Is an interest only mortgage a daft idea?

[MaggieFS]

This is really just a Monday lunchtime blues pipe dream, but I'll ask anyway (and probably not get any replies hidden away on this board!).

We would like a bigger house. We love the area in which we live. Salaries are flat as pancakes. In time, I am due 25% of the value of DMs house when she dies, which is half of what was my late Dad's half, currently in trust. I wouldn't bank on half of mum's half because she will hopefully be around for many years to come and may need care fees covered.

I've always had full repayment mortgages, but I'm wondering if it's silly to get an interest only to enable us to get on NOW living the life we want to live and in time use the inheritance from my Dad against capital?

Bonkers or worth digging into?

Further back story for context: I loathe my job and want to leave, most likely towards a self employed direction. I have built up enough savings to cover a couple of years of trying to make it work, after which I would have to go back to FTE if it doesn't work. But I am conscious I would need six months pay slips/ proof of income to get a mortgage, and I don't want to wait a couple of years before moving house. We're bursting at the seams.

We've got one and wouldn't really recommend tbh

I'm surprised that interest only mortgages are still easily available. A lot of peple got burned by them last time they were the answer to a prayer over rising interest rates, The issue, obviously, is that you need a repayment vehicle and a contingent interest in your Mother's house may not cut the mustard.

Well it’s a bit crazy as paying interest only is like renting - as you’re not paying the capital off you’ll never own the house!

Also, inheritance is never a given.

You need a proper plan of how and when you’re going to repay the capital part of the loan.

I don't think it's a completely bonkers idea. You'd need to do your research properly, and I don't even know how easy it is to get an interest only mortgage now. But you say you have had repayment mortgages in the past, so do you have a decent amount of equity in your current house? You could, in theory, upgrade to a bigger house, pay interest only to live there for however many years, you'd have some equity in the house from your deposit (current equity) and then you would either pay the capital with inheritance, or have to sell up and downsize, which presumably you could do in the future?

It's the now Vs future money issue, isn't it? Financially your future will be better if you stick to a repayment mortgage and pay it off. But you could upgrade your Now for a better standard of living, for a trade off of a lesser financially secure future.

I don't think it's a daft idea at any stretch. But it would need some careful calculation as to how much you would stand to lose over the long term, and what your contingency is if your inheritance can't pay the capital - i.e. you'd be forced to sell, how much equity would you have and would it be enough to buy somewhere else outright?

Well inheritance is sort of a given if the person has already died, as they have in the case of the OP.

It’s just a question of whether the investment will hold up, and if UK residential property goes pop then the OP will likely have bigger things to worry about than the value of her inheritance (unless it was enough to settle the mortgage anyway).

We have a part IO/ part repayment mortgage with no repayment vehicle to pay off the IO part other than the sale of the house at the end of the term - we do have 50% equity though and are relatively high earners and had no issue getting this type of mortgage.

As someone said on an old thread about this - we view it as partially renting off the bank - and what it means for us is that we have a family house that is the right size for us at the point we have a family at home.

We are fully aware of the pitfalls, but thought it was a risk worth taking. We are chipping away at the IO part when we can. But if it comes to it, we will sell at the end of the term (which tbh is not that much different to someone downsizing to release equity to fund their retirement).

Why wouldn't you?

I have one, but I over pay it, i can stop the over payment at any time and reduce my mortgage payments by £500 a month.

We have one. It was never meant to be a long term solution but things, life, changed and we swapped several years back. To be honest, we are happy with it, but exceptionally lucky that the house has tripled in value since we got it and we can pay little bits extra here and there. Our rate means we're paying around £500 a month for a large house in a very desirable area, so, although we'll still owe some at the end of the term ( we're older than average!) we will make a profit and possibly buy somewhere cheaper (a plan we'd had anyway)

That's just our situation though, I don't know if it's a good idea for everyone, especially nowadays.

We have built up a fair bit of equity, but I don't think we could afford a full repayment mortgage on the value of property we need to give us the space we want without moving areas - which is what I'm trying to avoid.

A few things will change in future- if (I know IF) my work does go the way I hope, I will actually earn more in future. But I'm not banking on this. We will stop paying DC's extortionate fees in a year's time, but really should save more so I'm trying to disregard that too.

The inheritance probably wouldn't cover the full cost (not at today's values) but it would considerably close the gap. And therefore make it feel like an acceptable risk.

We have 50% interest only to give us flexibility as bonuses are a big part of our income and it's conceivable that we wouldn't get them one year but we have paid off 10% of the capital of our mortgage every year on top of the monthly payments. We have a plan to pay it off (bonuses) but just want to be covered in case one year we can't make the payments. If you've got a good reason for them they can work well.

Thanks for all of the replies. I certainly sounds like it's something to look into. I can dream of a utility room for a little longer as I sit her in the spare bedroom/home office/laundry drying room!

