Overpayment of Interest Only - any catches?

Deladuro

I'm sure someone must have covered this topic somewhere in this forum but after an hour I've given up searching.

Anyway....I'd appreciate any advice.

My wife and I are currently looking to borrow around £200k for a property valued at £300k. As we're currently with RBS (on 0.22%) I've used their mortgage calculators to work out that a 5yr fixed rate for 20 yr term would cost £1275per month for capital & interest. Interest only would be £765. (4.59%)

My question is......If we went for the interest only and made overpayments each month of between £100 & £700, (well within the 10% of outstanding debt allowed) do we lose out anywhere by having this extra flexibility?

The way I see it is that we would make minimal overpayments in the 1st year or so whilst daughter is under 2, then make increasing payments as childcare costs decrease and wife is able to increase her working hours thus reducing our capital.

Does this sound sensible or have I failed to take something into account somewhere along the way?

caracal_77

Any overpayment you make on an interest only mortgage comes off the capital, effectively making it a repayment mortgage. You need to look at how much overpayment you'll be allowed to make (repayment Vs. interest only). Also going the interest only route, might tempt you sometimes not to overpay (and spend on other things), while with a repayment route you'll have no choice but to reduce the capital.

pixiepie99

These days it's difficult to get an interest only mortgage without proving you have a 'repayment vehicle' to repay the mortgage. Just saying you plan to overpay the mortgage probably won't cut it.

But yes, your plan is sensible and it's exactly what we've done with our mortgage.

Fizzy1

Only catch is not discipling youself to pay off the capital. Something more important usually comes along (like more children in my case). I have just changed to an IO mortgage and the bank only "advised" on the offer paperwork that we have a repayment vehicle - no proof required. I have a 10% overpayment clause and will use itto reduce the capital. Certainly gives you a very flexible mortgage.

Dithering_Dad

I agree with the above. In many cases, an IO mortgage makes absolute sense, provided you're disciplined enough to make the overpayments. I have an interest only mortgage because I had my own company and wanted to have low monthly outgoings when money was tight and could make overpayments when times were good. It has worked out well for us.

I would be wary of your planning around your wife returning to work, etc. Sometimes 'life' can get in the way and throw a spanner in the works. It did with us and we're still a one-income family (our youngest is 7). Also, children have a tendancy to get more, not less expensive :eek:

Good luck though.

p.s. I'd not feel as though I had done my 'duty' if I didn't say that I feel that if the only way you can afford this house is to overextend yourself to the point where you have a £200k IO mortgage at a time when we're falling into a deep recession, will soon be having huge tax increases and when you have small children, then perhaps you should re-think and buy a smaller/cheaper home that may not be as luxurious or in as nice an area but will provide you with real financial security. Hope you don't mind me sticking my oar in with that last comment.

Jonbvn

Dithering_Dad wrote: »

p.s. I'd not feel as though I had done my 'duty' if I didn't say that I feel that if the only way you can afford this house is to overextend yourself to the point where you have a £200k IO mortgage at a time when we're falling into a deep recession, will soon be having huge tax increases and when you have small children, then perhaps you should re-think and buy a smaller/cheaper home that may not be as luxurious or in as nice an area but will provide you with real financial security. Hope you don't mind me sticking my oar in with that last comment.

For emphasis!:cool:

happybroker

Interest only with no repayment vehicle is still readily available below 75% and there are much better deals out there than 4.59%.

You do have to be very disciplined to run things that way however and should you not be so for a couple of years you suddenly have less time to repay the mortgage over, meaning higher monthly payments.

Why not consider (and I'm assuming here that you are still fairly young given the age of your daughter) having a repayment mortgage over a longer term to take the worry out of and overpay on that as and when you can to reduce the loan term?