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.

Well obviously it wouldn't be good to leave it until the last couple of years but on a 16 year mortgage if you plan to sell in 5-10 years?

Presumably switching back to a repayment mortgage is also an option or paying off some of the balance from savings early and reduce the sum owing (and therefore the overall risk)?

Yes and banks don't seem too concerned either as they will accept downsizing as a repayment strategy but only when there is a minimum amount of deposit/equity - it will vary by lender but think ours was 300k although of course probably depends on where you are in the country.

There's a huge difference between someone taking out IO with no plan to pay back or other options, and someone who has enough equity to secure housing elsewhere - and lenders do recognise that hence allowing downsizing as an option.

If you have 390k equity and in your sole name I imagine your in a better position than the vast majority of ppl in the UK, given most couples aren't sat on 780k of equity.

I would do everything you can to keep the bigger house in the hope it's value grows more so you can release even more when you do downsize , and try and delay so you only need to downsize once and save thousands on solicitor fees, stamp duty

I actually think you're in a really good financial position for your age, and for being single, and your equity is probably higher than most ppl on 45k on their own would have. But yes do look at your spending as I don't think your £492 is the problem, but if you carried as a compromise the 60k mortgage as an Io (rather than borrowing more) it still leaves you with 390k.

The only real risk is if you can't sell for some reason when you need to. So if you do go down that route, you need to look at selling with plenty of time before the mortgage runs out.

Thanks @Gingerbreadman1972

I don't necessarily think the mortgage repayments are the issue. It is more that I want to keep £10K in a savings pot and currenly have almost that in debt. Having looked at the numbers again, I realise if I stay I could use some of the savings to pay off the loan and that would give me almost £200 a month extra which along with my other savings means I could work on paying of the credit card by the end of 2026 and then in 2027 would be able to start building my savings back up - so long as I get a grip on my spending.

However really wanted to keep the £10K for now if I am considering moving in the short term, as I may need some available cash. For example if I buy a new build and want 'extras', I understand you need to pay those up front. Also, if someone wants to buy my house, they may say they will buy if I agree to do certain jobs (in a scenario where they may not have the cash to do them but do have the deposit and can get the mortgage) and I want to be in a postion to do them. The estate agents have advised not doing any minor work but waiting to see what buyers say first.

Are you factoring in repairs and maintenance in curent house in next 5 to 10 years?

You've had great advice, @Scarlettpixie . I think your main issue really is living beyond your means. You're obviously onto this now and have made some changes already. Just keep driving down your costs. Milk delivery, when you're struggling to pay your mortgage, is crazy, but you've cancelled this. Grocery delivery is always more expensive. Why pay £18 for Spotify when you can use the free version? Your overall financial position is pretty decent. You've extended your mortgage term. Pay off the car loan, put your CC debt on another interest free card when your current one expires and keep chipping away at it. Your natural tendency seems to be to waste money and live beyond your means. You don't have to answer here, but are you unhappy at work, or trying to compensate for other things your unhappy about? Well done for posting about this. Much better to do this than just to take on more debt.

As I see it, I have a number of options if I decide to stay put. Obviously the interest only ones depend on whether or not someone will lend to me on that basis.

A) Stay here with an interest only mortgage and borrow £80K costing £268 per month. I could replace the old bathroom and pay off my debts keeping the £10K I currently have in savings. I would be able to start saving straight away for any repairs and maintenance or anything else as well as increasing my pension contributions (AVCs).

B) Stay here with an interest only mortgage and borrow £70K, costing £235 per month. I could replace the old bathroom and pay off my loan using my savings. I could spend 2026 clearing the credit card, then start building my savings up again in 2027.

C) Stay here with interest only and borrow £60K (same as my current mortgage), costing £201 per month. The bathroom would have to wait but I could pay off loan using my savings and spend 2026 clearing the credit card, then start building my saving up again. I reckon I could save up enough to get the bathroom done in the next 5 years (if I am still here), as well as pay for any repairs and maintenance.

