interest only

katkins2

Hi,

I'm sorry if this is a bit of a dumb question but I am a complete novice when it comes to mortgages. We have a repayment mortgage with approx 120,000 outstanding. We are about to lose a huge chunk of my OH's monthly income due to the credit crunch. We are already struggling to meet all our monthly bills so we are considering changing our mortgage to intersest only for 12 months until (hopfully) things improve. Please can someone tell me what the longer term effects of this will be.

Many thanks in advance;)

TroJon

There's a lot of places you can find this information in straightforward guides. Because of the variables it will be impossible under the scope of one post to say what the longer term effects of changing this for 12 months will be.

Basically at the heart of it, if it's 12 months interest only, and you wouldn't pay anything into the mortgage account, you're looking at extending the mortgage by 12 months in future- otherwise if you chip away at it, this length of time will change.

Generally speaking the interest only is a tool where you keep the required minimum payments per month much lower, but you're left open with how you intend to pay back the full loan, as you will not be chipping away at it. Please do not take this as advice, but if you just go on interest only for 12 months, it's basically just a year out, and although it means the overall interest you pay back to the bank will be greater (as the interest will be calculated on a larger amount without those regular monthly chippings at the capital loan), it seems like the benefits (i.e. actually being able to meet the payments) will be a far greater boon to your situation.

katkins2

Thank you so much for taking the time to reply, much appreciated.

Katkins

dimbo61

Please remember that lenders are refusing to allow this IF you have little equity in your home or you are in negative equity!
If you pay interest only and the property decreases in value over the next 12 months the debt would stay the same but the property would be worth even less.

struggling-breadwinner

Hi ya. We had a letter today from the Abbey approvin a change to interest only on a £226k mortgage. Similar circumstances. They took a vlaue on the property and allowed us to change to interest only for everything UNDER 75% of their valuation (which was lower than the market valuation) everything above that had to remain on repayment.
They also asked for evidence of a repayment vehicle. ie something that will clear the capital in 22 yrs time (or whatever is o/s on your mortgage) because ultimately if you stay on interest only you will still owe then the capital sum in 22 yrs time and have to clear that debt. In our case we sent two pension projections although in reality of course of it was a long term change to int. only you wouldn't want to spend your pension clearing your mortgage and would take an ISA or endowment to pay out in 22 yrs time.

HTH?

opinions4u

katkins2 wrote: »

We are already struggling to meet all our monthly bills so we are considering changing our mortgage to intersest only for 12 months until (hopfully) things improve.

It is completely at the lender's discretion as to whether or not they agree to this.

If they insist on you having a "repayment vehicle" in place like an ISA then there's little point in going on to interest only.

If they won't allow it, they may agree to accept a reduced payment. Some lenders will treat this as authorised arrears and impact your credit record accordingly. Others won't.

Please can someone tell me what the longer term effects of this will be.

When you come off interest only your monthly payment will be higher than it is now to ensure the debt is repaid within the originally agreed term.

It may be worthwhile heading for the 'Debt-free Wannabe' forum for help on ways of increasing income and reducing outgoings.

Personally my view is that there are key bills that you should prioritise ahead of others. These include food, mortgage, council tax, water, heating. Next set of priorities would include maintaining unsecured debts.

Look at things like tv package, gym, mobile phone contracts, coffee shops, eating out, petrol v walking to shops/work, cutting out desserts, making sandwiches instead of buying Boots meal deal etc if you haven't already done so. These are areas that many people can make significant savings that allow them to afford to meet their primary financial commitments.