Mortgage advice please

[germainebeer]

Hi everyone, my current mortgage deal has expired. My partner works full-time and I am a student; we are both pushing 40. For the last few years we've been on an interest-only deal but really need to start paying it off. Given the low interest rate at the moment and the Bank of England's announcement that rates won't rise until unemployment drops to 7% (which isn't expected to happen for at least another couple of years), are we better off tying into a fixed-rate repayment deal or staying with our current provider and paying as much as we can each month on the current low rate of interest and tying in later when a rate rise is more imminent? Which way will make best use of our money and bring the debt down faster?

It really depends on what the SVR is for your current mortgage is and how much you can over pay by each month.

Are the rates of interest lower on interest only mortgages compared to repayment mortgages?

If that's the case, I would beat them at their own game would stick with an interest free mortgage, but set up a standing order to pay an additional £500 per month, or whatever it is you need to pay, depending on when you want your mortgage to finish.

SVR is usually a lot higher than you could get by tying in (can be trackers, don't have to be fixed), then set up a standing order to a savings account each month (ISA if you are not already using that allowance?). Once out of your 'tie-in' pay off the lump sum you've paid, and set up another low interest rate again for the next 2 or 3 years.
Of course only works if you are disciplined about not dipping in to what you are saving each month.

My feeling is that the difference between fixed and variable is one of how much risk you're happy with. Fixed offers a guaranteed monthly outgoing and protects you should the interest rates go up. Variable offers a cheaper monthly payment but doesn't guarantee the amount. Ask yourself, if interest rates went up half a % or even a full %, what would that do to the monthly payment. If finding that extra would send you into a panic, fix the rate. If it would be manageable, stay with variable. Either way, however, I would convert to a repayment mortgage rather than stay interest only.

EachandEvery that's my instinct too and I guess it depends on the factors noted by Lonecat. I love your idea BackforGood (and the disclaimer!) but unfortunately as I'm not working there's a limit to how much we can pay. I just can't figure out whether tying into a 20-yr term on a rate which is fixed for 2-3 years would be better than paying the same monthly amount (c£1k) to my existing provider at a lower rate of interest. The latter makes most sense to me (and would be an overpayment of about £500) but my partner disagrees. He thinks not tying in would waste money and make the loan take longer to pay off. I expect he's right but I didn't understand his reasoning and I don't remember any enough of his argument to reproduce it here. Guess a trip to an IFA is in order...

I tend to agree with your partner simply because he presumably knows what kind of people you are. If he thinks that if you don't tie yourselves into a regular repayment agreement you (plural) will waste money then I think what he's saying is that you'll be tempted to say 'let's give it a miss this month'. There are often times when something big happens like an appliance fails or some repair needs doing. If he £500 overpayment is not committed, it'll get spent on something else.

It really depends on what interest rate you have now you are on SVR - our deal is about to expire and we would then be on 3.99% but I have found a lifetime tracker with HSBC which is BBR + 1.63 (so currently 2.13%) and fully flexible re overpayments and paying off early, so think we will go for that - it saves us £250 per month compared to SVR, and if we decide to move back from London to the north we won't have a hefty charge to pay.

Have a look at these spreadsheets I wrote - they give you an idea of the different options - once you plug your numbers in ....
www.mumsnet.com/Talk/site_stuff/1715581-Cost-of-credit-cards-and-mortgages-the-spreadsheets