Interest-only mortgages - good idea/bad idea?(21 Posts)
DH and I are both self-employed. We have a house in London that we're hoping to sell so we can buy a small flat in London as well as a house somewhere cheaper. (The flat is for both of us to use when we're in London for work, not a rental property.) Even though our cost of living should go down when we move, I am aware that we'll be spending more on other things (I'll need a car, for instance, which I don't at the moment) and there may be other expenses I haven't foreseen. I also don't want to buy a much worse house than the one we live in at the moment, having endured various problems with it over the last five years. I don't mind a smaller house in the right location, but I don't want an absolute wreck! And I am wary of having very high monthly financial commitments. We aren't big borrowers, because of being self-employed - we prefer to save and spend what we have.
Because we're both self-employed we are fairly flexible about how and when we work but our income fluctuates a fair bit from month to month. Mine tends to be in lump sums two or three times a year, but I've been earning the same amount for the last four or five years. With an eye to managing monthly outgoings I was wondering about getting an interest-only mortgage on the London property and paying off the actual loan as and when I can - or just selling it on if and when we don't need it anymore. Does anyone have any experience of this, or any advice? Renting looks as if it would be more expensive than a repayment mortgage!
Can you actually get an interest money mortgage? You are self employed and looking to buy two properties. I don't rate your chances....
There are very few IO mortgages available on residential properties these days, most have high deposit requirements, and I'd expect some of these to be harder to secure as two self-employed people.
First step would be to contact a whole-of-market broker for a chat, IMO - they'll be able to tell you outright whether this is feasible.
We have an IO mortgage and we are both self employed but we've had it a few years now and our mortgage is only 20 percent of the value of the house (so we have 80% equity)
Very difficult to get an interest only mortgage these days. You will need to have a solid investment vehicle in place to show the bank on how you intend to clear the principle loan.
Going by the information you have given in your OP, I dont think an interst only mortgage is a good idea.
Can you try a longer term which affords you some flexibility by keeping your monthly repayments lower but also enables overpay when you actually some cash to spare? Or drop back down to the original lower payments during the financially lean times?
Our London house has doubled in value so (assuming it sells, obviously) we would be able to manage a 50% deposit on the flat and have a decent deposit for the house too. Both DH and I earn just over six figures and we don't have any other debts. But we're going to be 40 next year - I'm wondering if that would affect our chances of getting a longer term mortgage.
Shouldn't do my husband and I have recently (years ago) got a 28 year mortgage - he's 45 I'm 41! Depends on the lender - think Santander were the most flexible! You should be fine for interest only didn't realise you owned another property, I'm self employed too although with interest rates so low aren't you better paying some of it off?
our interest only mortgage was only approved for a ten year term. We are also both six figure earners and the mortgage was only a couple of times joint income. You ned to ask the question. ours was with HSBC.
You're absolutely right about low interest rates. I would want to pay it off as we go along rather than just paying the interest - it's more to have flexibility on when we pay off the principle, if you see what I mean, rather than a fixed larger amount every month on a repayment mortgage. And I wouldn't do it with our main home; we'd have a repayment mortgage on that one.
Interest-only is a terrible idea if you wouldn't put in any extra payments - it's a fast track to negative equity if prices fall.
However if you would be intending to use it as effectively a very flexible repayment mortgage where you aimed to average payments over the year that were equivalent to what you would put into a repayment mortgage, then it's not a bad idea - if you can persuade a lender that you are reliable enough.
Thank you for the advice, everyone. Much appreciated. I'm braced for the lenders to just laugh at us - we'll work on a plan b too!
We did this for the flex as FTBs, years ago. Watch out for overpayment limits especially if this mortgage is fairly small beans compared with your income. While interest rates are so low, the IO payment is quite a lot less than the repayment one, and that difference you'll be paying to make it up to repayment levels (on average) could eat heavily into the available overpayment headroom. Overpayment limits seem to be less of a bind these days though TBF.
Might an offset mortgage be another option for flexibility?
That's a good idea Plotter. Will look into it.
We have an IO offset mortgage and it has been brilliant. My DH is self-employed and I was until recently (although we were both employed when we took it out). I bought a car recently and just added it onto the mortgage as when we took the mortgage out we borrowed a lot more than we actually needed, but just offset it so no interest charged until actually drawn-down. It is such a cheap and flexible form of debt. We will be in a position to pay it off next year but will still keep it for the rest of the term in case we need to borrow money for anything else.
The law changed in March this year, its going to far harder to get an IO mortgage.
Our io mortgage has been a god send, shame if you can't get one anymore I'd highly recommend. Managed properly they work really well.
Ours is a life time tracker, (over 18 years by the time it ends) which we overpay as we can, but if times are tricky we can scale it right back. It's saved our arses quite frankly.
What law peter? Not questioning you but interested since if we remortgaged we would want another IO mortgage and we're coming to the end of our term.
We do something similar to this. We own a flat (although we rent it out) plus house we live in. We have about 55% equity in flat. About 65% in house. Both on IO mortgages. We wanted the flexibility regarding payments, for various reasons.
We got the IO on the flat about 7 years ago - when IO mortgages were easier to get, so no issues there. The one on the house (which we bought last year) was much harder to get. Rules are stricter, etc.
They will want to know what investment vehicle you have in place to pay off the mortgage at term. We have an investment portfolio worth more than the two mortgages, but we still had to jump through lots of hoops to get it.
And, in my experience, the reason you (and us too) want the IO is not a good/valid one in the lenders' eyes. I said it was because it made better financial sense for us to put the equivalent of the monthly capital mortgage payment into our investment portfolio because that was making gains at a higher percentage rate than our applied-for mortgage.
A good broker will be able to guide you through all this and I highly, highly recommend you using one, rather than trying to do this yourself. We used someone recommended to me by another MN'er and he was brilliant. Small fee, but he earned it back in spades. Happy to give you his details if you pm me.
One other tip, from the broker, was to not set the term of the mortgage past your/the national retirement age. Apparently that can send up red flag for some lenders.
We have an interest only mortgage, they are not impossible to get. We did need a joint income of over £100k and also substantial equity (we have about 66% equity) to get this.
They did not require a repayment vehicle from us, they were ok with accepting "sale of property" as the repayment vehicle. We do have another repayment vehicle anyway.
I also recommend a broker for this. Town and Country won't charge you.
Actually nothing specific about IO.
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