In general, no, I think they are a bad idea. There are too many people now around 60 years old who had them, didn't pay off their homes and are being forced to downsize (easier said than done) or even move to rented, or take an equity release loan, or continue to pay interest in retirement at a rate higher than previously on a lower than previous income. These people are in an awful situation which you would definitely want to avoid.

However, we did take partial IO and partial repayment last time we moved. We then made overpayments on the IO part whenever possible and actually paid it off in about 7 years. We then increased payments on the main mortgage and paid that off in about 15 years.

We had an interest only mortgage for almost 10 years as we knew it wasn’t our ‘forever home’ and was in a very up and coming area of London. We sold the flat in 2021 and it had doubled in value so it was well worth it for us as it allowed us to get onto the next step up and buy a (mortgaged) house a bit further out of london. We were lucky in that interest rates for mortgages were so low back then too.

But if it’s a home you want to live in long term I wouldn’t do it as what if at the end of the interest only period you find for whatever reason you can’t afford the repayment and have to downsize or go into a rental property?

Plus would a bank even offer you an interest only mortgage? We had to go through the usual checks of affordability based on repayment to be offered the interest only mortgage. I understand it’s different if it’s a interest only buy to let mortgage but that’s not what you are talking about.

It all depends on your attitude and long term goals.

Now is a good time to buy a house if you intend to live in it for a long time.

Interest only gives you more security than renting. Maintenance costs a lot though so this is a cost you have to factor in too.

Madness

As long as you're OK with downsizing - go for it!

Take the equity you have, move it yo a bigger house. Then know that at the end of the mortgage term you'll need to downsize. As long as you plan for and are OK with that, it's no big deal.

We did similar for our current house. We plan to live here for only 10 years, while our four children are teens. We needed more rooms, so moved from 4-bed to a 6-bed. But in 10 years time, youngest will be uni age a the others adults. At that point we won't want a 6-bed and plan to downsize to pay off the mortgage.

All it needs is a mindset change that your 'family home' isn't a forever home and acceptance you'll have to downsize

I have an interest only mortgage, taken out in 2004 when near-100% interest only mortgages were available without even specifying a repayment vehicle.

It has been the best thing ever. It was a low fixed rate which then moved to a base rate + tiny% variable rate. Interest rates have been low for years and years and years, so the mortgage was barely anything. Meanwhile property prices have soared and the amount I owe seems very low to me. I have 18 years left and am not worried about how I will repay it,

Same as @HappyAsASandboy I don’t think it’s daft at all.

Half of our mortgage is interest only and the amount owing has just “inflated down” by staying the same over the years as our salaries have gone up and the value of the house has increased. What used to look like a scary amount owing now just looks like something we can deal with in 15 years time - with a combination of overpayments when possible, lump sums from pensions and savings.

It’s been the best financial decision we ever made - allowing us to live within our means in a lovely house which should still be ours at the end of it all!

It's not a good idea it's very poor financial management.

This is really just a Monday lunchtime blues pipe dream
If that is true then it is a daft idea. If it works, it's great; if it doesn't, it's a disaster. You need more than a dream: you need a concrete plan, a what-if-it-all-goes-wrong plan.

Interest-only can work if you are financially savvy. Everybody thinks that they are above-average savvy. Just like they are above-average intelligence, above-average driver, etc, etc
You need a better plan than relying on 25% of 50% of somebody else's money!

Have you thought about extending the term of the loan instead? It will cost more in the long term but less each month (or, to phrase it another way, you can borrow more for the same monthly repayment).

I wouldn’t do it now, but we took one out (offset mortgage) when rates were rock bottom and benefitted whilst they stayed low. Not something I’d recommend in the current climate.

I took one out in 2005, always meant to convert but circumstances meant I never got round to it - I suppose I look at it as kind of renting from the bank now.

That said, my house has doubled in value since I moved in so that equity is mine.

Had hoped to get an inheritance but care home costs put paid to that.

To start paying the capital off would financially cripple me and it is a kind of worry thinking about what will happen when the term ends, but prefer to live for now, to be honest.

Have no kids so only myself to think about and couldn’t afford to rent my current property as be nearly double my mortgage payment, so for me it’s a good compromise between buying and renting.

I've got a friend who has ended up in negative equity with an interest-only mortgage. She is now unable to sell the property as she cannot afford to pay this back and has ended up having to rent it out and rent somewhere else for her to live in.

It's risky - you can't predict the future, either in terms of how house prices will change or whether you will want to live in the same place for the rest of your life. Unexpected family breakdowns happen.

They are fine if you have a plan to either pay it off or sell up to pay it. We knew we would never be able to pay ours off, so we sold up when the kids left home. It allowed us to live in a bigger, nicer house without having to actually pay for it.