I'm a Novice - but considering doing this.....

cullen00

I'm a first time buyer and considering purchasing a intrest only mortgage.

The Wife and I could afford to pay capital back on the mortgage as well, but i'm considering just investing the extra until we have enough to pay off the mortgage in full.

My theory is, if intrest rates begin to rise signifcantly, we'll have enough of a cushion to take out of the monthly saving to make sure we're safe for the short term to allow us to renegociate the mortgage.

Just done a quick calculation and reckon with paying intrest only (at current tracker rates) along with all our other outgoings and living at our current standard of living. - we could prob afford to put away £650 a month. if we can keep putting that amount away each month, even in a no risk savings account we could pay the mortgage off in 9/10 years. Meaning we're mortgage free by the time we're both in our mid thirty's, a very appealing prospect.

I'm sure this idea is flawed, as it seems too easy but if anyone could point me in the direction of the pro's and con's of intrest only mortgages, or point out any flaws in my thoughts I would appreciate.

As i said i'm a first time buyer and a novice with regards to the mortgage market, its just Mrs is out tonight and i'm home alone, and just having a think about the best way of going about financing the purchase of our new house.

_Andy_

How much deposit do you have?

You need to be aware most lenders, unless you have a huge deposit, won't allow you to do an interest only mortgage without a suitable repayment vehicle in place.

Gorgeous_George

Just like In-ger-land it's in-ter-est.

Do you purchase a mortgage?

So long as the in-ter-est on your savings is at a higher rate than your mortgage (after tax) your 'plan' will work. Of course, you need the self-discipline to keep the savings and you need the lender to offer an in-ter-est-free loan.

GG

paulfaz

Two reasons why it's a bad idea:

There will be a massive temptation to dip into your 'savings' pot.

You'll pay tax on your savings. The interest gained after this needs to be greater than your mortgage rate - unlikely to be achievable in current climate.

cullen00

Thanks all, to give you a bit more info

I get share options in my company and come Sept 09 I should bank about £15k, when they vest, already got £15k saved for a deposit, so will have at least £30K as a deposit plus whatever we can save between now and September. we can get the property we want for around £125K -so should be able to afford a 25% deposit.

We're both very discpined with money and i'm confident we wont dip into the savings unless it is neccessary. I'll prob look to tie it up in a long term investment anyway.

I understand its risky, but is it do-able do you think? Be intrested to know if others have done something similar?

Robert_Sterling_3

House prices are falling.
You need to have a repayment mortgage to avoid negative equity.

Conrad

It's a perfectly reasonable idea - my own mortgage I/O and so does my Accountant. I've calculated you repay an I/O cdebt faster than a C/I with the same payments.

Gorgeous_George

As I said, if the interest on your savings, after tax, is higher than your mortgage rate, it is better to have an interest only mortgage and save the repayment element.

As the meercat says, "simples, ".

GG

Gorgeous_George

Robert_Sterling wrote: »

House prices are falling.
You need to have a repayment mortgage to avoid negative equity.

That is being somewhat ignorant of the maths.

If you save the difference between the interest only payment and the repayment payment for the same sum borrowed, so long as the savings earn more than the mortgage costs (just compare the net interest rates), going interest only and saving is financially more astute.

If prices continue to fall, you will still be better off as your savings will be more than the sum repaid via a repayment mortgage.

GG

getmore4less

Conrad wrote: »

It's a perfectly reasonable idea - my own mortgage I/O and so does my Accountant. I've calculated you repay an I/O cdebt faster than a C/I with the same payments.

How?

Love to see the calcs that show that.

foreversummer

You would not be entitled to any means-tested benefits if you have savings over a certain threshold. So if the worse happened in the future - loss of employment etc, you might have to dip into these savings.

Foreversummer