Interest Only - Disadvantages?

Dopple

My girlfriend and myself are looking to buy a bigger place, and get a bigger mortgage.
We are in our early 40s and have no kids, so wouldn't have anyone to leave the new house to.
So we are considering an interest only mortgage as this would save us about £300 a month.
But once we get to a certain age we may want to release some equity in the house.
Can this still be done if we are on interest only?
What are the other advantages and disavantages of this?

_Andy_

Depending on the LTV the lender probably won't be happy with you going IO without a suitable repayment vehicle.

getmore4less

First direct seem to allow you to operate their offset mortgages on an I/O basis.


Going I/O AND depending on prices rses so you can release funds in the future is probably a risk to far.


The mortgage will not be able to extend into retirement without good retirement income.

(add the "not")

redlady_1

Having just bought a house I can confirm that unless a suitable repayment plan is in place you have very little chance of getting interest only.

Disadvantages...lady I work with had interest only, they released some equity over the years, she is 58. They now have to sell the house to repay the mortgage and cannot afford to do this and buy somewhere else. So, they will be homeless once the mortgage term is up. The sale will cover the mortgage.

dunstonh

The FSA told lenders a while back that interest only should not be used unless there is a viable repayment vehicle or method in place.

But once we get to a certain age we may want to release some equity in the house.

That assumes you will have equity and equity release is still available as a product. Recently there has been a reduction in providers offering equity release.

opinions4u

Dopple wrote: »

But once we get to a certain age we may want to release some equity in the house.

Why? Most people don't borrow when the reach "a certain age".

Can this still be done if we are on interest only?

If the lender allows you to. In the current climate, probably not. In a future climate, quite possibly.

What are the other advantages and disavantages of this?

For me you are deferring the inevitable. Sooner or later the debt has to be repaid one way or the other.

Let's assume your income reduces by 50% on retirement. How will you then meet the payments? How will you meet higher payments if you've released equity?

For me you should be looking at this the other way. Rather than having an interest only mortgage which runs for as long as you live (and, in fact, beyond your death!), you should be looking at how soon you can pay it off.

Consider a 15 year term and be debt free before you retire.

TOBRUK

Dopple, I don't have a great understanding on the subject but what exactly is your current position: what mortgage do you have now, interest or repayment? How much equity have you on your current house? Are you feeling stretched with your current payments?

I currently have part repayment part interest mortgage since I changed it from the dreaded endownment mortgage (still kept the endownment) and am selling my property. I have a lot of equity in the house, I need to move to a bungalow (because of health) but because the bungalow will cost 15-£20,000 more than what I get on sale of the house, I need to add extra on my new mortgage. I have found a mortgage (as I too have no dependents and in my forties) and been offered a 40 year mortgage! It sounds terrible but then I don't need to go interest only and repayment will be easier.

CLAPTON

Dopple wrote: »

My girlfriend and myself are looking to buy a bigger place, and get a bigger mortgage.
We are in our early 40s and have no kids, so wouldn't have anyone to leave the new house to.
So we are considering an interest only mortgage as this would save us about £300 a month.
But once we get to a certain age we may want to release some equity in the house.
Can this still be done if we are on interest only?
What are the other advantages and disavantages of this?

lets say it as it is

by release equity you mean you will increase your mortgage even more?

at a certain age your lender may not be willing to increase your debt
your income may have declined and you may not be able to afford to pay the mortgage
if you sell up the balance left behind may be insufficient to pay something you want


as two people on decent incomes with no children you should be at or near your max earnings.. now the time to plan for the future which includes paying off the mortgage so you have no debts when you retire.

getmore4less

If you realy don't want a big wodge tied up in a house(because no one to leave it to) then you could rent.


Paying off a mortgage is part of retirement planning it provides a relatively(maintanence only) cheap roof over your head.

The alternative is to generate more income to pay rent.

udydudy

Dopple I agree with your plan as long as your aim for IO is not so that yuo can spend the extra money.

We are IO since we bought our home 4-1/2 years ago. but we make sure our Cash ISA allowance is always utilized every year and fixed for 5 year period as that it earns more than our mortgage rate.

The idea being that when we reitre we will have a nice big pot of ISA(provided the next government does not withdraw future ISA allowances).

Advantages: (1) Our money earns more and tax free in an ISA, (2) Our monthly payments are low and always manageable even if one of us losses their jobs.

Disadvantages: (1) if you do not save the money then at retirement you are going to look at a big black hole in yoru finances with the otential of losing your home!! (2) if you ever head for a divorce the other half can walk away with their ISA allowance and leave you holding the mortgage even if on joint names coz the other half can just spend their money and go belly up anytime they want.

Dopple

Thanks for the advice. Present situation is this:
Girlfriends house worth about £110k, will get about £60k profit when sold.
Want to move out before it's sold if possible due to neighbour.

New house will be around the £210K-£240k mark, but will rent first if we don't find anything suitable.
We have about £40k deposit we can put into new house, and proceeds from the sale of old house if and when it's sold.
I'm unemployed but have about £110k in savings.
Partner get's about £40k a year from her job.

So we are doing OK and can afford a new house even if old house doesn't sell for a while.
I'm a bit concerned that the mortgage will go from the £350 it currently is to over double that, which is why I asked about interest only.
We would also like to release equity on the new house and some stage as we don't have any kid.