Intrest only mortgage?

Inaspin2

Hi..hope someone can advise me. I'm separated from my husband who was paying the mortgage. Abbey have sent me the details to pay as interest only which would be £456.70pm as opposed to £688.01pm. There is still 17years 2mths to go on the mortgage and the outstanding amount would be just over £86,000. What would be the best way to finance the outstanding amount or would it be more sensible to stick with the current repayment mortgage? My hope is that at some time in the future my children will still receive something when the house is eventually sold.

ema_o

Hello
What we are planning to do (if we ever get around to buying a house) is getting an interest only mortgage then paying the difference between that and the repayment into a cash ISA with a reasonable interest rate.
We think this will work out well as we would have the money accessible to us if we needed it for an emergency, however we know we're putting aside enough to cover repaying the house. Every couple of years or so we will review what we have and see whether we wanted to remortgage and/or pay off a lump sum, or keep the money in ISAs.
Obviously I don't have a mortgage yet so would appreciate any thoughts on this approach from someone who is more of an expert...

thescouselander

ema_o wrote: »

Hello
What we are planning to do (if we ever get around to buying a house) is getting an interest only mortgage then paying the difference between that and the repayment into a cash ISA with a reasonable interest rate.
We think this will work out well as we would have the money accessible to us if we needed it for an emergency, however we know we're putting aside enough to cover repaying the house. Every couple of years or so we will review what we have and see whether we wanted to remortgage and/or pay off a lump sum, or keep the money in ISAs.
Obviously I don't have a mortgage yet so would appreciate any thoughts on this approach from someone who is more of an expert...

We do this aswell and have found it works very well. you have to be good at saving though.

Nenen

The only difficulty I can see with doing that is that the amount you are saving will not earn as much interest as the interest you will be paying on your mortgage and over the whole term you might end up paying out more by doing it this way. For example, I just used the Chelt & Glos mortgage calculator to see what the repayments would be on a mortgage over 25 years of £100,000 using their online tracker rate of 6.33% (of course there are probably cheaper deals around)
Interest only = £527.50
Repayment = £664.62

Thus the repayment mortgage is costing you an extra £137.12 per month

If you had to save to pay the mortgage off then you would need to save £100,000 / 25 / 12 each month = £333.34 (excluding compound interest)

You would have to save £166.25 per month to get £100,000 in 25 years (assuming compound interest of 5%). This is almost £30 per month more than you'd pay with a repayment mortgage.

Out of interest, I've just used an online compound interest calculator to see what the compound interest take your total to if you saved £137.12 per month over 25 years assuming average interest of 5% and it is only £82,436.63. This would leave you £17,563.37 still to pay off your mortgage.

However, having said all that... if the only way you can manage to keep your house if to take this route then it might be worth considering as long as you know that overall you'd probably be paying more doing it this way. Obviously, how much more you'd pay is dependant upon mortgage interest rates and saving interest rates too.

Good luck

Dithering_Dad

ema_o wrote: »

Hello
What we are planning to do (if we ever get around to buying a house) is getting an interest only mortgage then paying the difference between that and the repayment into a cash ISA with a reasonable interest rate.
We think this will work out well as we would have the money accessible to us if we needed it for an emergency, however we know we're putting aside enough to cover repaying the house. Every couple of years or so we will review what we have and see whether we wanted to remortgage and/or pay off a lump sum, or keep the money in ISAs.
Obviously I don't have a mortgage yet so would appreciate any thoughts on this approach from someone who is more of an expert...

As a previous poster has commented, sometimes even an ISA cannot provide better interest rates than you're paying on your mortgage. When deciding whether to do this, remember to factor in all of the costs, i.e. arrangement fees and redemption fees as well as the mortgage interest rates.

If you're struggling at the moment to pay the mortgage, then the option of going interest only (short-term) is not a bad one, another option would be to extend the length of the mortgage and reduce your repayments that way. Both options will however result in you paying more interest over the term of your mortgage.

Long-term fixes are also useful because keep your mortgage payments at a set level and help hugely when doing your household budget.

AceCobra1

Dithering_Dad wrote: »

As a previous poster has commented, sometimes even an ISA cannot provide better interest rates than you're paying on your mortgage. When deciding whether to do this, remember to factor in all of the costs, i.e. arrangement fees and redemption fees as well as the mortgage interest rates.

If you're struggling at the moment to pay the mortgage, then the option of going interest only (short-term) is not a bad one, another option would be to extend the length of the mortgage and reduce your repayments that way. Both options will however result in you paying more interest over the term of your mortgage.

Long-term fixes are also useful because keep your mortgage payments at a set level and help hugely when doing your household budget.

I thought it is quite dangerous to pay interest only? I mean surely if you are struggling to pay IO mortgage, most wouldn't be able to pay the principle when the IO mortgage is paid in full? Or is principle only payment after IO has been paid is less normally? I am a newbie to this but I have ALWAYS been told to avoid IO because it suggests that you can't afford the mortgage to start off with and a lot of people paying IO are gambling

I mean of course in a short term it might be benificial - but only if you KNOW that you will step up the income ladder. Perhaps that might be a good idea as you will know you have a bit of leeway if the interest rates rise? Or IO payments are fixed amounts every month ?

