A good case for an interest only mortgage?

maxtor

I am considering taking out an interest only mortgage, but I want to make sure that I have thought this one out correctly, so any comments are welcome:

Situation
House value ~£200,000, current repayment mortgage has £50,000 outstanding and we're paying £360/month.

Proposal
Replace current mortgage with an interest only mortgage and increase the borrowing to £80,000 providing £30,000 cash for home improvements (we have no intention of moving house again).

Rationale
I stand to inherit £300,000+ from my father (he is 94 and suffers from advanced dementia. He only needs ~£2500 / year to supplement his care costs).

We could wait until he passes away before we do our home improvements in which case the money available would be greater, but the cost of doing the work x years hence would probably cancel this out. Or we could take out an interest only mortgage and do it now, it would cost us more in interest, but we would get the work done at today’s prices not in x years time which should offset this. Obviously the benefit of doing this now is that we get the improvements now not in x years time.

thejoose

Bear in mind that if taking out an interest only mortgage you will be asked to present to the new lender how you are going to pay back the balance at the end of the term. They will be asking questions about what savings vehicle you have in place.

That's not to say that what you are looking to do is wrong but the new lender is highly unlikely to accept inheritance as a means of repaying back the balance at the end of the term.

maxtor

I hadn't thought of that - although I did read somewhere that lenders are no longer required to ensure that a suitable investment has been made. As I am an only child, my father's only living blood relative and I have his Will, I think the risk is very small, but presumably the lender may not see it that way?

_Andy_

It will depend on the lender, but with your LTV being so low, there'd be plenty that would be willing to do it.

mazza1985

If your morgage repayments are only £360 now, I would stick at repayment. I would only recommend interest only if a) you have log term savings plans b) you are coming off a fixed rate , are only 2/3 years into a 15-30 year mortgage and would be in extreme financial hardship if you didnt convert c) it is a buy to let and you are making enough profit to save up and repay your capital.

Do not rely on inheritance. Anything can happen.

ChasingButterflies

Hi op,

With regards to having the means to pay off an IO mortgage... with both RBS and Abbey they took proof of DH's pension as proof as to us having the means to pay them off (although he has 2 pensions - not sure if that make any difference?) House value at the time was 281k with 115k mortgage (it would probably take an hour for me to work out the percentage and I have a heap of ironing to get through )

With rbs our bank manager was telling the mortgage center that the would put it through - he had the means to see the bigger picture. With Abbey they were as slow as a week in jail but there didn't bat an eyelid with regards to the pension being involved - we went through a broker.

dimbo61

dont forget inheritance tax which the taxman will want !
is your dads money tied up in a property which might be hard to sell or need thousands spending on it before selling.
The TAXMAN can and wiil make you take out a loan to pay the TAX if you dont have the cash to pay them.
Go and see an accountant / tax adviser on inheritance GOOD LUCK

maxtor

Thanks for all of the responses,

“is your dads money tied up in a property which might be hard to sell or need thousands spending on it before selling”

No the property was sold 2 years ago the money is mostly in building society bonds. Also 300K is below the inheritance tax threshold.

“With rbs our bank manager was telling the mortgage center that the would put it through - he had the means to see the bigger picture. With Abbey they were as slow as a week in jail but there didn't bat an eyelid with regards to the pension being involved - we went through a broker.”
“It will depend on the lender, but with your LTV being so low, there'd be plenty that would be willing to do it.”

Sounds like there is a high likelihood that someone would lend me the money.

“Do not rely on inheritance. Anything can happen.”

In most cases I would agree but I think in this case the risk is very small – what problems do you think might arise?

“How about taking your Dad on a nice trip to Switzerland with a visit to Dr Death thrown in................Got to be cheaper than an interest only loan.”

Not a helpful comment – dealing with a close relative suffering from advanced Alzheimer’s is bad enough as it is and I am certain that my father would have whole heartedly agreed with what I am doing if he were able to do so.

IT_nerd

Death money is NEVER a simple thing. Never.
It only causes problems.
If you have any other relatives, see the tables turn as they see you inherit more than a quater of a million quid.

Gorgeous_George

Please come back and let us know if he leaves everything to a cat's home - or a young nurse.

Seriously, don't count your chickens before they hatch. With dad at 94, you can't be a spring chicken (pun not intened) yourself.

I hope you both live for many years to come.

GG

maxtor

"If you have any other relatives, see the tables turn as they see you inherit more than a quater of a million quid."

My father was an only child and I am an only child, he has no other blood relatives left that are even remotely close

"Please come back and let us know if he leaves everything to a cat's home - or a young nurse."

I'm sure he would have approved of a friendly young nurse but I doubt he would have changed his will, in fact I have a copy of his Will and I know he hasn't. He also gave me EPA over his affairs that is now registered with the court of protection so any further Will would not be legally valid.