D) Stay here with a repayment (with the extended term - and a lower interest rate from a new fixed deal in May) and borrowed £60K it will cost me £423 per month, I could pay off my debt using my loan, really tighten my belt and spend 2026 clearing the credit card. Then start building my savings up again. The bathroom would have to wait a bit longer or not get done at all (depending on other spending and how long I stay).

E) If I do as D above and borrow 70K. It would costs £494 per month but I could get the bathroom done now.

All of the above should be affordable and the interest rates are very similar. I am going to cut my spending over the next couple of months and see where I am before making any decisions.

In the meantime, once I am within 3 months of my current mortgage deal expiring I will contact my current lender and also YBS to see what is possible.

The rates may fall again before April but the forecasts show this to be insignificant in my case.

Any mortgage will be on a 2 year fixed term so I can reconsider my options again in April 2028.

Presumably, most of you think D is the better option?

Does being able to pay more into a pension (before tax) affect how you view option A?

Just to add, EON have confirmed they will reduce my direct debit from March to £160 from £174. I reckon I can get it down further - I like a challenge.

I feel super motivated this morning. I think living cheaper could be my new hobby!

Thank you. This has been a really interesting and useful discussion.

Who’s is your with? Is the rate competitive vs repayment mortgages?

Really? Surely not -- getting a supermarket delivery is the same as going in to the shop and doing it yourself.

It's really not. I've been really ill for the last year and have had a lot of opportunity to compare. You get so much more shopping from Aldi or Lidl than any online delivery.

It really depends how far you need to travel. The cost of delivery would be excessive for me instead of nipping less than 10 minutes up the road once a week where I have 5 large supermarkets. If I am tight for time, I sometimes do a click and collect which is free.

My supermarket delivery is about £30 for a year of midweek deliveries and I would easily spend that on stuff I didn't need in about 2 weeks if I actually went to the supermarket!

It's mainly the cost of the groceries, not the delivery.

That’s what I thought you meant, so a mortgage of £160k!!!

I would talk to existing lender about increasing the term of the mortgage to reduce payments but keep paying the interest. This may mean you will be able to stay where you are for longer and will be almost mortgage free when you do move. Moving twice sounds like a waste of money. Better to wait and only move the once to the home you will retire in.

Always focus on debt that incurs the highest interest so at the moment your credit card is interest free, the loan is not. Paying off your loan from savings, and then focusing on replacing the savings would be wiser.

How much more a month would make you more comfortable, could that come from managing your money better?

You still have £6k to pay off your car loan? After 7 years? How much was it when you bought it? Get a cheaper / more economical car next time, or look into a cheaper way of buying.

Can you get a lodger?

Does your town have a theatre? There are websites for advertising digs for touring actors. You don't have to have a permanent lodger and actors are out every evening and sleep late!

I bought the car when it was 6 years old for 10K - a couple of years ago. I am single and need a reliable car. It was a decent buy. It's still only done 30K miles.

I would rather downsize than get a lodger. There are no big companies, theatres, universities etc who might want occasional lodgings. I don't live near a train station (it's a housing estate on the outskirts of a small town). I am 10 miles from a small city and 20 miles from a decent theatre.

I spend more when I grocery shop in person. The delivery saver £6.99 per month is a drop in the ocean compared to what I save by being able to check for offers and reduce my basket before checking out if I think I am over buying or go over budget. I can't get everything I need from Aldi/Lidl and don't have the time or inclination to go to 2 shops. I also risk spending more (and overbuying) by going to 2 shops.

Mid week only delivery might be cheaper.

I think we can all agree the £7 a month delivery is not the OPs downfall.

@Scarlettpixie has taken on some advice from this thread and put some things in place to reduce outgoings. And I'm sure in a few months she will review again to see how she's doing.

Fair point. But I am a "watch the pennies and the pounds watch themselves" sort of person which is why I mentioned it.