This is a totally random example but what I ment by secure is that one of my mates work for specsavers and he makes £16k a year. He wrote a letter in recently and is HOPING to get a payrise soon. On the other hand, being employed by the NHS myself, I know my income in 1st year is £32k. But depending on which branch you take - go back to hospital and get less or if you go to work in a practise as an associate, it is not unrealistic to average £50k. That of course still is not a secure income as is dependent on the number of patients you see. And what i ment by secure is the income is more or less predictable - and you don't need and I assume can't write in for a payrise... A lot of the assumption income wise is based on other people's opinion as well as facts.

dmg24

AceCobra1 wrote: »

I thought it is quite dangerous to pay interest only? I mean surely if you are struggling to pay IO mortgage, most wouldn't be able to pay the principle when the IO mortgage is paid in full? Or is principle only payment after IO has been paid is less normally? I am a newbie to this but I have ALWAYS been told to avoid IO because it suggests that you can't afford the mortgage to start off with and a lot of people paying IO are gambling

I mean of course in a short term it might be benificial - but only if you KNOW that you will step up the income ladder. Perhaps that might be a good idea as you will know you have a bit of leeway if the interest rates rise? Or IO payments are fixed amounts every month ?

This is a totally random example but what I ment by secure is that one of my mates work for specsavers and he makes £16k a year. He wrote a letter in recently and is HOPING to get a payrise soon. On the other hand, being employed by the NHS myself, I know my income in 1st year is £32k. But depending on which branch you take - go back to hospital and get less or if you go to work in a practise as an associate, it is not unrealistic to average £50k. That of course still is not a secure income as is dependent on the number of patients you see. And what i ment by secure is the income is more or less predictable - and you don't need and I assume can't write in for a payrise... A lot of the assumption income wise is based on other people's opinion as well as facts.

Some people have different reasons for going interest only. For instance, if the repayment amount is beyond your means at the time of purchase/ transfer, it may still be viable if you know that you will gain sufficient capital to repay the capital element in the future. An example of this is where someone is guaranteed an inheritance at a point in the short to medium term.

AceCobra1

dmg24 wrote: »

Some people have different reasons for going interest only. For instance, if the repayment amount is beyond your means at the time of purchase/ transfer, it may still be viable if you know that you will gain sufficient capital to repay the capital element in the future. An example of this is where someone is guaranteed an inheritance at a point in the short to medium term.

Ah yeah gotcha... its just because I seem to get impression that the IO mortgages were a division of the subprime market. Of course a lot of people used it trying to flip properties and got stung. My auntie is one of them and think she is getting slightly more than a bee sting which is a shame... but she was 'gambling' so to speak

dmg24

AceCobra1 wrote: »

Ah yeah gotcha... its just because I seem to get impression that the IO mortgages were a division of the subprime market. Of course a lot of people used it trying to flip properties and got stung. My auntie is one of them and think she is getting slightly more than a bee sting which is a shame... but she was 'gambling' so to speak

Until recently, there was nothing unusual about interest only mortgages. The borrower would/ should be advised that they would need to take out a repayment vehicle alongside the mortgage, and the lender would give the money on the assumption that this was happening. Interest only mortgages are still available from prime mortgages, but now they are a great deal more cautious, and tend to ask for proof of a repayment vehicle (i.e. they will not allow people to rely on uncertainties to pay off their mortgage).

I am a believer that all borrowers (of any kind of credit) should have to pass a test to show that they understand the agreement that they are entering into. It would solve a lot of questions on here!

AceCobra1

dmg24 wrote: »

Until recently, there was nothing unusual about interest only mortgages. The borrower would/ should be advised that they would need to take out a repayment vehicle alongside the mortgage, and the lender would give the money on the assumption that this was happening. Interest only mortgages are still available from prime mortgages, but now they are a great deal more cautious, and tend to ask for proof of a repayment vehicle (i.e. they will not allow people to rely on uncertainties to pay off their mortgage).

I am a believer that all borrowers (of any kind of credit) should have to pass a test to show that they understand the agreement that they are entering into. It would solve a lot of questions on here!

I suppose a lot of these things stem from the self cert mortgage isn't

DaftMule

AceCobra1 wrote: »

I thought it is quite dangerous to pay interest only? I mean surely if you are struggling to pay IO mortgage, most wouldn't be able to pay the principle when the IO mortgage is paid in full? Or is principle only payment after IO has been paid is less normally? I am a newbie to this but I have ALWAYS been told to avoid IO because it suggests that you can't afford the mortgage to start off with and a lot of people paying IO are gambling

I mean of course in a short term it might be benificial - but only if you KNOW that you will step up the income ladder. Perhaps that might be a good idea as you will know you have a bit of leeway if the interest rates rise? Or IO payments are fixed amounts every month ?

This is a totally random example but what I ment by secure is that one of my mates work for specsavers and he makes £16k a year. He wrote a letter in recently and is HOPING to get a payrise soon. On the other hand, being employed by the NHS myself, I know my income in 1st year is £32k. But depending on which branch you take - go back to hospital and get less or if you go to work in a practise as an associate, it is not unrealistic to average £50k. That of course still is not a secure income as is dependent on the number of patients you see. And what i ment by secure is the income is more or less predictable - and you don't need and I assume can't write in for a payrise... A lot of the assumption income wise is based on other people's opinion as well as facts.

I would think a lot of people go for the IO option when they decided to have kids. Gives you that flexibility at the time you have most financial pressure and one of the income earners in the household is not working. Our plan is to IO until the kids are at school at which point the wife will be going back to work full time again (I hope!). We then start over payments into the mortgage once again.

As to suggestion of paying interest only and puttig extra into an ISA as made above....I thought it was always best to pay into the mortgage to reduce the capital owed and hence the interest paid. Also, a lot of mortgages allowing overpayment will also allow you to draw down on what you have over paid if need be so the cash is available once again in an emergency.