Interest Only Mortgage- Is it wise?

Plarka_2

My husband and I bought our first property last year, a 2 bed flat. A friend of ours, who is an estate agent, letting agent, and owns about 10 properties, recommended we get an interest only mortgage. He said in the future, when the value of our property is much higher, we sell and pay off the mortgage, and downsize.

I just can't get this to make sense to me. I think it's fine for him who owns so many properties he'll always be able to sell and pay others off, but this is our only one and we can't downsize much from 2 bedrooms. I don't see that it could work, but my brain isn't really wired to understand this mortgage stuff!

Is it wise to go on not paying off our mortgage for years and years hoping this plan will work? It seems very risky to me. We're not saving money to pay it off either. Last we checked with our mortgage lender, it would be 100 pounds more a month, which we can just afford. Is it better to switch to repayment, and is there a bad, good, better and best time to do that?

sdooley

No it's not better to stay interest only on your own house, if you can afford a repayment mortgage. If you have a drop in income and can't afford repayment, go interest only for a while. But if you can pay down your debt it's the best form of saving.

_Andy_

Thank god your friend isn't a mortgage adviser.

Seriously though, if you can afford repayment - go for it.

This notion of paying it off with the sale of the house is very risk given the way property prices are dropping.

Badger_Lady

If you're not already saving into an ISA, you might want to look at the interest rates and decide whether it would be worth paying the extra £100 a month into one... however, in this climate, you may find that paying the mortgage off works out better.

Personally, I have an interest only mortgage at 5%. I pay maximum allowance (£300 pcm) into an ISA at 6%, then overpay the mortgage by £200pcm. So I'm actually making a bigger dent in my mortgage than if I was on standard repayment! And, in case of emergency, I can access that ISA money to use for something else.

Your mate's advice sounds like something to give in a rising market

Plarka_2

Thanks for your replies and I'd love to hear more.

We're only 32, so there is time for the market to rise in the next 30 years...but it's still really risky I think.

We do have an ISA but can only afford about 100 a month to either put in the ISA towards the mortgage, or go repayment.

getmore4less

You identified the real problem with the plan there is unlikely to be anything to down size to unless prices go up a lot how long have you got.

Did you buy the place through this "friend" and did you have to stretch to afford it?

For most people(even if they don't realise it) paying of the mortgage is part of retirement planning, Providing free shelter.

If you have no savings I would build up emergency funds before starting to pay down the debt, I would do this by overpaying/saving to keep flexabiliy, but If you want certainty then a repayment mortgage will be the way to go.

The longer you leave capital payment the higher they will get to pay off the loan on the same schedule as the current one.

Badger_Lady

In that case, what's the mortgage interest? Martin's article, plus a calculator, here: http://www.moneysavingexpert.com/mortgages/mortgages-vs-savings#calculator

treliac

If you pay mortgage interest only, with no other 'savings vehicle' to eventually repay the loan, then you may as well rent - as that, in effect, is what you would be doing. And, in addition to paying a huge amount of interest more than you need to over the years on the whole loan, you will still end up owing exactly what you started off borrowing.

A repayment mortgage ensures that you pay interest on the outstanding balance, whilst reducing that balance at the same time. Thus, although it costs somewhat more per month, you are in fact buying your house and at the end of the term, it will be yours. If the market rises over that period, you will have a bonus in your investment.

(I know about interest only mortgages to my cost, due to my own previous lack of knowledge and having acted on bad advice. )

Plarka_2

getmore4less wrote: »

Did you buy the place through this "friend" and did you have to stretch to afford it?.

No, we didn't buy through this friend at all, and we didn't have to stretch. Our mortgage payments are a lot lower than rent would even be, and we have enough to do repayment and still not be stretching very much.