Interest only mortgage

[DoomScroller52]

Our current mortgage product ends in July 2024 and there are no signs of rates reducing drastically between now and then. Our current rate is 3.59% so not exactly low anyway but we're being offered 5.27%, so around £250 increase per month on what we pay now. Which is doable but will leave us with virtually nothing extra each month, which is a concern.

I was considering going interest only for 6 months under the impression it would buy me an extra 6 months to wait for interest rates to drop before I commit to a new product - but am I correct in thinking this is how it works, or would I have to commit to the 5.27% now and then after the 6m interest free, go back to this?

TIA

I don’t think rates are going to drop much in 6 months time. Do you have good equity?

We are waiting for a new valuation update from the bank surveyor as we've made some significant improvements since buying the property, including adding 2 extra rooms, so if it's valued at what we've been advised elsewhere, we should have around 65% LTV, which would drop out rate to 4.89% hopefully...
They may not drop hugely so I'd have to weigh it up, but I just didn't know if my logic was correct and it would essentially buy me an extra 6 months to see if they dropped a bit more.

Can you even get an interest only mortgage for six months?

And if you can, would you not have to have some kind of policy in place to back it up?

You're going to have to go onto a deal to get any rate, otherwise you will end up on standard variable rate. So you will either be tying yourself in at a higher rate or you may be able to get a tracker you can leave early. The benefit of interest only will be a lower repayment but your interest calculation will be on a higher rate. So you're not really buying yourself time, just mitigating your higher repayment.
You are not going to be able to keep your current rate beyond the end of the deal

I really recommend you find a good local broker you can talk this through with, they will be able to advise on your specific concerns.

Can you extend the term? Seems silly to not be able to pay towards the capital because you can meet the laments in the short term

I’ve done exactly this - go on a six month interest only deal to bide myself some time. You can easily switch under the Mortgage Charter, a government scheme that hasn’t been well publicised at all but most lenders have signed up to it. Like you, I’ve got a low fixed rate (1.4%) coming to an end in July and my reckoning is they’ll come down a bit by November December, if not before.

Your credit won’t be affected and you can sign up to a fix while you’re on interest only, to take over when it finishes. The main downside is that you’re only paying off the interest and your repayments will therefore go up slightly at the end, to make up for the shortfall in the capital repayment. It’s likely to be worth that though, compared with signing up to a 2 year fixed rate at a higher price than you’ll get in November. It’s a good idea in my view.

Just be careful that you dont keep extending interest only. We have a relation who went this route to help fund his business. 30 years later he is still paying a substantial mortgage which means he is still having to work in his 70s as he can't afford to retire. There are other issues too, but his mortgage has become a millstone.

£250 isn’t a huge increase, I would look for ways to make this work. It sounds like there are two of you? Not paying off capital isn’t ideal and you risk rates not coming down and never being able to afford to pay back the capital. I’d fix for two years, cut back on non-essential spending for a couple of years, then reassess.

Don’t do it! Once you do “interest only” it’s sooooo easy to stay with these lower payments. It will be too tempting, trust me, I’ve seen it happen A LOT.