Interest Only Mortgage

[Scarlettpixie]

Has anyone got an interest only mortgage? Was it easy to arrange?

I live in a 4 bed house with a mortgage of around £500 per month. My son is at university, living away from home/home in the holidays/some weekends.

I have a car loan of £200 per month and about £3000 on credit cards (on 0%). I give my son £200 per month for groceries while at uni (less over the summer when he will be home and I will be buying more food).

I have literally no money left at the end of the month. It's tight. I have been spending my savings to top up when I need to make a purchase and now that has reduced to the lowest level I am comfortable with. What is left, I really don't want to touch as it is for emergencies. Basically, it would be enough to pay off my credit card and car loan leaving me with zero. It is my safety net.

I planned to downsize when my son started uni but I love living here and keep putting it off. The more I think about it, the more I wish I could stay until DS has finished uni and is set up in his own home. Obviously if he comes back here to live and work for a while, he will pay board which will help with the monthly expenses until he is ready to move out.

I am wondering about taking on an interest only mortgage of around £100K which will give me enough money to do some jobs around the house (new bathroom/kitchen) and pay off the existing mortgage/debts. I have priced this up and would be around £500 a month better off.

I earn £45k per year and am single. I see many lenders won't allow an interest only mortgage unless the annual household income is significantly higher, although on paper I appear to meet the criteria with 1 lender.

My house is currently worth £450K so within the next 5-10 years, my plan would be to downsize to a house worth £300K - £350K and pay off the mortgage in full. The work I plan to do should add value, at least to the value of the work and would make the house more appealing when I do come to sell.

Has anyone done similar? Can you suggest any lenders? Any thoughts welcome.

I have just looked on EON and they suggest reducing my direct debit to £160 from £174 so I must have already cut down a fair bit since my son left. It wouldn't let me change it online though so I have messaged them. I reckon I can get it down further :)

Octopus have been charging me £177 for gas and electric admittedly, but it is winter. It will hopefully go down again from March. I'm paying £120 towards it with an existing credit on my account.

I would be looking to increase income ... lodger or second job.

But it's not a sensible thing to do if you're on a fixed rate for a year, you pay penalties then

Just realised I took my ISA out in Sept and its a 1 year one so nothing can be changing with that until Sept 26 if I want the interest. I am allowed up to 3 withdrawals though if I do want to pay off my loan.

I would rather downsize than take in a lodger.

Sounds like you have thought this through, and the large amount of equity puts you in a good place financially although you are cash poor. I would go to the lender you've found and see if they would accept you in principle. Sounds like a plan to me.

are you on octopus tracker tariff though? that could save more.

Nothing will be different in 5 years time - you’ll still be emotionally attached to house and still have stamp duty and moving costs , I think it would be much better to make the downsize sooner

I have cancelled a bunch of subscription shit and my milk delivery this morning. That should make it much easier to keep track of my 'grocery' spending.

I have also extended my morgage term by 3 years making an instant reduction in the monthly payments.

If the isa rate is lower than the loan rate you better paying the loan off

Nope would never just get an interest only mortgage. How do you plan to pay off the mortgage? You would need a plan otherwise who is going to lend you the money.

By downsizing to a cheaper house.

I'm on a loyal Octopus 14m fixed tariff atm.

@Scarlettpixiea risky strategy and not really one a lender would favour.

Downsize
your sons timetable does not change every few weeks! That would be madness and no uni would do that. He can get a part time job!

It absolutely does. Assignment 1 - Tues, Wed, Thurs, Assignment 2 - Mon, Tues, Wed, Fri, Assignment 3 - Tues, Wed Fri! Lectures can be anytime between 9 and 6.

Oh look... every Saturday and Sunday available then? Like most students.

Absolutely no reason for him not to work.

Ok so it’s a rolling 3 week timetable and he can work weekends! I had a weekend job in a clothes shop - I had to work and 6 of my 8 housemates did too! My now DH had a super intense course and worked every holiday instead. Your son could easily get a job working weekends and by doing Monday , Thursday, Monday shifts for example. Uni towns are used to that kind of situation. Retail or hospitality could start doing weekends and pick up extra shifts when he can!

My mother had one around 30 odd years ago. She says they’re a scam, but it was the only way she could buy a house at the time because she was single.

In order to pay off the mortgage at the end of her term, she used an old small pension pot that she had forgotten about.

Of course, she made sure she would be comfortable without that small pension pot before using it. She still has her Civil Service pension, which is much larger and state pension etc.

The only way they really work is if you could pay a standard mortgage and instead put the principle into stocks and shares which could outperform the interest rate, leaving you with a lump sum to pay it off at the end.
Which is not how they are used or offered.

Interest only mortgages get a lot of negative reactions and a lot of people are scared of them because of the horror stories about ppl not being able to pay them off but if used correctly can work well.

In your situation, as you say even with 100k mortgage, you'd have 350k equity so as long as that buys you something in your area at the point you want to downsize, I don't think your plan is flawed. A pp said you may not be able to buy something for 350k in future years but is forgetting that your 450k house would also be worth more.

Whether or not you would be eligible for an Io I'm not sure. We have one but with a higher income and 2 incomes. Our bank does accept downsizing as a repayment strategy - we hope not to do that but it was easier to state that then have to show proof of other strategies.

My DH is extremely risk averse and the last person you would think would get an IO mortgage but we did so because the equity we have is already enough to buy elsewhere if worst came to it, but it allows us to direct money elsewhere which we think is more beneficial than paying down a mortgage.

If anything I think downsizing now is the wrong decision for you. As a 4 bedroom house is likely to increase more in value over the next 10 years than one you could downsize to now. And like you have said, you'd have to move twice if you dowmsize now so while it's tempting to downsize now to free up funds, longer term staying put for longer may be better overall

That said as a PP identified, your mortgage repayment really isn't the issue. £492 on a 4 bed home is ridiculously cheap and not a big % of your income. So you really don't need to move to IO, although unlike others, I don't think it's a bad plan. Extending your term as you've done is a good option, and hopefully you can make some other savings elsewhere.

But just wanted to say IO isn't all doom and gloom as long as you know your equity would buy somethung elsewhere

My first mortgage was like that before they all went to being straightforward repayment ones.

In my scenario - I would use the equity in my house as a repayment vehicle. House is worth £450K so sell, pay off the mortgage and buy a smaller house at £300 - 330 morgage free. I appreciate most lenders won't allow this unless you are a high earner (£75K plus). It is a thing though.

Thank you.

If smaller house prices go by percentages, mine will also go up and I would be better off.

I am also worth more dead or ill if I stay put as the life/critical illness cover will pay off all or most of the mortgage.

I don't really understand why people are so worried about interest only when you have sufficient equity in the properly to be able to buy another house and pay off the mortgage.

I don't want to push my son to get a job during term time. I know a lot of students work and a lot have to, but I want him to be able to concentrate on his course which is a big step up from what he was doing in college. I also want him to be able to come home some weekends. He and his 3 flat mates are all on similar courses and non of them have jobs at the moment. I will be encouraging him to find something over the summer. I intend to keep supporting him because I want to and I should be able to afford to if I cut back in other areas.

when you have sufficient equity in the properly to be able to buy another house and pay off the mortgage.

Because potential stress at having to sell to a fixed date.
Having to take a low offer because you have to sell at that point as term is ended.

If you have another option to pay off the loan sure.