interest only mortgage or extend term?

[bejeezus]

Hi, I spoke to my mortgage lender today as I am struggling with payment because I have seperated from my husband and I am only working part time until my baby dd2 gets a bit older. They offered me 2 options;

Extend my term by 4 years to maximum and payments reduce from 626 to 375

Or

Go to interest only and payments will be 264.

I obviously want to be paying more than just interest off but wad thinking it might be nest to take interest only option and then make over payments to equal 375. So keeping the term a bit shorter. I don't understand how mortgages are calculated. If I extend the term will I end up paying a lot more overall?

Also, is there a reason I shouldn't ask for interest only- will it affect credit rating or eligibility to take mortgage on in my sole name eventually?

Thank you in advance

Was not wad.

Best not nest

Extend term

Thanks Viva. Can I ask you to explain why?

Extending the term does mean that you will end up paying more money over all (the bank calculates the interest on the loan over the new longer period, which produces a higher figure).

If you go to interest only, will the bank not require you to take out an endowment policy as well, in order to pay off the original loan at the end of the loan period? If so, you need to remember to factor in the cost of that.

if you move to interest only you are effectively extending the term indefinitely - as you then aren't paying it off.

If you extend the term and pay £375 then you pay your mortgage off 4 years later than you planned. If you go interest only and overpay you will get to the end of the term and still owe a lot of money. I would be inclined to extend the term in case something happens which means you can't remortgage at the end of the term and you have to sell to repay the capital. You can always overpay in the future to cut the term down again.

An extra four years doesn't seem like loads but the amount reduced is a big difference. With interest only you still have the overall amount there, not reducing.
I think once you've ot used to the small amounts of interest only it would be hard to o back to normal repayments and even harder to go to overpaying to make up for it. What if the hours aren't there at work when dd is older, what if it's still a struggle.?

If you go to interest only you need to have some way to pay off the capital at the end of the term. Traditionally they were always paired with endowment policies which, in the days of growth, shares performing, etc, often paid out the capital sum and more but in recent times have frequently not paid out enough.

Extending the term will undoubtedly cost you more but seems like a more sensible offer unless you think you will have a way to pay off the capital at the end.

And if you extend the term now could you not reduce the term later on if things are better. We reduced our term recently.

Thanks all-in looks like extend the term is favourite.

If I did do interest only but paid 375 instead of just the interest would that not mean that I would pay it off the same ad if I had extended the term?? But actually better because they haven't added the extra interest for the longer term?

Gah! I hate finances

Yes Viva, I could reduce the term at a later date couldn't i!

going interest only but making the same payments as if you had increased the term would have EXACTLY the same effect as increasing the term (various fees not withstanding).
You wouldn't be better off either way.
What would be an issue is paying it off in the end if you went interest only and didn't make the overpayments.

Thanks Squirrels- that is what I couldn't understand

"If I did do interest only but paid 375 instead of just the interest would that not mean that I would pay it off the same ad if I had extended the term?? But actually better because they haven't added the extra interest for the longer term?"

You would still pay the extra interest because you are still borrowing capital over a longer term but you couldn't guarantee getting the extra term tacked onto the end of your mortgage when the original term ends.

Aaahhhh! Got it

But, say you want to sell the place relatively soon (say within 5 years). Then what does it matter if you're on interest only? You repay the amount with the sale of the house / flat.

As long as you have enough equity to do this, what's the problem?

Definitely extend the term. With interest only you need to be making adequate provision to pay off the capital. It's not a get out of jail free card.

Pap! Just phoned mortgage lender to take extended term and they inform me it was a mistake, it would be 575 and so they can't offer me that based on affordability!
Interest only it is then

Thanks for all your advice

Can someone please explain to me though, if you plan to sell your flat / house fairly soon and you aren't in negative equity then how would it matter if you were on interest only with no endowment policy?

You just use the money from the sale to pay off the loan, surely? And what's left over is your deposit for your new flat / house.

Unless you're actuually planning on staying there until the mortgage reaches term, then what's the problem? Am I missing something here?

I think you are probably right.

In my case though, I do intend to stay in my house, I don't want to sell it

Thanks bejeezus, I was worried I was missing something!

I went onto interest-only to study. Depending on what happens with DP's work I may stay on it until I go back to work full-time (that'll be a while now as DS is little).

Personally I think it's fine to be on interest-only as long as you know it'll be for a fixed period of time - e.g. while your child is little and you are workig part-time, as you say. Why struggle to pay a large mortgage through this time if you don't have to?

I'm sure the banks have a different view, but this makes sense to me.

I did think the 626 to 375 with an extension of 4 years sounded really good!
But even though you are going to interest only you can still make the overpayment to 375 to at least be paying something off it, assuming your mortgage allows for overpayments, if it doesn't, or if it only lets you overpay once a year then save up the extra each month in a high-interest (yeah I know!) account and pay it off when you can.

Hope things pick up for you.

It's a projecting out over time thing, I think, threefeethigh. The more time you spend on interest only (if you're doing it as a temporary break), the further back you push the eventual date at which you wil have paid off the mortgage when you go back onto repayment. Then you start having to worry about whether you'll have done it safely in advance of the point at which you plan to retire.

It's a perfectly valid option, but as far as I can see the only advantage to it is that it makes it possible for you to stay in your home in the immediate term when other circs are making things tricky financially for you.

As set against the longer term need to be making sure that you will be able to stay in your home in the future, ie when you retire.

yeah squirrels- thought i'd caught a break there! if it sounds too good to be true, huh?

Am thinking instead of making over payments might use any spare cash this year to carry out some pretty desperate house maintenance as when i go back onto repayments its going to be very hard to afford them