Interest Only or Repayment??

Gareth83

I'm a first time buyer and looking to get a house this coming Summer.

House prices are rock bottom now and I have a 10-15% deposit so the mortgage is all go.

The question I have is should I get an interest only or repayment?

Here's a few hypothetical calculations:

Rent is roughly £525 in my area so I'm basing my calculations on this figure.

I can either get an interest only mortgage on a £120,000 house for £525 a month and hope that as prices go back up I can make a bit of money over say 3-4yrs

or

get a repayment mortgage on a £100,000 house for £525 a month.

these figures are just rough

Being a first time buyer I'd imagine £400 or so of the repayment mortgage would be interest anyway so over 2yrs we'd only really end up paying £2-3000 off the mortgage.

So what is the better option?

mclaren32

I will be the first to say im worried about you for so many reasons....

Rock bottom prices? Make money over the next 4 years?

_Andy_

If you go interest only how do you intend to pay back the capital?

Gareth83

Well either way I need to move out of my parents within next 3months

We don't want to rent as we want to make a home and have a child on the way.

So it's either interest only or repayment.

When I say make money on the house I don't mean mega money but the houses I'm looking at need work so it's better to renovate etc. and have the possibility of making money than just renting

either way we have to take the risk

Gareth83

_Andy_ wrote: »

If you go interest only how do you intend to pay back the capital?

Switch to repayment mortgage when she returns back to work after the baby's born.

If interest only is cheaper or equivalent to renting then it's worthwhile

Comyface

I would advise against interest-only (if you haven't got a repayment vehicle).

There are too many unknowns; things change, circumstances change (as we've all witnessed recently). Also you pay more interest on an interest-only mortgage (as you pay interest on what you owe and what you owe is not going down, unlike with a repayment mortgage).

p.s. If the interest-only payment is £525/mth then the interest element of a capital and interest mortgage would also start at £525/mth not £400/mth.

Gareth83

comyface the figure of £400 for interest was based on a £100,000 house not a £120,000 which I based the first method on.

What I figure is if we'd only pay £125 or so off the actual mortgage a month then we could actually deposit this elsewhere and use it as a lump sum in the future when remortgage

dimbo61

With a low deposit of 10/15% you may well find you cant get an interest only mortgage as lenders are looking very carefully at each application for a mortgage !
If you cant afford a repayment mortgage then you cant afford to buy.
Buy a property to be your home and not a money making idea.
With a child on the way do you and your OH want to live in a building site and have you got the money to pay for the building work!
Putting a brand new kitchen/bathroom in a house will not add one penny onto the value of a property in the present market.

Gareth83

I'm not looking to buy to make money per se but this is why I would rather buy than rent as it 'may' make money and either way we'd have to pay 'x' in rent

It may also lose money but I can't see houses going much lower so it's worth the risk same as most homeowners

I do have the money to do decorating work as we would do a room at a time. The house we are looking at will also consider doing a 5% vendor gifted deposit so we are essentially only putting 5% deposit down of our money so the other 5% can be used for renovations etc.

You also mention if you can't afford a repayment then you can't afford to buy, so what about all the other people on interest only?

kieran1979

Gareth,

So much of what you've put suggests you need to do some serious further research and thinking about this.

"Prices are at rock bottom" - I wouldn't bet on it

You've got 10-15% deposit so it's "all go" with the mortgage - I wouldn't bet on it

"as prices go back up I can make a bit of money over say 3-4yrs" - I wouldn't bet on it.

With a deposit of 10-15% you'll very likely be close to or in negative equity before you've even moved in.

I could go on...

You ask "So what is the better option?"

Stay where you are OR if you really can't, then rent somewhere until the market settles and save more for your deposit in the meantime.

Also, see a whole of market mortgage broker and get some realtic ideas of what mortgages are available to you with a small (for these times) deposit.

Don't mean to be poo poo-ing your grand plan, but you need to face up to the issues you face and not get too carried away with the idea of buying/

_Andy_

You're not going to find a lender at that LTV that's going to accept 'switch to repayment later on' as a suitable repayment vehicle.