downsizing vs. going interest only on the mortgage

[Nanga]

DH is self employed and because of the recession, his earnings have dipped by about 75%. Because his income varies so massively, we have had a few good months and then, more frequently, some awful months with hardly anything coming in at all, and it's getting increasingly clear that we can't keep on hoping things will improve soon. We are broke. Luckily I work too and get a steady wage, but we can't run the house on just one salary.

We have two options. Firstly, going interest only on the mortgage which will cut our repayments by about 40%. We will still be a bit short, but it could be manageable. We are on a mortgage with a high interest rate (5.5%) fixed for 3 yrs, ending June 2011.

OR, sell the house, and downsize to something much smaller. We are a family of 4, and already bursting at the seams. Downsizing would mean selling half our furniture, putting the DCs into the same room, etc, as we need office space too.

I think we ought to ride it out on interest only for at least 2 - 3 years, until we no longer have to pay childcare for DD (1) (£650 per month) and hope things pick up over this timeframe. DH thinks that's just prolonging the inevitable - in that we'll have to make up for the shortfall in our mortgage somehow. He's really adverse to the idea of not paying our mortgage off normally.

Meanwhile, I think spending £20k on moving costs - stamp duy, legal fees etc is just money down the drain when things could pick up again soon. I'm willing to be skint for a little while longer if it means we can hang on to the house. I'm not being sentimental about where we live, and would move if we HAD to, it just seems such an extreme step and can't see the logic of shelling out so much on moving costs, just to be a bit better off each month, when an interest only mortgage would give us the same financial respite.

anyone with any opinions most welcome....

Moving will be massively expensive. We've gone interest-only when we've not had so much money, and never regretted it.

You'd have to extend the life of your mortgage hugely to cover the costs of moving - think of your interest-only months as paying 'rent' rather than repaying the capital. And you'd have to pay a lot of 'rent' before you got to the equivalent of the costs of moving house.

And you can usually extent the term of your mortgage, even within a deal - so if you pushed the term out to 35 years you'd still be repaying something but still reducing your monthly payment. And when you remortgage, it's likely you'll be on a much lower rate, so that will help you out.

Its is so horribly expensive to move house - I'd go interest only (we have at the moment) and either extend the life of your mortgage or pay extra if you can, once you're not paying nursery fees that should help too.

Unless you're very close to retirement or have no hope of ever increasing your dh's income I think it would be bonkers to downsize at this stage. Interest only is a bad idea when you've got no realistic chance to ever repay the capital, but in situations such as yours it can be a real help and makes much more sense than downsizing. If you have a mortgage where you can overpay then you've always got the possibility of doing that as soon as you're able to pay more than just the interest.

I agree with the others, definitely try the interest only route. There are so many advantages to staying put and so many disadvantages to downsizing.

Tell your dh it's a no-brainer. Some friends of ours have a £750,000 mortgage on interest only and are planning on downsizing when their daughter's gone off to Uni or possibly relying on inheritances.

It's not that unusual these days.

Intrest only and over pay when you can (although not when rates are low, put the money into high savings account).

I'm going to buck the trend here! We are downsizing imminently! Looking forward to paying off a sizeable whack of our mortgage in one fell swoop and then planning to overpay on the remaining amount to clear it as soon as possible. We'll have more spare cash for holidays etc, too. Horses for courses, though, you must follow your instincts.