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

Thanks for all the replies! Lots of interesting perspectives.

The plan would be short term in the grand scheme of things, that is if we choose this route. I do think we could comfortably overpay to rebalance in around four years but agree there's no guarantee and always a degree of risk.

My employment is as safe as it can be. If made redundant / sick, payments would be equivalent to around 14 months income. My husbands less so, but if anything catastrophic happened in the next five years that impacted our income we'd likely have to sell.

It's tricky! Lots to balance.

I think you are getting a hard time about this. Agree that you need to be careful not to just keep staying a year or another year but you don't sound like someone who has just recklessly spent or doesn't have a plan, just someone who has a squeeze at the moment. It would give you flexibility in your finances. You can always make the same payments if you find you have enough.

You save £500 a month not paying back your mortgage loan. If you do that for three years, then go bank to repayment and over pay by £500+ for 3 years, you’ll be OK. Given your childcare costs, that seems doable on paper.

Noone knows where mortgage rates will settle. Your hope of 3% seems very optimistic given historical rates. If your broker is telling you that, your broker is being disingenuous as they also absolutely do not know. Predictions of a quick peak and fall in UK inflation rates has not happened and now analysts are predicting a longer period of inflation (and they could also be wrong about that). The market is pricing in another BoE rate rise at the next meeting.

Good luck with whatever you decide.

This made me laugh: “ 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.

My ‘free’ nursery for June will be £1200. I will be significantly better off come September and no other costs will come close.

if you are disciplined interest only could work for you (although as another poster pointed out the savings might not be as big as you’d hope). The one caveat to that is if you think private school may be on the cards. That would likely be more than nursery so if you got into the habit of interest only that could be riskier long-term.

Just very mindful that (in my experience anyway) childcare costs don't drop off a cliff. I still had to find money for afterschool clubs and holiday camps/summer schemes for the kids during the school holidays. They definitely reduced when they went to school, but didn't completely stop.

Then some payments started that I wouldn't have had to consider as much when the kids were younger; birthday parties (both attending classmates and hosting), school trips, hobbies and sports memberships and all of their associated kits/equipment etc.

Now my eldest is a teenager he is eating us out of house and home and seems to outgrow his clothes constantly. We pay him pocket money for his chores but his school ski trip was over £1k and he is doing the Duke of Edinburgh award which has been an extra couple of hundred plus equipment. Also lots more driving him about and collecting him from things.

How old are your children ? How much is childcare - will it reduce in 2yrs when start school

You then have to think about before /after school plus holiday clubs

Yes less then full time
Childcare but that is subsidised with the 15hrs possibly 30 salary depending

Yes worst comes to worst and you have to downsize /sell

I think you sound fairly sensible, disciplined and pragmatic and this sounds like a good stop gap. Also, you have a 33 year mortgage term - a lot can happen in that time, either for good or bad.

We have a 50/50 repayment/ interest only mortgage to keep payments down and give us flexibility and intend to repay the interest only part as and when we can, but ultimately we have gone into it with the knowledge that we may need to sell and downsize at the end of the term to repay the interest only part (which was a perfectly acceptable repayment strategy for our bank and was given on the mortgage offer).

I think a lot of it does depend on your tolerance for risk. But you’ve already had one major unexpected expense (childcare/mum’s ill health), you’ve already maxed out the mortgage term - this doesn’t leave you a lot of wriggle room for another shock.

If your savings/shares are such that you can cash them in and cover mortgage payments, no matter whether they are performing well or not (so you can take them out at a loss to your input) then I might do it. But I think a payment holiday might be more sensible as it has a finite end. It’s very easy to get sucked into “it’s just for 2 years” and then find yourself 15 years later and never having caught up.

So in terms of how much our costs change with my eldest in school versus youngest in last year of nursery.

Nursery annual cost for 4x days: average 14.5k annually with free hours.
wrap around: around 2k plus around another 1k for holiday clubs.

I wouldn’t say there was a particularly different set of costs as they’re both doing similar activities. Eldest’s ones are a little bit more expensive as they tend to be longer but not that much. Main extra difference is piano lessons which is close to £1k and obviously not compulsory. parties seem to peak in reception and year 1 but 4yo going to plenty and we did one so I don’t see that rising a huge amount next year. So even accounting for wrap around, some extra activity costs and more parties I reckon I’ll be at least £10k a year up.

If the OP is looking at similar numbers then a decision to go interest free for a few years could be very rational. The biggest risk is then not reverting to repayment and getting some lifestyle creep to divert that money into a big holiday etc.

I suppose everyone's area and after school clubs have different costs, but wrap around care was half the price of full time care for us.
Our school does provide a low cost after school club, but it books up very quickly, only covers until 5pm and there is an additional cost for breakfast club.

