Converting to interest only mortgage?

[Teaandtonic]

Would I be mad to consider switching to an interest only mortgage?
We've just remortgaged for a 5 year fixed.
£270,000 mortgage, house increasing in value circa £470,000
Have about 28 years left on mortgage atm.

We are thinking of having another baby. The cost of childcare, the cost of mat leave, we need a new car, would I be mad to go to interest only until the baby is at school and childcare is less?

We earn about 100k pre tax but our mortgage and childcare combined atm is 2500 per month

We decided on an interest only mortgage. You'll find mumsnet is very anti it. We are a planning to pay it off a bit each year but it's nice to be able to not HAVE to when I'm on maternity leave etc.

You'll find very limited places that will offer it to you without one of you earning at least 100k so santander is really your only option though

We have an Interest only mortgage. We paid minimum payments when kids were little but now overpay enough each month to make sure it’s repaid by the end of term. If doing it again I’d dig my mortgage part repayment and part IO to ensure a little capital was bring repaid but to keep it affordable.
You could save how much you can into a separate account that you could use in an emergency but have it earmarked to repay a chunk of the mortgage capital. Start by asking your mortgage provider what is possible. They will probably want you to have a repayment vehicle which you could say is an ISA, and fund it however much you can afford. They may allow you 12 months IO as a short term measure. See what they can offer and take it from there.

I wouldn’t as there’s a danger you’ll never pay any of the capital off as there will always be something else to spend the money on. You could be stuck in a terrible position in the future.

I’m keen on getting our mortgage paid off ASAP though & hate the thought of having a mortgage past 50, as we want to retire early.

You will be lucky to get it agreed. Most mortgage companies will want a robust repayment strategy. A second property savings and investments ect. You can rarely go very high just on the fact that you will save up in the future.

I've got an interest only mortgage and it's a godsend. So worst case scenario you never pay it all off and end up at retirement age still with a mortgage? These days the lenders don't force you to repay it all and sell the house. There are lifetime mortgages that only end when you die, and in the meantime your repayments will be much less than rent. And you can still overpay if you can afford it.

Interest-only mortgages can make sense for sophisticated individuals who know what they are doing. E.g. from investing the money they don't put in the mortgage elsewhere, in the hope it will return more than the mortgage rate, to knowing they need more cash for a few years (eg childcare) but will revert to an ordinary mortgage after that, to gully appreciating they will have to sell the house in the future because they won't pay off the mortgage in full.

Sadly, the vast majority of people, far from being sophisticated, lack the most basic literacy skills and even fail to grasp what "5 interest" even means.

This is why the country is full of people who took on interest-only mortgages without knowing what they were doing...

@ParentOfOne genuine question, what does “5 interest” mean?

Not so genuine question… what does “gully appreciate” mean?

I don’t think I’m sophisticated or literate enough for that one

We have interest only but can repay 10% of the capital each year. It suits us. We usually make the repayment but if we can't for a few months we don't sweat. By the end of the mortgage term we can always sell the house and downsize if we haven't paid it all, or else extend the term. It's much less than rent. As long as you pay off a bit extra whenever you can and have enough equity to downsize if you needed to in retirement it can work well. Plus there were lots of lenders available to us.

@GemmaRuby hopefully it doesn't take too much sophistication to realise that 5 and % are on the same key, and that f and g are next to each other.

My penance awaits :)

I’d love an interest only for the security of lower payments in the event of short-term payments. I’d pay off the same as a repayment through. Problem is too many people were never saving or paying off the capital.

How old are you?
We have increased our mortgage term to 40 years whilst we are in the maternity leave / childcare years. Once we are back to two incomes / the children are in school we will reduce the term again.
This felt like a ‘safer’ option for us.

Another option could be to extend the mortgage to the maximum term which is probably 35 years. This would reduce the monthly repayments and make it more affordable. You could always overpay extra if you want to.

However this all sounds a bit precarious to me, like you basically can’t afford what you want to achieve (more kids, house, new car) and are having to really move things around to make it work. It would make me nervous - what if DH lost his job or became seriously unwell? What if another child had SN and one of you had to stop work?

Cross post with @ForkedIt

How do you plan to repay the £270k?

We have half our mortgage on interest only - having ported that bit from the old house when we moved.

The other half is repayment and was new when we moved to a bigger house. We overpay by between 5% and 10% on the repayment mortgage which is fixed, but the interest only one is a super-low tracker with a tiny rate so it is absolutely not worth repaying it. We have money in various investments which we’ll use to overpay when interest rates go up.

It can be a high-risk strategy but it’s worked well for us so far; we were lucky with the tracker and a long period of low rates. You need to have a contingency though! If we haven’t replayed it by the time we retire our pension lump sums should cover it but the bottom line is that we could downsize if we needed to

Sorry, this doesn't sound financially sensible at all

If you can’t raise a couple of children on 100k and repay the mortgage I think you are in for a shock. Yes mat leave is expensive but so is school uniform, holiday clubs, extra curricular activities, holidays during non term time- you don’t save a load of money once children hit school age it just gets allocated somewhere else.
Borrowing is only going to get more expensive, pay as much as you can now whilst interest rates are low.

I think it’s fine as long as you have a robust plan for paying it all back and have thought everything through

How old are you? Why not consider extending the term perhaps instead?

If you're young you can go as long as 40 years with some lenders,

I don't know many people with enough discipline to operate an interest only mortgage if I'm honest.

I'd perhaps rethink having another child if you're stretched that much.

We had an interest-only mortgage for 20 years so we could afford a lifestyle we otherwise couldn't - our kids had nice holidays etc. Our mortgage was for 150k and our house is now worth 900k.

It worked well for us as we were fairly sure we would inherit money later in life (we did) and if we didn't we would have downsized then paid it off when we retired.

We ended up paying about £230 a month in interest, much much cheaper than renting.

If you've got 100k income then it might make sense to pay more into a pension rather than pay a mortgage off. You DO have a pension, don't you? ;)

Have you looked at the actual figures ? There will be a fee for coming off your 5 year deal and a fee to switch. This could be almost as much as you would be saving. Look at other ways to save like a cheaper car