Interest only Vs Repayment

helptheden

Hi,
I am currently in the process of buying a new house and am currently deciding what type of mortgage to go for.

I am currently with the one account and have a mortgage agreed in principle for the new property. I am currently undecided about whether to continue with this product or look elsewhere..

My current position is that the equity from my sale will cover the 25% deposit on the new property, it will leave me with only a little savings/back up ( I am a little uncomfortable with this in the current climate). I have looked at putting down a lower deposit, but the interest rates do not look great with LTV >75%)..

My wife also owns a property outright which is currently being rented out on a guaranteed lease (which has 4 and a half years to run). The rental income is about £700 a month.

My dilemma is whether to go for an interest only mortgage or continue with the capital repayment (which is what I have always gone for). I am looking to lend around 230k

The advantages and thinking behind going for an interest only option is that:
The Rental income will cover the majority of the interest only mortgage
The additional money saved by the lower repayments will enable me to build up my savings/back up fund quickly.
I would prob look to get a fixed rate for 3 to 5 years and put aside the money saved each month, at the end of the fixed rate period, I will remortgage to a repayment mortgage and use the savings to reduce the mortgage amount. We will also have the option to sell the rental property.

I am not familiar with interest only mortgages, I assume that when I remortgage at the end of the fixed period I would just have to find a new mortgage for 230k (or use my savings to reduce the amount required). Do interest only mortgages normally have redemption fees after the fixed period?

If I understand the concept of interest only mortgages, I see this as a lower risk in these current uncertain times and would make it easier to manage any unforeseen changes in circumstances such as losing a job etc…

Is their a flaw to this plan? Can anyone recommend the best interest only fixed deal out there.

I can afford going for a repayment mortgage, however, feel that going for this approach might be better in the current climate?

Thanks for any advice

confused969

have you thought of an offset morgage? first direct maybe this will allow you access to your savings if you need them

helptheden

I've currently got a repayment offset mortgage with the one account and like the concept. I'm not sure how an offset works for an interest only mortgage. Does any overpayments/savings work to pay of the interest sooner? I'd rather overpayments go towards paying of the property..

I would like to keep my mortgage payments low for the next few years (Mainly due to the current climate), taking this approach would mean that to fulfill my monthly mortgage I would only have to find around £100 on top of the rental income each month (which would be a weight off my mind). I believe that I would be disciplined enough to put away the money saved each month to build up a lump sum when moving back to a repayment mortgage after the fixed term, it would also make it easier to deal with a change of circumstances (Loss of job etc...)

dimbo61

Will the people from the one account allow you to go interest only ?
That way you could set up a DD to pay the interest each month and another DD to repay the capital ( as if you had a repayment mortgage)
First Direct do IO and repayment offset mortgages so give them a call.

Thrugelmir

Are interest only mortgages easy to find in the current market?

Randy

I`ve got an interest only with The One Account... the RBS One account if thats the same thing.