (what an awful mixed metaphor) as
somewhat more than £4800 of extra debt he would not otherwise have
had.  Still, to keep a sense of proportion, the effective shortfall
would only be about £230 over the 24 month timescale (based on an
interest rate of 0.4%pm).