So for us childcare costs aprx halved but then there was extra for over the summer holidays so maybe went to something like 60% of the previous costs. Obviously might be different for the OP was I was just cautioning against thinking that all of the money that was previously spent on childcare would now be available.

I’m amazed at people saying that you don’t save money when you finish nursery. I have two in nursery 4 days a week at the moment; my nursery bill (with tax free childcare) is currently £2k a month. When they’re both at school (have priced it up as older cousins already attend so I know prices) we’re looking at £300 a month plus holidays.

Also comparing £1k (ie half my nursery bill this month) for a ski trip - ie a luxury - with childcare - ie an essential so I can maintain a career and feed them - isn’t really fair.

OP, I’m looking forward to having £1700 a month ‘spare’ in 2.5 years time and if I were in your shoes I’d be extremely tempted to go interest only. I don’t think it’s always a bad idea, but you have to exercise a lot of caution, and it’s those that don’t who give them a bad name.

I don't think anyone has said she won't save money. Just that it might not be as much as OP is expecting and exercise some caution as unexpected costs can crop up in other areas too.

It seems like you are sensible and have planned this through. It would enable you to put some money aside for if your parents suddenly need it too, which I am sure would help you sleep better.

I would try to find interest only with no overpayment penalties, if such a thing exists. Chuck aside as much as you possibly can and carefully balance lifestyle needs versus overpaying and review that split regularly.

If it doesn't exist, 10% OP that let you overpay monthly so you can choose how much and when might be the next best thing.

Thanks everyone! I am typically super risk averse and very much a rule follower so interest only is definitely against my natural instincts but it's good to see different perspectives and that it has worked for some people.

We're currently paying £1800 for childcare so even if we were able to overpay by £1000 a month in the future I think it would rebalance quite quickly. I also benefit from annual bonuses which we'd use to overpay.

Basically, my thinking would be to pay the "fixed" equivalent amount every month but with the freedom to "miss" a month if for any reason we need to.

I still have time! And given the last 8 months I'm not sure predicting interest rates is possible so we shall see.

On the plus side, we really love our house so no need to spend much time outside of it - our 30s are wild!

Another option if you need a mortgage break is using overpayments accrued towards the mortgage to take a mortgage holiday as and when needed, ours would let us do that until the overpayment amount has gone.

But it sounds like extra cash for OPs might not be feasible.

SE house prices are horrible.

I have a portion of our mortgage on interest only and am saving 10% of the amount per year from bonus payments to pay it off. On a five year fix and we will half the mortgage amount at the end of this fix. Getting better interest in a fixed ISA than I would be saving by paying it off, though that’s not why I’m doing it (similar to you, I know I will have the money but not on a monthly basis as it’s bonus and LTIP based). As long as you are disciplined and won’t dip in, you should be fine!

1k in piano lessons for a pre-schooler. I am clearly living in a different world.

I've always had an interest only mortgage. It's a bit of a no brainer for me (helped by working in investing and not being risk averse).

I've made around 20-30% a year on average from my ISA investments so it pays me not to pay off my mortgage (which is currently 18 months into a five year fix at 0.99%).

That said, lenders have tightened up the criteria significantly in recent years. Last time, I had to cover it in cash plus (something like) 75% of my ISA investments. In the end, they decided to put the mortgage through on sale of house as the repayment mechanism as it was apparently less hassle.

Firstly, she didn't say it was for a preschooler (indeed she didn't say it was for just one child), secondly she didn't say how long a time period that covered but based on the context I'd guess a year so £20 a week for lessons for 1 or 2 children does not sound outrageous although I appreciate that many people are on low incomes and couldn't afford that.

@JaninaDuszejko thank you- you’re pretty much bang on. And yes piano costs were for a whole year at around £20 a week.

Point I was making is my 7yo even with wrap around and expensive activities costs a hell of a lot less than nursery- no comparison at all really. The OP sounds like she’s in a similar position with v high childcare costs that will subside once school starts which is relevant to her initial question.

My nephews fund (endowment, PEP?) at the end of the term, underperformed really badly & he had to be bailed out by his family as couldn't get a mortgage due to circumstances.

It sounds a perfectly sensible option to me in your situation (I'm also very risk averse), as long as you can find a suitable mortgage at a reasonable rate of interest.

Yes, in a few years time your debt in monetary terms will not have changed. But, high interest rates aside, inflation is actually good news for debtors as the value of the debt in real terms decreases over time, whilst your income continues to increase. It is one of the mechanisms government relies on to manage its own debts.

Have you considered getting an au pair? Or some other way to reduce your childcare bill?

Interest only @6% must be quite a lot!

You are right in saying the rates are going to drop which is why the banks are offering 5yr fixes at 4% - typically they wouldn’t do this if they thought rates were going to rise!

Also 15k a year is only going to make a small dent in that mortgage balance

I didn't think they let people have IO mortgages anymore without a clear plan to pay them off . ( ie endowment etc )