I have an interest o my mortgage (with Santander). As a previous poster said, I needed to be earning over £75k and had to take a shorter term mortgage (17 years) as they wouldn’t lend after 70. They accepted downsizing as the repayment vehicle, and I do have £500k equity so should be ok.
in your situation I would downsize now though. I couldn’t really go smaller at the moment as I have 3 kids to house

An update. I have done a lot of calculations over the past couple of weeks and think I have a plan! I am getting to grips with my finances, have cut my shopping budget and am accounting for and thinking about every penny I spend, over and above my direct debits. I have budgets for everything.

YBS have given me a decision in principle to borrow £80,000 on an interest only basis, with my house as the repayment vehicle. They were very helpful and would actually lend me up to £114,000. When I come to apply, I will be in a stronger position then when I called them yesterday, as I will be settling my car loan this month from savings and will no longer have that monthly amount (£194.00) as an outgoing. This will immediately help my cashflow. My new mortgage will be from 1st May and I will be arranging the application in a couple of weeks time to ensure all is in place when my current deal ends.

My plan now is to stay put until my son finishes uni and beyond, and see if he wants to come back home to live here for a while afterwards. If he does, his contribution once he is working will cover most of the interest payment and I also would no longer be contributing to his groceries. Either way, by Sept 27 (or Sept 28 if he does an extra year), I will £200 - 400 per month better off - maybe more.

I will be stopping Mounjaro by the end of 2026 which is currently a big expense. I am currently paying £230 per month for this.

I would be looking to downsize in 7-10 years and will decide on when that is, based on the markets at the time. I will potentially save the cost of a second house move by staying as by that point, I am assuming my son will be living independantly and I will want to buy something a bit smaller than I would if I were to move now.

Further, my home will go up in value over time, as will the one I want to buy but on a percentage basis I should come out potentially better off as mine is worth more. This means that If I wait, I should have a larger pot of money left over following the move and paying off the mortgage. I have looked at various scenarios (with AI's help) and even in various market crash scenarios and with low market growth I still come out financially better off by moving once later rather than moving now and/or potentially moving twice.

With the £80K, I will be able to settle my current mortgage of £60K and keep a safety net of cash in an ISA, get some home improvements done and, due to the lower mortgage payments be more financially solvent/secure. I am not worried about owing £80K on a house valued at £450K. I have £370K equity in the house and if I were to move now I would be looking at houses worth £350K and later £300 - £320K. In the later scenario, I will have a very decent pot of money left which with a bit of luck will enable me to go part time at work from 63 - 67. I am also looking to increase my pension AVCs - by a small amount per month from May and then by more once my son leaves Uni. I will then be able to draw down on the AVC pot to supplement my part time income when I am 63.

I have been doing A LOT of calculations and really can't see any downsides. I have budgets all the way up to the end of 2028!

At the end of the day, if I take this mortgage there is nothing to stop me moving at any time, if I change my mind.

And the interest rates on the interest only morgage are only very slightly higher than the repayment ones.

Crikey OP..... I was excited to see an update and absolutely devastated to see that you went against almost everyone's advice and applied for an interest only mortgage (that you don't bloody need).

Your mortgage payments weren't your financial downfall.

A lot of people also said no one would give me an interest only mortgage and they were wrong.

People have homes that are bigger than they need or which are in a more expensive area than they need - but not everything is about need.

In my case what I am doing is freeing up some cash so that we can live more comfortably in the short term.

I just don't see the risk (and clearly YBS don't either). If when I apply they decide not to proceed to a full mortgage offer, I still have a plan B which now involves staying put and taking out a repayment mortgage with my current lender on a 2 year fixed rate which is lower than my current one.

I can still downsize at any time in the future be this in 2 years, 5 years or 10 years.

@Scarlettpixie UBS don’t see it as a risk as they will take a charge out against your home if you don’t pay or force you to sell it. It means they think they can make money out of you either way. It doesn’t mean it’s a sensible financial decision which won’t disadvantage you in the long run. They’re not there to look out for your interests, only theirs.