Intrest only mortgage?

Dithering_Dad

I'm about to convert my repayment mortgage to interest only. I'm a freelance I.T. consultant and so I get paid quite a lot when I'm working and nothing at all when I'm between contracts.

I basically want to reduce my outgoing down as much as I can for periods of non-work to make sure that my backup savings go much further. Once I'm in a contract, I start making overpayments onto the mortgage. I'm currently 10 years ahead on my mortgage repayments, so I'm not worried if I have to have a few months on interest only.

Other people might go interest only during periods of sickness or unemployment or times like now when prices for everything seem to be going through the roof. As long as you overpay during the good times, it's a reasonable way of managing the ups and downs of your life.

happybroker

Inaspin2 wrote: »

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.

If your motivation for going interest only is lower monthly mortgage payments but you still want to save to repay the mortgage I don't think you will really achieve a great deal, if anything by doing this.

The only guaranteed way to repay the mortgage is capital repayment

Keeping_Motivated

Hi as others have said going IO is a good way of keeping things manageable when income is low. We went IO when we had our DD as I decided to take a couple of years off at home with her. I am now working again so intend to now up my game with the payments/over payments. It was great for us as it allowed me to be at home with our child and kept our payments low but as someone has already mentioned it should only be short term and you should have intention of going back to paying at some point so have a goal if you decide to do it.

Good luck

silvercar

A lot of people go interest only as they move up the property ladder with the intention of downsizing once the children have left home. In a lot of areas, whatever happens to property prices, a 2 bedroom flat is half the price of a 4 bed detached which will release enough money to clear the mortgage.

ema_o

Oh yes, sorry I forgot to say we wouldn't stay IO and pay into ISA for the whole term. The plan was to do this for the short term to make sure we have lower fixed outgoings for when we have kids or in case one of us lost our jobs in the next few years.
Once we have a reasonable amount saved we would prob switch to repayment anyhow, but when we do buy the majority of our savings will go straight in as deposit!

byrneand

The decision should simply be based on:

1.) your interest rate (as %)
2.) your post-tax return on an investment (as %)

If you believe that 2 > 1 then you should get an IO mortgage and save in a seperate investment vehicle as this will save you money and give you more flexibility.

If you believe that 2 < 1 then you should get a repayment mortgage.

Other factors to consider are:

- you should review your decision on interest rate moves/ end of discount/fixed periods.

- If you are going to undergo a vast salary increase (e.g > 100% in the next 3 years) then it could be worth paying IO now and then swapping to over repayment.overpaying on increase allowing you a better lifestyle etc. To do this you should be sure that this will be the case and you should understand the risks that the capital will remain if you do not start repaying.

- If you have momentary lapses of self-discipline then it could be worth just doing a repayment as although you may miss out on "savings" - these could easily be eroded if you spend your investments/cash on shoes/cars/holidays/ or general treats etc.

Essentially though the decision fundamentally should be based on the initial equation is 2 > 1.

Dithering_Dad

byrneand wrote: »

The decision should simply be based on:

1.) your interest rate (as %)
2.) your post-tax return on an investment (as %)

If you believe that 2 > 1 then you should get an IO mortgage and save in a seperate investment vehicle as this will save you money and give you more flexibility.

If you believe that 2 < 1 then you should get a repayment mortgage.

Other factors to consider are:

- you should review your decision on interest rate moves/ end of discount/fixed periods.

- If you are going to undergo a vast salary increase (e.g > 100% in the next 3 years) then it could be worth paying IO now and then swapping to over repayment.overpaying on increase allowing you a better lifestyle etc. To do this you should be sure that this will be the case and you should understand the risks that the capital will remain if you do not start repaying.

- If you have momentary lapses of self-discipline then it could be worth just doing a repayment as although you may miss out on "savings" - these could easily be eroded if you spend your investments/cash on shoes/cars/holidays/ or general treats etc.

Essentially though the decision fundamentally should be based on the initial equation is 2 > 1.

I'd echo these points and also point out that if you have savings above 6k, you will find that you either do not qualify or have to take reduced state benefits. So if you or your partner goes onto long-term sick (incapacity benefit), you will have to use your ISA savings to pay your way until they dip below 6k. Simply moving the money onto your mortgage will be seen by the DSS as deliberately debriving yourself of money and they will still calculate as though you had the cash.

Ian_Griffiths_Halifax

Inaspin2 wrote: »

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.

If your main priority is to keep your roof above your head, then Interest Only is no problem.

If your main priority is to pay your mortgage off, then ideally it should be a repayment mortgage. If you can't afford a repayment mortgage on this property, then you may need to down size your mortgage by moving if that's possible.

A good compromise would be to switch to an Interest Only mortgage but check that you have an Overpayment Facility within your mortgage, which would allow you to borrow this back if necessary. This way you would be making some inroads to paying it off and you can review it periodically to see if you are on track. At the same time you could get your hands on funds in an emergency.

Downsizing at retirement, future partners additional household income, inheritances, pension lump sum payouts, lottery wins, pay rises, income from a lodger, all these are possible ways of getting rid of the mortgage in the future, but really can't be 100% relied upon unless you have a 100% cast iron guarantee that the money is going to be there.