Interest only or capital repayment?

[Bells3032]

Hello all

Some thoughts please. We are looking to buy a four bed house and have been offered a mainly interest only mortgage (90% interest only and 10% capital repayment) which comes to about 11% of our current monthly take home pay.

Should we go for this or stick to a capital repayment at about twice the monthly cost?

We are both young and buying in an easily saleable road. We are looking to start trying for a family within the next few months so fingers crossed the next few years are gonna be the most expensive of our lives. We'd still aim to pay off the same amount of mortgage each year just wouldn't HAVE TO.

The 5% ERC are making me very very nervous too.

Any advice?

Thanks

Whichever has the lowest interest rate and lowest early repayment penalties? (I understand you will make additional payments - so no need for a savings vehicle alongside an interest only?) Have you talked to a broker about your options and relative costs associated?

The interest rate is the same for both. Although the interest only is over 25 years and the repayment would likely be over 30 years.

What do you mean by a savings vehicle.

If you only ever pay the interest you will still always owe the entire outstanding loan. But you know that. Do you want to own the property at the end of 25 years?

Mortgage lenders will only lend what they think you can afford, according to their own criteria; most will expect/assume you are contributing to some sort of repayment vehicle throughout the term in order to pay this off at the end.

If you don't have some way to pay it off, your house will need to be sold and you'll have to spend any equity on rent forever, or you'll need to remortgage again for a silly number of years to pay off the capital to keep the house.

Kids are expensive, and (16 years in) I found they never get cheaper. Sure, the childcare can be crippling in the first few years but then they start going to clubs, want fancy trainers, school uniforms, driving lessons... And then figuring out a way to repay your capital on top of that?

Interest rates are incredibly low at the moment, imo you'd be bonkers not to take advantage of this and overpay the capital if you can rather than just pay the interest.

If you start a family, you need to factor drop in income/maternity leave and associated pay; nursery fees?..... It's easier to overpay mortgage or save a cushion so that mortgage payments during young family expensive period can be covered, while you are dinkys.

If you can easily afford the repayments why would you take out an interest only mortgage. No point because you'll never repay any of the capital.

Repayment.

We got massively stung when we had an interest-only mortgage (years ago when they first became fashionable) as we were advised to take out an endowment policy. When it matured at the end of the mortgage term, it was supposed to repay the capital in full. Along with thousands of other people, we were incorrectly advised, and the policy we took out was worth nowhere near enough. As it happens, my ex inherited another property which we were able to sell, and repay what we owed. Otherwise we would have been stuffed.

Search 'endowment mortgage scandal' - it's quite an eye-opener.

Savings vehicle is like a savings plan that you pay into to pay off your mortgage (the capital) at the end of the term.

Say you want to borrow £100k over 25 years. With interest only your monthly payment to the mortgage company is lower but you'll still owe exactly the £100k at the end of the term. Repayment monthly payments are higher but at the end of the 25 years there's nothing else to pay.

With interest only you pay into a repayment vehicle to hopefully pay off the £100k at the end.

How risk averse are you op? Have you spoken to any lenders yet?

The only time I'd take interest only is when you don't intend to stay in the property for long, so would barely pay anything off the capital in that time with a repayment mortgage anyway.

What Muppetry said. Although the capital repayment mortgage is more expensive (and for longer) you would at least OWN the house at the end of it. With the interest only mortgage unless you've got some other way of paying for the outstanding equity of the house you won't. That's why PPs are talking about savings vehicles with interest only, how would you plan on raising the outstanding equity/value of the house at the end of the mortgage term?

Savings vehicle - for interest only mortgage, you will need to pay off the capitol loan at the end of the term so will need savings/investments over the term so you are able to do so. I think you've suggested you will overpay during term of loan, as you can afford to, so I'm thinking you plan to have paid majority of loan at term? Early repayment charges can be nasty. Also interes calculated may be annual only so you may not see the benefits of additional payments until the following year?

If you're doing interest only you don't pay off the mortgage. You have to also save enough to pay off the principle at the end. So you won't actually be paying less, it'll just be going into different pots - and possibly be way riskier, if you choose badly on handling the savings, or decide to just dip into it occasionally for a holiday or a new car...

I'd pay the capital. And if you can, overpay in the early years - I know it's unlikely, but worth mentioning because it makes a much larger difference to your total pay amount than overpaying later does.

I wouldn't be splashing out on a 4 bed house when you don't need that space yet.

Did you discuss options with your prospective mortgage lender?

Thanks all for comments. To add a little bit of context we were thinking only doing interest only for 5 years and then either remortgaging or selling. Likely to sell within 5-10 years. The mortgage is about 50% of the property value. Husband's salary likely to increase a lot over the next five years. Mine obv may go down a bit obv but I work in a family friendly job so shouldn't be for too long.

Repayment everytime.

Thanks for all the comments guys. Will get the broker to look into capital for us as well.

It really depends on your figures and your mortgage options! And how long you envisage having the mortgage for....

If you have strong credit rating, and 50% LTV is positive - you can probably find/negotiate terms with your lender that suit you better.

OP from what you've said, I'm concerned that your broker hasn't explained much about mortgages to you. The difference between repayment/interest only can be twice or three times more in cost, and I'd be cautious they haven't even gone that far in explaining how it works. Brokers also work for a fee so may be pushing some lenders over others, and may not have access to the full market.

Have a look on a couple of comparison websites - they'll give you an idea of costs and how much each type will cost you. There's nothing stopping you going straight to the lender yourself if your financial set-up is straightforward.

You generally get free advice from a high street lender, of course they will only have access to their own products, but they can fully explain the intricacies of the whole process to you

Interest only is expensive. With a repayment mortgage as the balance gets lower, more money goes to capital and less to interest. With interest only the interest payments are high throughout and you have nothing to show for it at the end of the term.