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Is an interest only mortgage a bad idea?

(18 Posts)
AlbusPercival Thu 28-Jul-16 13:02:36

We are at the end of a 3 year fixed period on our mortgage, currently on repayment.

I am expecting DS1 in a few weeks.

Get exceptionally good maternity package and will be on full pay throughout, the issue is what happens when I go back to work. Paying childcare and repayment mortgage will be a stretch, not impossible, but everything would be tight.

To me it makes sense to move to an interest only mortgage for 3 years, and then once little one is in school, move back to repayment.

I still think we could pay the total off by the end of our original 25 year term, and would overpay where possible in the interim, or indeed put some money aside each month to part pay the capital if there was a punitive early repayment charge.

Would that work, and will the banks lend on that kind of basis?

KitKat1985 Thu 28-Jul-16 13:06:27

I wouldn't personally. Certainly it would be my absolute last choice resort because you never know what else is going to crop up financially in the next 3 years (so you might not be able to put any money aside for mortgage repayments), and I'd rather cut back on everything else physically possible first before I risked not being able to afford repayments on the house. I'm very financially risk-adverse though.

AgentProvocateur Thu 28-Jul-16 13:08:41

It would be a last resort for me too unless I was somehow guaranteed a lump sum that would pay it off.

mollie123 Thu 28-Jul-16 13:10:51

So far as I know - IO mortgages are only available from a few lenders with very strict criteria - lots of equity in the property and the LTV of 75%
Unless you can be sure of a lump sum payment at some point over the mortgage term it is better to take out a repayment mortgage and overpay as much as possible to reduce the term - just IMO of course
The only mortgagees who can play fast and loose with IO mortgages (as they do not lose their home if they cannot repay the capital) are BTLers

PenelopePitstops Thu 28-Jul-16 13:11:08

Absolute last resort for when you really really can't afford to pay.

Is there any way you can save money on mat leave if you are at full pay? Most people have to survive on less so you should have some flexibility.

AlbusPercival Thu 28-Jul-16 13:16:01

My thinking was to have it on interest only for 3 years.

Then at the end of the 3 years move back to repayment through a remortgage on a 20 year deal, so would still get whole thing paid off.

House has risen in value since we bought it, so now have a 60% LTV ratio.

Grumpysfirstwife Thu 28-Jul-16 13:19:01

We had one but changed to repayment. I wouldn't do it unless it was a last resort.

We had been advised it was the cheapest way to have a mortgage but we needed a savings policy that you built up over the years to pay out the remaining figure (endowment policy) .

Unfortunately for us our final payout figure from the savings policy went from giving us in excess of £25,000 over and above what was needed when we first took the mortgage out to being almost £60,000 below what we needed to pay off the final amount.

In the end it worked out that changing to a repayment mortgage for the remaining term was actually cheaper per month than having a second endowment policy to cover the shortfall that we needed. We are also actually paying off the amount borrowed which we weren't doing before.

You really need to speak to a financial advisor about this and if you do go down the route of an interest only mortgage you need to be really strict with putting extra funds aside to invest to pay off your lump sum at the end of your mortgage term. You cant rely on selling your house to cover the costs at the end of it because you just don't know how much your house would be worth or even whether it would sell in time or not.

EssentialHummus Thu 28-Jul-16 13:23:15

I wouldn't recommend it. Could you see about extending the term of your Repayment mortgage by 5 years or so, to lower the monthly cost? Yes, you'll pay more overall, but it's less risky than IO.

Callmecordelia Thu 28-Jul-16 13:25:33

I suspect the decision will be made for you - IO mortgages are very rarely available these days, and for good reason.

I wouldn't do it. You'll be squeezed once the baby is here whatever happens, and that won't stop when the three years is up. Far better to be paying off interest and loan and being used to doing so, rather than scrabbling around in three years trying to find extra for the mortgage.

AwakeCantSleep Thu 28-Jul-16 13:28:34

IO residential lending has become a lot stricter. You'd have to evidence a repayment vehicle for the outstanding capital. It's not as easy as saying "let's switch to IO".

I second the idea of extending the term of the repayment mortgage. It'll give you some breathing space. Your lender would have to agree obviously, and that will depend on lender's lending criteria, your ages, equity in the property etc.

FinallyHere Thu 28-Jul-16 13:34:33

We had interest only, but overpaid ( no penalty) significantly from the start, so paid it all off in ten years. The interest only made it much easier to work out what we were paying in interest and what capital we we were paying down.

As a means to reduce outgoings, with no plan in place to pay it off, I really would't do it.

NotDavidTennant Thu 28-Jul-16 13:39:24

If you think you're going to struggle with the repayments could you remortgage over a longer term to bring them down? At least that way you are still paying down the capital if something goes wrong and you can't remortgage again in 3 years.

AlbusPercival Thu 28-Jul-16 13:42:22

Spent lunch time doing some reading.
You are all right, we wouldn't be lent the money.
The good news is the change in LTV since when we took the mortgage out looks like it could save us £200 - £300 a month by getting a cheaper deal, so that helps a lot.

Tigresswoods Thu 28-Jul-16 13:46:18

It's a good idea in theory. In practice you'll struggle to find a lender who will accept you.

venys Thu 28-Jul-16 13:48:52

If you can get the mortgage, there is a.lifetime tracker mortgage from HSBC which is probably still available . Put the.longest term on it and make additional capital repayments when you can. It does have big up front fee may be worth getting a mortgage advisor to show you what's out there and the total costs associated with it at the same time.

cexuwaleozbu Thu 28-Jul-16 13:54:58

You are still more than a year away from needing to pay both mortgage and childcare. Stick to repayment and start overpaying now - overpay as close as you can get to the amount you will eventually be paying for childcare so that right from the start you can get used to that level of disposable income.

Them when you do have to start paying childcare you will have the flexibility to underpay a little and the bank won't care.

So: with figures picked for easy calculations, say your normal mortgage costs on a repayment mortgage is £1000 a month, your expected childcare costs will be £800 per month but you feel you will find it difficult to make ends meet if these two come to more than £1600 a month so are wondering about switching to IO to reduce mortgage to £800 per month.

Instead, over the next 12 months you overpay an extra £600 into your mortgage every month giving you £7,200 of overpayment by the time you go back to work.

Then reduce your repayments to £800 per month when childcare bills kick in. Your outgoings in total don't change much. Over the next 36 months the amount by which your mortgage is ahead of schedule will gradually reduce but you will still be ahead. When that credit runs out your child will be starting school and your mortgage repayments can increase again.

StopShoutingAtYourBrother Thu 28-Jul-16 14:08:29

You really need qualified advice on this but my personal view is bad idea. You're effectively deferring a problem. Could you remortgage for a longer term so your monthly repayments are lower and overpay where you can!

StopShoutingAtYourBrother Thu 28-Jul-16 14:08:42

Sorry ? Not !

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