Stick with interest only or find repayment deal?

HJH07

Just need to pick some brains on this one really. We have an interest only mortgage for £145K, the repayments are approx £225 per month. We took out this loan in Nov 2008 and the deal was for 5 years. We could afford to pay back quite a bit more each month and are able to save and keep some money back each month so that we can overpay towards the capital.
We would love to be able to extend our property and this would cost about £20K to do.
What we would like to know is would it be worth looking into increasing our loan so that we could get the work done asap and getting ourselves a fixed rate while IR are low so that we can start paying off some capital. In essence do we stick with our interest only for the next few years or do we try to increase our borrowing and get a repayment deal while IR are low?
We earn between us approx £38K pa gross.
Thanks in advance!

phlash

I'm not entirely convinced you would be able to borrow another £20k with your joint salary?

HJH07

Neither are we, do you think it would be worth exploring a repayment mortgage on our current level of borrowing though? It does seem that IR are so low at the moment that it seems it would be silly to let them pass by. I don't want to get to the point in 3 or so years time when we have to find a new deal to find that IR have risen and we are kicking ourselves that we didn't sign up to a fixed rate now.

missma

I am no expert, but from personal experience had a interest only for 3 years. I wish I had went on repayment sooner, I have always fixed so I got no surprise jumps.
£225 seems very little on a 140k mortgage. Iknow I paid more on a 85k mortgage but thats going back about 5-6 years

Thrugelmir

How do you intend repaying the mortgage?

Dan_1976

I would look at a repayment mortgage before you do anything, if its within budget then look at extending.

Boozer

i may be wrong, but i calculate your mortgage rate to be 1.8%, do you really have a fixed rate of this???

You are not going to get a fixed rate for anywhere near this just now, most likely around 5% i would guess.

I think you should see a mortgage advisor, i think it all depends on how much you really want this extension.

phlash

Check the terms of your mortgage regarding overpayments.

It may be that you are allowed to overpay. If that is the case you can effectively turn your interest only mortgage into a repayment mortgage by diligently overpaying each month. The advantages are that you keep taking advantage of the low rate you have, and you can control as and when you overpay, therefore if cash flow was awkward at any point you can just pay the interest at £225 in the month.

The disadvantage is if you are not a diligent person, you may nt be overpaying enough in order to reduce the mortgage to zero in the required timeline.

Best of luck.

HJH07

Thank you all for the useful replies. We have had a good look at the mortgage documents this evening and our early repayment charge is enormous! We can overpay though with no penalties. I think the extension is going to have to wait and we have set up a Standing Order to pay some off the capital each month. We plan to remortgage when the 5 years is up on this deal to a repayment - the interest only was a good option for us when we took the loan out in Nov 2008 to save us from having to move again in the future. We have the house that we want with the option of being able to extend when we can increase the mortgage without having to pay huge repayment charges.
Luckily our circumstances have improved earlier than we thought - we are not going to pay £7K+ to remortgage when we can set up a payment towards the mortgage as phlash suggested.
Thanks again!