Interest only mortgage / First time buyer

Civilian

I have read a bit recently about interest only mortgages and it seems about the only way i am going to be able to buy a property at the moment is to go down this route as due to salary/location I am simply not earning enough to pay any more than the interest, although the option to "overpay" and thus reduce the capital would be useful.
I would anticipate being able to pay of the actual loan within the next 10 years through inheritance, I just don't want to wait that long to own my own property as having been renting for the last 10 years all I have done is pay off somone elses mortgage.

Is this kind of thing possible and would mortgage lenders go aove the standard 3x salary or whatever as the paymets would obviously be less than for a repayment mortgage?

Sorry if the above makes no sense whatsoever but despite having done some reading up of late I must admit the world of mortgages leaves me feeling totally confused, however if anyone can make sense of it and offer any advice then it would be greatly appreciated.

Ben_Baileys

I hear what you're saying - the monthly cost of a repayment mortgage is just too much for a lot of people. I don't see any difficulty with going above 3x salary for this although obviously you could get some advice from a professional broker who would be expert. There are some very helpful experts on this website for a start.

We're in the process of buying a place and intend to start off paying interest only so that we can set ourselves up in the property with the extra cash. We then intend to change to a repayment plan when we feel able to do so. However, we have had to convince the lender that we would have set aside enough money to ensure that we can pay back the entire loan at the end of the 25 year term.

Be aware that while you say that you expect to pay the whole thing off within 10 years, lenders might not take you on your word. And if you get to the end of the term of the mortgage and have spent the entire 25 years (or however long your mortgage term will be) paying just the interest, you would have a real problem if the property had devalued. Lenders have really clamped down and are now advising people in your situation, in the strongest terms, that they need to have some kind of savings account in place in which you'll put the extra money so that you have the entire loan amount in place at the end of the term of your mortgage. When we applied the lender actually wanted to see proof that we had set up an appropriate account!

So you need to be careful with this kind of thing, and I guess you would have to convince the lender that you have considered all options and are proceeding cautiously.

herbiesjp

You can indeed look to do what you are stating here.

What figures are you looking at?

lightspeed

This is certainly the same predicament that me and my partner found ourselves in recently. Many will say that IO mortgages are BAD as your are never paying off the capital, however, those who say this dont seem to consider that the individual concerned wont stay with this mortgage type until the end of the term and instead switch to repayment at some point (makes sense).

In our situation, we chose IO because firstly the repayment method would eat up a lot of our spare cash initially needed for modernisation. This doesnt mean that we cant afford the repayments, just that we have chosen to free this extra cash to get our first home up to scratch. Secondly, we are still going to put aside the repayment equivalent into an ISA so that if we manage to only use part or if we are lucky none of this, it can be paid off the mortgage at the end of our 2 year fix. This will mean that we are no worse off than we would have been if we had taken out a repayment mortgage.

Additionally, we are both quite young 24 and OH is 25 and have only been in full time employment for 2 years, therefore, we are at the start of our careers which due to our type of employment, also means that we are at the lower end of our earning potential.

I think that if the IO option is used to make life easier while you start out then its fine. However, if an IO mortgage currently pushes you to the limits meaning that the future switch to a repayment mortgage would be a struggle if not impossible, then i would think very carefully about this.

As a short term option i really dont see the problem. Just be aware that IR's can rise, therefore, just calculate what the payments would be at double the present rates to be fully informed (obviously this is unlikely to happen, but not impossible).

Civilian

Thanks for all the replies.
As far as being cautious about the possibility of an interest rate rise is it not possible to get a fixed rate mortgage, I have been looking at a site that offers fixed rates upto the next 10 years by which time I would hope to be able to pay the mortgage off anyway. Is it likely I would incurr penalties for paying it off early?

As for how much I am looking to borrow, as much as possible! I earn around 21k per year and am currently paying £580 per month rent so would be looking to have a similar outgoing. Probably looking to borrow 90-95% of property value.

Thanks again for any replies.

herbiesjp

Civilian wrote:

Thanks for all the replies.
As far as being cautious about the possibility of an interest rate rise is it not possible to get a fixed rate mortgage, I have been looking at a site that offers fixed rates upto the next 10 years by which time I would hope to be able to pay the mortgage off anyway. Is it likely I would incurr penalties for paying it off early?

As for how much I am looking to borrow, as much as possible! I earn around 21k per year and am currently paying £580 per month rent so would be looking to have a similar outgoing. Probably looking to borrow 90-95% of property value.

Thanks again for any replies.

To clear a mortgage in full whilst on a "special" rate you will indeed incur penalties especially if you are looking at a 10 year fixed rate - however there may be windows within schemes where you can redeem, however they may not occur when you need them to

What are the house prices in your area?

Civilian

herbiesjp wrote:

To clear a mortgage in full whilst on a "special" rate you will indeed incur penalties especially if you are looking at a 10 year fixed rate - however there may be windows within schemes where you can redeem, however they may not occur when you need them to

What are the house prices in your area?

To be honest paying it off early probably isn't a big deal when I do finally come into some money, I could at least invest it knowing at least I have enough to pay off the lump sum as and when.

Prices here start around the £135k'ish mark.

Thanks again for the replies.