Interest only mortgage, what else do I need?

Sonofa

Hi new member here.

I haven't really had to deal with setting up a mortgage since my first endowment mortgage :-( back in 1990 so I'm looking to become educated in everything there is to know about mortgages (well, maybe not everything)

I've been reading the threads here for the last few days now and have seen a few discussions on switching between repayment and interest only mortgages. The general feeling I seem to be getting is that it is pretty simple to do and relatively inexpensive.

I'm looking at moving up the property ladder and this would mean waving bye-bye to my tiny £17500 repayment mortgage with 7 years left to run and jumping in with both feet on about a 100k mortgage for 25 years:eek:

My question really is, if I decided to go with an interest only, what other financial product would the lender require me to take out? Life insurance, surely not an endowment?

Looking at a 5 year fixed rate deal with the Woolwich the monthly payment would be about £477 vs £625 interest only and repayment respectively. Nearly £150 difference, but is it more likely that whatever else I have to take out is going to swallow up so much of this difference as to make it negligible?

Any advice/info gratefully received.

Dan

opinions4u

The investment backed mortgage (e.g. endowment or pension or old style PEP) is just about dead in the water. And yes, the cost of the policy/plan usually worked out pretty close to the cost of repayment anyway. With the downside that far too many endowments have failed.

Bite the bullet and go repayment.

Assess any need for life assurance separately. Who would lose out financially if you croaked? If the answer is nobody, ask yourself if you really need a policy at all. The house sale should clear the mortgage debt (unless there's a negative equity situation). Make sure you review this decision quickly when life changes and you end up with a partner or child who has a financial dependence on you.

Finally, and this is a key budgeting question for you, why are you going for 25 years? What life issues are going to hit you (e.g. kids going to Uni at 18, early retirement aspirations etc). Ask for a quote on a term that coincides with any of these possible outcomes. It will cost a little more but could make your life so much simpler if you're debt free when something big comes along. If you're child free but planning to sire a kiddie in the next couple of years, don't go longer than 20!

If you can afford to, that is.

koexelek

The only insurance that lenders usually make compulsory these days is buildings insurance. You don't have to do it with them, but you have to have it.
They would no doubt recommend life insurance/critical illness cover, permanent health insurance, accisent, sickess and unemployment cover, but it's up to you what you do.
If on a budget, give priority to the areas you are most worried about

getmore4less

Barclays/Woolwich don't require any life cover.(we don't have any)

What is important is how YOU plan to pay the £100k back

A repayment mortgage is a starting point to plan this since that is the default way to be sure of paying it back.

If this is too expensive then you need to be sure that you will be able to afford this later, maybe pay rises are a certainty so you can delay the repayments.

The longer you leave it the bigger the payments get to finish at the same date. so if you start on I/O and switch to repayment after 5y or 10y the new payment will be as follows.
£100k @5.79(60%LTV) 25years £631pm
£100k @5.79(60%LTV) 20years £704pm
£100k @5.79(60%LTV) 15years £832pm

The latest date you should be considering is your planned retirement date but consider that you may want to retire earlier than your current plans(happened to me)

There are other factors to consider like ISAs, or any lump sums say from a pension scheme to consider but this is the details afordability is the first thing to consider.

Basic rule is if you cannot afford a repayment(or have a very solid plan) then you are borrowing too much

PS: your I/O payment looks a bit low, I get 482.50 @ 5.79 the cuurent 5y fix 60%LTV.

Sonofa

Thanks for the comments. In reply, I'm 40 so 25 years is me hitting 65. To be honest I only really consider a 25 year mortgage on the basis that it helps keep the payments down in the initial few years, when we would need it most. I'm not really thinking that I am going to be paying for the full term. It would be more likely than not that we would move on, and probably downsize, before the full term.

I'm not really concerned about negative equity even if the market continues to slump for a few years, the 100K mortgage is only about 50% or the current value of the property.

The family bit is done and dusted, we have three (youngest 14) and realistically think only one might be Uni material.

I am the main income so we would need life assurance.

One other point I would welcome advice on is mortgage retentions. This house is in need of a lot of work to make it habitable. Initial figures are suggesting 40k to make it perfect. We are looking at spending an initial 10k to get in to it with everything else being as and when we can.

If I'm only looking for a 55-60% loan would the lender be likely to hold back a retention? Surely in its present state the value far exceeds the loan amount anyway? We have no other money to throw at it, everything would be from the equity made on the current house. A retention would really hurt us.

£482.50, yes, I don't know where I got that other figure from?

opinions4u

Retention unlikely unless there's a significant issue that needs addressing.
Good luck with the move!

getmore4less

To give yourself some flexability barclays have a reserve facility.

So you could borrow against this reserve to do some work and then save to pay it back,

Definately worth considering since you can plan the work better and it is likely that the next few years will be quite good for building work as the main house builders will be building less labour should be cheaper.

VfM4meplse

Don't bother with an interest-only mortagage unless it is a BTL property.

If you want to move up fast and get real VfM from your mortgage, always go for an offset mortgage. Say you would like a 25-year term regardless and it makes the inital mortage payments more manageable and then pay it off quickly.

getmore4less

VfM4meplse wrote: »

Don't bother with an interest-only mortagage unless it is a BTL property.

If you want to move up fast and get real VfM from your mortgage, always go for an offset mortgage. Say you would like a 25-year term regardless and it makes the inital mortage payments more manageable and then pay it off quickly.

I think you need to clarify and justify these statements.

I think you are wrong.

Offset mortgage are not always te best option.

Interest only give a borrower flexability so can be the right thing to do and has nothing to do with BTL.

dunstonh

I wouldnt say investment backed mortgages are a no go. For the experienced and knowledgeable investor they are still very much in use. Albeit with a S&S ISA and frequent reviews and rebalancing. It isnt a sensible option for the inexperienced individual though. Its all about risk, potential reward, tax and affordability.

VfM4meplse

getmore4less wrote: »

Offset mortgage are not always te best option.

I agree that they are not for everyone, those on a higher rate tax band gain the most benefit here but then it depends on you attitude to risk. If the long term aim is to own your own home the cheapest way is by avoiding excessive long-term interest and repaying the capital value of the loan rather than saving through alternative financial products. The right mortgage will allow maximum flexibility and you will still be able to afford life's luxuries.

The reason I say interest-only mortages are for BTL only is because of the tax relief available on the interest payments, I would not wish for my homeownership to be compromised by fluctuating markets that endowments and other investments are inevitably subject to. Whilst they can do well the actual return is unpredictable: "past performance is no guarantee of future returns" . Pensions are subject to exactly the same risks. An overtrusting approach to these financial products has caused a lot of people untold misery over the years at a point where they should be looking fwd to financial security.