Bought in 2007 on an interest only mortgage...still on it and now looking to move!

[propertyhunter]

Hi,

Long time lurker here!

So we bought out flat in 2007, had bid (and lost out on ) 8 properties before we paid out max budget to this one. We were 23 and 24 at the time and went on an interest only mortgage.

14 years, a marriage and 2 kids later we are looking to move, as the properties in the area are now exceeding what we paid in 2007.

We have been on interest only all this time (trust me- it makes me feel ill every time I think about it)

We have been paying £600+ for the last 6 years on childcare but the youngest turns 3 this year so thankfully we will see that reduce dramatically.

We live in a very expensive city (Scotland) and the property market is just mental here- people paying 20k plus over the home report value.

We would probably have around £14k for a deposit after fees which wouldn't get us anything bigger than what we have at the moment.
We could borrow up to £280k but would need some help with a deposit- and I'm dreading asking my parents as they helped out with £5k on our current property!!

We've started looking out of the city but even then, those areas have been growing over the last 5 years and are starting to look unattainable.

Help to buy Scotland can help on a new build property but only up to £200k, you would maybe get a 1 bed flat for that so that's useless!

Over the last year we have been overpaying on the mortgage around £500 per month

Is anyone in a similar position? We are almost like first time buyers again but without any financial assistance- which is grim!!

Thanks for reading - didn't realise the post would be so long!

Sounds like you may have to move somewhere cheaper. Most people have to do this if they can't afford to buy in the area they want.

Sounds like you need to sell what you can to get a deposit together.

14 years on interest only? What did you spend the money on?

Instead of overpaying the mortgage by £500 if you actually need the cash for deposit then I would start saving this amount instead so that cash is available for the deposit instead.

What’s the value of your home vs the mortgage? Is it £14k (less fees?)

Your only option then really is to move to a cheaper location if you want a bigger home for only a little more £.

Does the £14k include the appreciation of your place? If property is selling over asking, that could make a massive difference to your deposit.

Also, what interest rate is your current mortgage on? We got three interest only mortgages in 2006. Interest rates have dropped massively since then, and repayment plus overpayment is currently less than just the interest was in 2006.

I also live in a very expensive city in Scotland so feel your pain!

Is there no way you can stay in your existing home, adapt for the family to make it workable, and switch to standard mortgage?

Are you in a decent school catchment? Is your location good for work?

You’re right that prices have been driven up outside the city, so is it worth considering if you could wait it out where you are until you’ve built up some decent equity?

The money has been spent on nursery fees mostly! And upgrading the home, general living etc etc

The £14k would be after fees- and working out at selling home at valuation so that's the worst case scenario.

Our rate is 4.14%! We are just outside the 90% LTV so once we are below that (hence overpaying) then we can negotiate a better deal. Our mortgage is cheap at the moment though!

Moving to a cheaper area is what we are trying to do..,,but those areas are growing and we are getting priced out of those too!

@mintbiscuit

I also live in a very expensive city in Scotland so feel your pain!

Is there no way you can stay in your existing home, adapt for the family to make it workable, and switch to standard mortgage?

Are you in a decent school catchment? Is your location good for work?

You’re right that prices have been driven up outside the city, so is it worth considering if you could wait it out where you are until you’ve built up some decent equity?

We may well be in the same city!

My oldest is in a great school which we got an out of catchment place for- we will be working from home for the foreseeable but both offices are under a 20 min commute.

We are in a flat- so really just want a garden!

If I could add an extra bedroom, have a garden and a back door I would be happy to stay where we are!

Don't feel too down...you were able to buy your first home at a very young age. And you still have plenty of time to pay off a mortgage. You do have a deposit, and will soon have extra income to invest in your home. Interest rates are low right now, so you could get chipping away at repayments.

You are not likely to be able to buy your 'forever home' right now. So, I guess it is all about what compromise / sacrifice you are willing to make: location, space, distance of your commute, catchment area, holidays etc. Sadly, a garden is what everyone will be looking for after a year of lockdown! If I were you, I would sacrifice location in order to build up a bit of equity in the mid term, with a plan to look again, or extend, once I had some equity to play with.

Having bought at a similar time as you, I am a bit windy about interest rates. I know how high they were when we bought. It is tempting to enjoy extra cash when they are low, but paying off as much as you can would be my priority for the next year or two to get a better rate.

Do you not have a repayment vehicle for the interest only mortgage? anyway, you're 14k short and able to save 500 a month, could you increase that 500 at all and put it aside for the deposit on the next place?

I’m not sure I understand - if you’re on an interest only mortgage; how or what is it your overpayments go towards?

Oh dear

Did they not insist you had a repayment vehicle in place before you agreed the interest only mortgage in the first place?

@Daisydoesnt

I’m not sure I understand - if you’re on an interest only mortgage; how or what is it your overpayments go towards?

I was just about to ask the same!

I’d presume the overpayments still reduce the capital owed

Which should mean the interest due reduced over time as well and you Can increase overpayments?

I’m glad I’m not the only one feeling confused! If it’s an interest only mortgage, the payments only go towards paying the interest due.

I’d presume the overpayments still reduce the capital owed

In this case - that payments go towards interest and capital- then surely it’s a repayment mortgage? Happy to be corrected and genuinely interested to know (no pun).

When I had an interest only mortgage as a first time buyer I had to show proof that I had a way of repaying it with an endowment policy.
Did you not have to show evidence?

With an interest only payment you can usually overpay by 10% a year and the overpayment reduces the capital outstanding.

You no longer have to have an endowment policy in place. Indeed many were missold and di not cover the balance due. Many people use them to move up the property ladder to house a family, then sell before the end of the term to clear the mortgage and downsize using the capital.

They are also handy for people who do not have a fixed monthly income as they can pay interest only monthly and then whack in lump sums from time to time to clear capital outstanding.

Most lenders are now very unwilling to give an interest only mortgage unless there's a repayment vehicle. So if you were to move house, they would probably insist on a new repayment mortgage.

You really need to talk to your mortgage lender, and possibly a mortgage broker.

With an interest only payment you can usually overpay by 10% a year and the overpayment reduces the capital outstanding

But surely that’s just ....a repayment mortgage?

Many people use them to move up the property ladder to house a family, then sell before the end of the term to clear the mortgage and downsize using the capital

That’s all very well, but when house prices go down there may not be enough to clear the amount owed. It’s an incredibly rickety strategy, and definitely not one that would let me sleep at night.

There's nothing wrong with an interest only mortgage. I've got one, and you can make overpayments, as somebody above has said.

But surely that’s just ....a repayment mortgage?

No, because the overpayments don't change the terms of your mortgage. On a repayment mortgage you're required to pay towards the principle. On an interest only mortgage you may pay a certain amount towards the principle, but you're not required.

Thanks Anonymous, I didn’t know that.

Hi,

Yes we can pay up to 10% a year (I believe) in overpayments without penalty, we call them and ask them to reduce the capital. So we have paid about £2k off the balance in the last couple of months and will continue to do so.

From memory from 2007 we did have to say we had a repayment vehicle in place - but didn't have to prove it (silly I know but we were young and desperate to get on the property market!) and since then- well life has happened!

We could switch to repayment only but it's over what we can afford each month! I think we could ask to extend the term as we only have 11 years left but as we are making the capital overpayments it's 6 and 2 three's!

Our original mortgage was with northern rock...so...yeah- not ideal!

@2bazookas yes we fully intend to switch to a repayment mortgage

@Singlenotsingle thank you...:)

@KG1000 thank you- I know we are definitely more financially aware now!