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.

The point is... you already live too comfortably! Your spending is out of control and your just pushing the buck down the line.

Your home as the repayment vehicle only works if a) someone is willing to buy it and b) you find somewhere else to move to within budget after repaying the capital.

Increasing your borrowing and taking out an IO mortgage just to live is absolutely ludicrous and very short sighted. You are clearly in need of financial advice; you are making assumptions ‘my house will definitely go up in value’ because you are not willing to make changes.

Surely that's the same for anyone taking out a mortgage?

I am in a much better position than many people as I have enough equity in my house to pay off the mortgage and still buy a decent 3 bed. What on earth could possible happen than makes me high risk? If I loose my job I could sell, if the market crashes I can wait it out.

I know I will have to sell at some point but I can promise you I won't be waiting until the last minute.

not the same at all as the mortgage you are taking out is interest only. in effect you are doing equity release. And banking on the hope that prices will increase. So short sighted. If you are re mortgaging at least choose repayment and not IO.

@Scarlettpixie You said ‘I just don't see the risk (and clearly UBS don't either).’

What is a risk to you and what is a risk to UBS is different. UBS are not on your side. It’s not risky for them, it’s risky for you. Them agreeing to give you an interest only mortgage doesn’t validate your decision.

Doing this doesn’t make financial sense. You will be worse off in the long run even if nothing dramatic happens. You mention selling if you have to or waiting out a crash if you have to. What if you have to sell during a crash? You are taking a big risk, and paying a significant penalty, to prolong a lifestyle you can’t afford.

Going against the grain, I think this sounds like a great plan, and you've clearly done your research!

Yes there's always risks with any financial decision, but you're aware of them and you have plans to mitigate them.

I am really not the financial nightmare you seem to think I am. I never miss a payment. I have an excellent credit score. I have enough in savings to settle the car loan and credit card bill. I know what all my bills are and shop around for the best deal every single time.

I have lived in this house for 15 years, 8 of those as a single mum with no financial support from my ex. During this time the house has gone up significantly in value and I am now in a very fortunate position with regards to the equity I have in the property. I just don't see the harm in drawing down some of that equity and to be fair, several other posters don't either.

I have a stable job and a works pension. I pay AVCs (deducted before tax). I have always maintained an emergency fund and never dipped into it.

What I have done is drop the ball with regards to my (non direct debit) spending, in particular my groceries, Amazon purchase, WLIs and holidays. Because of this, I have not been putting money aside for when I need it like I normally would.

I have allowed this to happen on the basis that I was going to downsize and would still be left with a nice lump sum after paying everything off. I have been using this as an excuse to stop paying attention and to buy/do things I couldn't really afford. It was stupid and I get it, I really do. It won't happen again.

Thank you!

I never said you were a financial nightmare... no need to make things up.

In terms of why I said you live too comfortably, you're mortgage and insurances etc weren't excessive compared to your income. But things like massive grocery bills (similar to a family of 4 or 5), concert tickets on a credit card, lots of holidays planned when you have a credit card debt, refusing to let your child grow up and get a PT job like most uni students.

You are making a huge important financial decision based on the fact you don't want to lower your living standards to align with your income.

Here’s a simple strategy:

Sell your 4 bedroom house for £450k.

Pay off your £60k mortgage.

Buy a 3 bedroom house for £350k.

You will have £40k left to pay all your debts plus lots of spending money and a mortgage free house.

I would get a lodger to rent a room whilst son is at university.

What is the risk to me? Why will I be worse off in the long run?

What are the chances of houses not going up at all in the next 7-10 years or my not being able to wait a couple of years for the markets to recover at the point I decide I am happy to move?

On interest only my mortgage will be tiny with this plan so it is highly unlikely I will need to move just to reduce that cost. The only scenario I can think of is if I needed to finish work perhaps through ill health (with redundancy I would find more work in my field although could have a pay drop). That wouldn't be an instant thing so I would just downsize then. I would have a safety net in the form of my ISA to see me though until the house was sold.

If I wait to sell, the pot of money I am left with is likely to be bigger that it would be if I move now even if I draw down an extra £20,000 and pay the interest on that £80,000 for the next few years - and that's also allowing for the property I want to buy going up in value as well.

I really have crunched the numbers and then run them through AI to check them and look at various worse case scenarios. In every scenario, staying where I am makes financial sense.

@Scarlettpixie It will cost you circa £30,000 to keep this mortgage going for 10 years. That’s on their best interest only rate (so Google tells me) and doesn’t include remortgaging fees. You’ll also be paying higher council tax and higher utilities on a bigger home you do not need. There’s also maintenance costs, bathrooms, kitchens, etc may need replacing in that time. You won’t necessarily see a return from that when you come to sell. This is a decision driven by your heart, not your head, which isn’t a good basis to make financial decisions.

I know and that was my plan although in reality, I may need to knock a bit of the house price to sell it (seems to be the norm around here) and may need to do a bit of work to the new house - that is to stay in this area so there wouldn't be much left after paying of the morgage and debt. I have also considered buying a cheaper house for around 300 in a cheaper area.

I just wanted to see if there was a way I could stay for a few more years and make it work and I think I have found one.

