How do you intend to pay off your interest only mortgage?

pingu2209

Out of interest, other than BTL, has anyone out there bought a house in recent years on an interest only mortgage but with no means of paying off the capital sum?

How do you intend to pay it off eventually?

Dom3663

I guess taking out an interest only mortgage has its risks, but taking it out with no means or plans to pay off the capital is very very risky

Could you potentially though sell the house and use the proceeds of the house sale to pay back the capital (providing it sold for more than you paid?) This would be a cheap way of "renting" a house, whilst still owning it (and also having the opportunity to purchase out right if you came into money?)

pingu2209

That is exactly what I was thinking. I guess if you were in your 'final' home, or home that you know you are going to be in for an age, waiting the 20 odd years paying interest only is a way of living in a house cheaper than renting.

Then 20 years on you can sell it and down size as there will be equity in it.

Manual_Reversion

You could use the 25% tax-free cash from your pension to pay off the capital. The beauty being that the capital is paid from gross pay rather than net.

Problem is you need a large pension pot to do this, the rules regarding tax-free status may change, and it smacks of 'eggs in one basket' since your home, as well as your retirement income, is dependent on the pension pot therefore presumably your employer.

david29dpo

Manual_Reversion wrote: »

You could use the 25% tax-free cash from your pension to pay off the capital. The beauty being that the capital is paid from gross pay rather than net.

Problem is you need a large pension pot to do this, the rules regarding tax-free status may change, and it smacks of 'eggs in one basket' since your home, as well as your retirement income, is dependent on the pension pot therefore presumably your employer.

This is what i intended, until the pension company went tits up. I now intend to downsize.

princeofpounds

Oh you don't need to worry about that, house prices double every few years and inflation will diminish the real value of the principal debt.

Now if you'll excuse me i'm just off to go and smell the coffee...

mlz1413

I took on an interest only mortgage 5 yrs ago but I make overpayments, so do intend to pay off the capital - but I didn't want to be tied to a higher monthly payment of a repayment mortgage at the start but wanted the fixed deal on offer.

If your pension co is in trouble I thought they normally merged rather than disappeared? Do you still have access to the fund built up? It may not be worth much now but it should be a frozen asset until you retire.

00ec25

I know someone who had 3 lodgers in her 5 bed house for the 15 years she has owned it who cover the interest only payments

She plans to repay the capital from her company share options in 6 years time when she is 66 years old, having already slightly reduced the amount through (the maximum permitted amount) annual overpayments. It is the only house she has owned.

PasturesNew

When your 3-bed semi cost you sixpence, repaying it had to be done, but wasn't as onerous as borrowing and having to repay: QUARTER OF A MILLION POUNDS ... for a flat.

I mean ... think that one through. If wages don't increase, then to pay back JUST the capital, over 25 years, that's the FIRST £14,000 OF YOUR SALARY (before tax) JUST TO REPAY THAT DEBT.

Blimey ......

Non stop ... every month ... every year ... come shine or rain ... relentlessly .... for 25 YEARS.

If you owe £250,000 and live in a flat .... how lucky do you feel?

pingu2209

Scenario: You are a family with 3 children. You can afford a repayment mortgage on a 3 bed semi selling at £280k (mortgage of £200k), but you buy a 4 bed detached house for £400k (mortgage of £320k) with a repayment only mortgage.

In 25 years the 3 bed semi is worth £500k and the 4 bed detached is worth £625k.

Now your children have left home and you sell the 4 bed and have £305k interest. You can't buy a 3 bed semi, perhaps a 2 bed terrace?

Is it better to have a paid in full for a 3 bed semi so in your retirement you still have your home, but would have stuggled for space when your children were still at home. OR

Is it better to have the space when the are children at home and have to downsize to a smaller than 3 bed semi? Although either way you still own your final home outright?

Just an interesting scenario. No right or wrongs. Just what you want from life.

mlz1413

if you buy the 4 bed is there any prospect of household income going up so that some of the mortgage can be paid off?

ie if currently one main income & one part time income.
as children grow up will there be 2 full time incomes?
will children be asked to pay rent when they start work?
will main income increase due to promotions?

if there is a point where some of the mortgage can be paid down then I'd go for the house you want.

if 4 bed is a struggle with both working full time I'd go for the 3 bed, enjoy life have hols and know its yours at the end of term and you will be able to enjoy your retirement.