Endowment mortgage?

Sphynx

Right I know it is a dirty word these days but we are looking at ways to bring our monthly payments down if we buy a much bigger property on less wages. Our current mortgage it a tracker at 1% above base rate. To keep that we have to stay with our current mortgage lender and then take out a top up bit of mortgage on a new deal to cover the difference. On a standard repayment we will be paying back about £289 more a month. We can afford this but it will be very tight once interest rates start to rise. So DH has put forward the idea of an endowment mortgage as his job will pay out a lump sum at retirement which will pay off the capital if we don't make enough. Either this or a standard interest only mortgage which I don't like the idea of.

I am pretty clueless when it comes to money to be honest. Anyone help with whether this is a really stupid idea or the way forward??

Trying_to_be_good

Don't worry about the terminology - an endowment mortgage was/is just an interest only mortgage, but with an investment vehicle (called an endowment) running alongside to pay back the capital at the end of the term. If you have a guaranteed pension lump sum to allocate to paying off the mortgage, that might be agreeable to your lender, but they'll call it an interest only mortgage.

Sphynx

Ok so I would have to set up an additional fund to (hopefully) pay off the mortgage when the term ends. In this case it doesn't sound like it will be any cheaper than a repayment mortgage?
Thank you for your reply, I knew I was stupid

dunstonh

People typically use S&S ISAs nowadays as the investment vehicle with interest only mortgages.

Investment backed mortgages tend to work best in a high inflation, boom/bust economy as you can typically use higher projection rates as your target rate and that makes the cost of an investment backed mortgage cheaper (although the events of the last 13 years show what happens in low inflation). Generally, the cost is more or less neutral between the two options.

jamesd

£289 difference causing trouble is very worrying. Can you really afford say 8% mortgage rate without trouble for a few years if the Bank Rate rises to fight inflation? Or even a normal 6% rate?

getmore4less

Sphynx wrote: »

we are looking at ways to bring our monthly payments down if we buy a much bigger property on less wages.

What total lending,wages and term are you looking at?

Current mortgage and top up lending rates

Whats the projected lump sum and pension?

It might be that you cannot afford this bigger property.

Sphynx

We earn jointly about £49K

Our current mortgage is for 100K and we will need to borrow another 70K

We will probably have 120K payout from husbands job and a further £80K from mine then pension of around 20K pa for dh (not sure of mine).

I feel like we should be able to afford this but maybe I am kidding myself

getmore4less

Certainly enough pension to cover things but these could change.

I think I would do a long term plan budget to see how the cash flow works.
Using up all the pension lump sums and not having other savings(eg ISA) might leave you short in retirement depending on what standard of living you plan to have.

£100k @ 1.5% is £125pm I/O 15y term £620pm
£70k top up say 4% £233pm I/O. 15y term £517pm


With £49k you should be bringing in around £3kpm

whats the SOA look like.
http://www.makesenseofcards.co.uk/soacalc.html

room to cut back?

Have you neen overpaying the current loan/saving while the rates have been low is yes by how much?

If not then that is telling you you have to cutback somewhere and reprioitise if you want a bigger place.

Sphynx

Thank you very much for this, very helpful indeed :beer: