Interest Only Mortgage

[milkshakeandchips5]

Hi!

We are due to remortgage in the next 6 months and looking at all options. We have a large mortgage (£580,000) that's already across 33 years so extending length isn't an option. We live in SE and this is a long term property. We bought with the intention of staying point as cost of moving and stamp duty we're too significant to "climb the ladder" so to speak. This was manageable and we stress tested at purchase to 6% (current rate is 1.42%). What we didn't account for was simultaneous increases in all other bills as well as my mum falling ill resulting in childcare increasing by £500 a month + a significant increase in petrol and travel to support her.

We could just about afford repayments at 6% but would need to tap into savings monthly to top up. Alternatively, I'm considering an interest only mortgage for 2/3 years whilst we get through what is probably the highest outgoings period of life. We would overpay/save towards equity monthly but interest only would give us some breathing room whilst rates settle (I personally believe they will settle at around 3%, not as low as before but not as high as now).

I'm confident we can repay the mortgage in the long term. My salary progression is good and I have a good bonus / company shares scheme.

Has anyone switched to an interest only mortgage? Is it crazy to do so for a period of time?

Thanks

Have you checked what percentage you can fix at? They are all lower than 6% because rhe assumption is that they will drop again so you should be able to get a mortgage about 4.4%.

You will be asked to show you have a repayment vehicle in place such as an endowment or an isa. It isn't that easy to just switch to an interest only mortgage now.

Don’t do it. It’s very easy to get into trap of putting off starting repayment again. Cut your cloth

I understand your temptation however I would say don't do it.

If you do go interest only, in two years time you will kick yourself that you did it. You are on plan and that is good. Like you I have a big mortgage (mine's even bigger and 22 years left) and we are squeezed too but having thought it through I realised it is a dangerous game. The capital needs paying off at some point. If your circumstances change as time passes you end up risking not being able to remortgage.

Stick with the repayment (capital + interest).

Rates are unlikely to settle as low as 3%. 4.5% maybe.

Having an interest-only mortgage as a short-term plan is ok if you can be confident that you'll be able to over-pay and get back on track fairly soon after. If things aren't dramatically better on 2 years you'll need to plan to sell up and downsize.

An interest only mortgage without a seriously reliable plan for repayment is basically renting, except that you are responsible for your own repairs and maintenance.

Thanks for the replies.

I have a clear vehicle for repayment. I receive significant shares through my job (equivalent to a value of ~£15,000 a year) but they're not accessible for a period of time. It's simple our current outgoings they feel heavy.

Disclaimer: I know we're fortunate / we made the decision to stretch our mortgage etc (albeit stamp duty / cost of moving / SE house prices all played a part) but it still leaves us with some tough balancing for now. I do think we'll come out the other side in 4/5 years. Just need to get through until then!

I'm not an accountant but i query your commenting you feel confident you could repay it in the long term. You struggle to do that right now, what if the issues currently hitting you arise again in a different form?

@dudsville we are mid-30s so relatively young. Good earning potential (my career path is quite clear, if something catastrophic happened we would have to sell), I have a significant shares portfolio from my role that when vested I could sell and pay down the mortgage. And when we stop paying childcare, we'd simply transfer that to the mortgage to overpay by £1800 a month.

I've been on the property ladder for 25 years and never had anything other than interest only. Then any bonus or windfall has been used to overpay within the allowed limit or to reduce the mortgage when refinancing.

I would seriously look elsewhere I your budget first. Magazine subscriptions, TV packages, phone packages, gym, drop a couple of meals/takeaways each month. You would be surprised what you can slim down to if you have to. We dropped £100k off our income a year ago (DH health) and have had to, as you can probimagibe, huge reduce our spending.
The worst bit has been seeing how much money we actually kind of frittered....

I wouldn't advise it for most people, but in your situation I'd do it.

I'd also pay off as much as the bank would let me annually and have a separate savings to pay down on the mortgage when you go back into a repayments mortgage.

As you say, if something unforeseen happens & the plan doesn't work, you'll just have to sell!

Is interest only actually an option for you? They're increasingly hard to get.

Unlike others here I think if you're looking for a short term cushion because you need it, this isn't necessarily madness. You can use a savings account to earn more interest than the mortgage and to hopefully repay it, but with the comfort of having easy access to equity. Even if your likelihood of needing to use it is low, its a lot easier having it in a savings account than tied into house equity

However, the difference isn't actually enormous. Plugging your numbers in at 4.5% (a reasonable prospect I imagine?) - repayment is £2833 a month, interest only is £2173 a month.

Flip side is, I think got to question what will change for you to want to go on repayment again and how likely that is - what if 4-5% rates are here to stay? Could you easily solve the situation by switching down the car, for example?

It's a bit of a 'play the game' situation- over two years you're not actually repaying a lot of capital anyway, so going interest free won't make enormous long term difference. But the bigger thing is should you just absorb the shock, because it might be here for a while?

It can work particularly if you have a lot of equity if you could do 50/50.

I know people who have huge interest only mortgages because it's still cheaper then renting & they will downsize one day & hopefully gain from the increased value.

We have had an interest only mortgage for about 16 years, initial mortgage of £500,000. It ends in around 3 years. We have been overpaying and at the end of term will owe about £40,000 which I can clear from savings.

interest only can work for financially savvy people.

the question is - can you get one?

Don’t do it. It feels like you’d rather go interest only than make any significant changes to your lifestyle to stay on a repayment. If you are waiting for interest rates to settle, then go on a short term tracker or stay on the SVR.

Childcare won’t last forever and if you have strong career progression plus bonus your earnings will tick up over the next few years.

@Ellicent these are roughly the figures I was thinking. Most of the time, we would overpay to the full amount by putting the equivalent in a savings account / using bonus etc. And if interest rates do come down slightly, we would then lock in (again, my personal view is that interest rates will fall slightly in 12/18 months). It makes me nervous locking in at such a high rate for a long period of time given the size of our mortgage. But agree it's all something of a gamble, particularly given the political landscape.

To those asking about interest only, our broker is confident we can secure a deal given our income + equity.

I admit it feels very unnatural and my parents would be horrified but it feels like it could be a good short term option.

On lifestyle, we don't have any subscriptions or sky. We haven't been on holiday for over four years.

We do have a car on finance. We looked into selling this but the numbers didn't work, particularly as I'm regularly driving 300 miles round trips on the motorway to help my parents - we need something reliable and safe. We also only have 12 months left on this so will trade down at that point.

Childcare has been brutal and the additional cost of travel to help my parents which is a necessity in the medium term. Although neither will last.

@ThroughThickAndThin01 I have a friend who said very similar. His view was if you are sensible and have a clear plan, it can actually be beneficial as it freed up cash for him to invest elsewhere. Clearly not for everyone, but can work for some.

I'd never risk my home. Surely you can keep going as you are and cut back on other things. Ask your broker to look around for the best rate you can secure. Although you say your job is safe anybody can lose their job at any time. If you have stress tested to 6 percent then that means you can comfortably afford to pay 4.5 percent. There are repayment deals out there for this amount. I'd stick with repayment otherwise you are only paying interest and effectively adding years to your mortgage.

What if you were made redundant? Or became ill and we’re off work for 2 years plus? Or same with partner? Or those stock price fell ( having a lot of stock in one company is making you very vulnerable to market forces)
just think about this ….
like most people my age we always had default interest only plus endowment. This is now no longer the standard way to pay for a home for a good reason. Most of us found we’d never pay off our house when planned as per mortgage period. If you stop paying capital you’re effectively racking up debt, then interest on that debt , in longer term it will cost you very heavily.

Re friend…it’s working now…ask him when he’s 50 or 60

you’re talking a lot about freeing up money when kids go to school, not most parents experience particularly since the government supports free hours of nursery these days. There are many hidden costs to raising kids at all ages even through university and until they’re wage earners

What’s your plan if interest rates are at 6% in 2 years’ time?

I don't think you will find shares to be a suitable repayment vehicle

Absolutely get where you are coming from. But have you considered a 6 month break if your mortgage company offer it?

We have a very high mortgage and took a 6 month break when DH was made redundant and it meant we got the breathing space we needed. I still put what I could afford in a separate account each month and this helped me when we restarted the mortgage repayments

I did this. My caveat is that I'm very financially savvy and also disciplined.
I've loved the flexibility of my interest only mortgage. At the start, I paid just the minimum but I knew I would have various things maturing and my cash flow profile would change, also as the kids got older I increased my hours at work. For the past 5 years I've overpaid 4 times the amount each month while interest rates were so low. When my low fix comes to end I'll still be able to overpay on my new rate, but not as much as before.
I had to borrow quite a bit, later in life and would not have been able to get an extended term to borrow more as too old.
They have a reputation for being irresponsible but with the right attitude to them I think they are very useful.