Changing mortgage and also releasing equity.

[wideawakenurse]

Wondered if anyone had any thoughts for me?

We are about the re-mortgage, we will need to pay a redemption fee but with a new interest rate it wont be long before it would be cost effective in the longer run.

However, having failed to sell our house we have decided to stay put and do some major work instead. To do this we need to release about 35-40K, which we do have.

I will be going on mat leave again next year, and would like to be in a position to go back to work but maybe in a different job which is local but would probably entail a pay reduction for me.

So, we went to a FSA last night who has offered us 2 products, a 5 year fixed repayment or a tracker (interest only).

The repayment mortgage would reduce our repayments by £300 a month, but its still a high proportion of our income.

Would we be totally crazy to go with the interest only option to accomodate our lives for the next couple of years, with the aim to go back to paying of the capital once we have done the work on the house, me back at work etc?

I have never been much of a risk taker when it comes to money...so any advice or views would be really helpful!

TIA

IME interest only should be a last resort if you are in financial difficulties. I'm not a fan. All it does is keep a roof over your head and cost you money. It's not even like paying rent because, even after you've paid out every month, you've still got a big debt to pay back at some point. What you have to consider is that rates will almost certainly rise in the next 3 to 5 years. If you start with interest only and get used to low payments, when it comes time to go back to capital repayment, you may find it's a struggle. I would go with a repayment of some description and maybe stagger the work on the house so that you are not overstretched just when your income drops.

I'm not 100% sure but I think it was this edition of MoneyBox Live that talked about interest only mortgages. Worth a listen either way.

Interest only is like the worst form of renting. Your landlord is the bank but you have to do all the maintenance etc and at the end of it they still own it. Many start out with the intention of switching back when things improve but in reality most people get used to the lower level of outgoings and are trapped iygwim. Looking at the economy i think the fix is wiser and 300 saving is still very good

Thank you both for your comments, food for thought.

I agree noddy that £300 is still a good saving, I think that it still feels not that much because our original repayments are still so high!

I know what you both mean about getting used to the lower outgoings, and it woud make be anxious that I would be potentially changing jobs based on having a lower repayment.

Oh why can't we win the lottery?

Thanks again.

Mortgages always look expensive at the outset and, when you're starting a family, finances are squeezed. However, time passes quicker than you think and your circumstances will improve. If you've spent the intervening 3, 5, 7 years paying down the capital, when things do improve you'll be a far better position than if you'd spent the same time just paying interest.

Whichever product you end up with, check the small print on things like early redemption and overpayments. You can seriously reduce your mortgage term with relatively small overpayments, for example.

Funnily enough its the early redemption on the repayment one that is worrying us. It ranges between 16,000 and 11,000K for the term. DH's concern is that if either of us lost our jobs and we need to sell up, we'd be stuffed.

Check whether the early redemption charges apply if you move house, rather than simply pay off the mortgage early. Are you using an independent mortgage broker to help you find the best product?