He still comes home in the holidays and some weekends and tbh I really don't fancy having a full time lodger. My anxious rescue dog is also a bit of a nightmare so it would take a very special person to want to live with her when it's likely it will take her a few weeks to properly settle around them. I certainly couldn't have different people coming and going or my preference would be to look for a Mon-Thurs lodger who is in the area for work and goes home at the weekend. She is getting better so I wouldn't rule it out entirely in the future, but it is very slow progress with her.

How much student loan does your son get and what are his accommodation costs/ is he budgeting effectively- ie does he need £50 a week on top of his loan. And why does he get £25 in the holidays? Does he have a part time job? Sorry if I have missed these points!

I don't think decisions around houses have to be purely head over heart. There is nothing wrong with being prepared to pay a bit more to live in a house you love in an area you love. This is just a slightly unusual way of going about it.

Where ever I live will need maintenance. I plan to get some work done. I reckon the kitchen will hold out for the next owners with some snagging (which is currently needed).

I accept I will be paying higher bills for the privilege of living here but do think I can get them down. My groceries and general spending is the same regardless of the house. The increase in property value should off set some if not all of the interest I will be paying while I am here.

He claims the maintenance loan which is somewhere between the basic and full amount. This is due to my income and I am expected to top him up. Most parents top up to at least the maximum loan amount or they pay the accomodation fee and the student lives of the minimum loan (which usually works out more). Some parents can afford to pay for cars, extra food shops, transport etc on top of that but I can't. Some can afford less and so those students have to work.

I wanted to give him a fixed weekly sum in year one and know he would always be able to buy food. He is pretty good with money and we sat down together and went through everything before he started. Luckily he has chosen a uni with accomodation at the cheaper end of the scale so does have some money left in addition to what I send him. His rent will be more in year 2 and his loan less as my income has gone up.

I planned to give him £100 instead of £200 in the summer to take into account that I am buying his food. I have seen other families do similar. He used to get £100 for spending/clothes when he was at college (no extra).

I didn't really want him to look for work at the start of his course because it was a big step up from college. None of his friends work and all for the same reason. They are all just starting to apply for jobs but have had no luck as yet. I just don't want him to work at the expense of his course.

My plan is to pay him the same in years 2 and 3 but if he gets less loan or has higher expenses than year 1, he will have to find a way to cover the shortfall be this by working or cutting costs.

Mine is at uni so I know how it can really vary between what parents can give but it sounds like your son has enough from you for food/washing/ some treats and enough from his loan for the extras. We only give weekly spends for the time they are at uni but obv cover groceries whilst home.
maybe he might be able to consider getting a part time job in the summer once he has settled in to uni life so he still has time to study/ have a break but would alleviate the need for you to give him money. Mine is doing an work heavy subject and we really didn't want then feeling the pressure to work in term time but they work part time every holiday as they enjoy working and the money is for their holiday spends plus some saved for treats at uni. It sounds like there a few areas you could save some money which would mean you could stay in the house and continue with your mortgage. Sorry that was a bit rambly but good luck with it all!

We looked into interest only when we remortgaged last summer but the criteria was impossibly high…..a total non starter…

I'm chuffed for you and you sound like you have thought it all through. I moved to interest only and got a 60k mortgage no problem on a very modest salary. It works for me and will make the next 2 years much more comfortable. Life is all about the long game but we need to accommodate the shorter term hiccups too. Fingers crossed that your plan to sell up in future may not even be needed. Who knows what's ahead. Living a quality life now matters too.

It’s a poor strategy because what will happen is you will continue to overspend but now do it with no proper mortgage in mind. So in 4 years you will need to make another poor financial decision to get you out of more mess. As someone said you need to sell up, buy a smaller house now and pay off the 60k and debts.

It was pretty obvious from the beginning that you were going to do this anyway whatever advice you received. Your plan is still not a good one at all. The questions you're asking about why is it risky show that you really don't understand what you're doing. I expect you will just keep replying to the posters who are saying great and well done etc. You sound hellbent on spending money you can't afford to spend.

To be fair I didn't come on here in the first place to ask if it was a good idea. I came on to ask if anyone had done it and if they knew of any lenders who would consider lending to me on an interest only basis with my income and circumstances.

A few people seem to get where I am coming from which I appreciate yes.

A whole bunch of people said that no one would lend to me and it seems they were wrong. Lots of people seem to think my plan is risky and there seems to be a fear of interest only mortgages. People have said it's risky because I will need to sell the house to pay off the mortgage but I fully understand that and have explained multiple times why this won't be an issue! They say it's risky because I am overspending but with an extra £400+ per month in disposable income (by paying off the loan and reducing the mortgage payments) I won't be!

A friend went interest only a few years ago (maybe 20) when she got divorced and it allowed her to afford the mortgage for a few more years while her children lived at home. She has since downsized. It seemed to work out for her.

The fact that you view the lower mortgage repayments as extra disposable income... when you already have a spending problem.. is why people are utterly against this for you.

You don't understand what you are doing. You just want a lifestyle you can't afford. I can guarantee in 10 years time, you'll come up with different excuses.