Which option would you take? Repayment or IO?

harmony83

Hi,

My husband and I have now saved up a deposit for a new home. We have two options:

We can purchase a house for 250k with an 85% mortgage repayment.

OR

We can purchase a house for 280-300k with an 85% mortgage again but we would need this to be interest only for the first 2 years while i'm out of work on maternity. Once I return to work we would be able to go onto repayment.

Basically we really love the area we live in but to get a 3 bed house we are looking at no less than £280,000. The repayments would be a bit too high for us whilst i'm not working so we would like to intially take out an interest only mortgage.

The alternative is buying a house for 250k but this would mean moving away. We would plan to move back to the area in a number of years once we could afford to. But obviously this would mean two sets of moving costs. The house at 280k would be a last move for us.

So getting to the point......

Would you want to do the one move but be on interest only for a while? Or two moves but on repayment the whole time?

And in this current climate can anyone advise on if they have been able to get an interest only mortgage?

Was it at the same advertised rate or higher?

And did they make you proof you have a repayment vehicle?

Thanks for your help

VT82

I recently saw a couple of lenders for a mortgage interview. Halifax told me their rates would be higher on interest only, but the subject didn't come up with HSBC. I have seen a mortgage advisor on here claim that mortgage rates were the same regardless of repayment method, so Halifax might have been an exception rather than the rule.

Every lender now will want evidence of a repayment vehicle. You can't just say 'ISA's' or 'lump sum from pension' any more. Could you consider taking out the longest term possible, as that won't be too much higher than interest only, and shorten the term or overpay once you get your income back? Use a mortgage calculator to see how much extra this would cost.

Good luck finding a nice place :j

Annisele

The options aren't just repayment or IO; renting is an option too.

My crystal ball doesn't have a particularly good record (I've spent ten years miserably failing to predict the housing market!), but it's possible that prices could fall substantially between now and 2012/2013. So, you could end up really stretching yourself to spend £300k on a house now, whereas if you'd waited a couple of years that same house would cost £250k or less. On the other hand it could cost £350k or more - you need to decide what you think is most likely.

I don't particularly like your chances of getting a mortgage for an amount that you couldn't afford if it was on repayment. The difference between an IO mortgage over 30 years and a repayment mortgage is so slight that if you can't afford the repayment, IMO you also can't afford interest rates to go up.

Thrugelmir

Annisele wrote: »

The difference between an IO mortgage over 30 years and a repayment mortgage is so slight that if you can't afford the repayment, IMO you also can't afford interest rates to go up.

Difference is substantial as the repayment mortgage does what it says on the can. Every month the required saving to repay the capital compounds on an interest only mortgage. 30 years sounds a long time , but its only 300 monthly pay days.

I would hedge that property prices are unlikely to increase and in fact will fall. As savings and investment is directed elsewhere.

VT82

Thrugelmir wrote: »

Difference is substantial as the repayment mortgage does what it says on the can. Every month the required saving to repay the capital compounds on an interest only mortgage. 30 years sounds a long time , but its only 300 monthly pay days.

On a £238k mortgage (85% of £280k) on a 5% mortgage for 35 years:

Monthly payment on Interest Only: £991.66
Monthly payment on Repayment: £1,211.26

The difference is £220 per month - a lot for most people, maybe not so much for people who qualify for quarter of a million pound mortgages. It's 5 grand over a couple of years, which will come off the mortgage balance anyway, and saves two lots of moving costs.

The OP would need to make sure it could be afforded of course, especially with all the costs the baby will entail, and that it could still be afforded if rates went up. But it's not immediately worth discounting out of hand as so many people on here on prone to doing.

P.S. Unless they decimalised the calendar while I wasn't looking, 30 years is 360 monthly pay days, not 300.

dimbo61

A £250K house would mean £2,500 stamp duty
While a £300K house would mean £9,000 stamp duty.

harmony83

Doing a repayment mortgage on a house of 280 over 35 years would be doable for us. A good option.

I've looked at a couple of online mortgage calculators (santander and nationwide) and neither of these seem to allow over 30 years for mortgage repayment.

Can anyone advise of any mortgage providers that would allow a 35 year mortgage term? (we're 28 incase age makes a difference)

Also, I notice that Yorkshire Building Society seem to do the best rates for 85% mortgages. Much lower than most i've seen. Does anyone have any experience of YBS?

Thanks for all the replies

Cannon_Fodder

I'd personally want a term that was sure to finish before age 60. To save the amount that used to go towards mortgage as a nest egg.

35-year terms pay next to nothing off the capital in the first few years.

Martin is very anti accumulating interest unnecessarily.

CapJ

Interest only for affordability purposes is a bad idea. There is no buffer and you aren't even starting to pay off loan. I know you want to go back to work in two years but what if you change your mind? What if your husband has a pay cut?

One tool that a lot of banks offer to people in financial difficulties who already have a repayment mortgage is some sort of temporary interest only period. But if you are already on interest only there is no buffer, no safety net of any sort.

Go for repayment, at least after two years you will have eaten some of the equity, and perhaps offset some of the likely fall in price.

Shimrod

Is there an option 3 - wait a bit longer and save up the extra 30K? How long would that take you or is there some deadline you need to meet (you mention maternity leave?)?
With the interest only option, have you factored in extra costs of nursery care into your equation - also is there an assumption that you would be able to get a job earning the same money after a two year break as you do now.

My first mortgage was interest only (with PEPs as the repayment vehicle), but I have preferred the security of repayment mortgages since.

VT82

dimbo61 wrote: »

A £250K house would mean £2,500 stamp duty
While a £300K house would mean £9,000 stamp duty.

A really good point. I'd not thought about that as my first house didn't have stamp duty to pay, and my next one probably won't either! It's always a good reason to haggle the price down to 249,999.99 - even on the 280k house!

Regarding 35 year mortgage terms, both Halifax and HSBC's advisors when I had a meeting with them started talking about 35 year mortgages before I'd suggested anything, just to get some numbers on the table, and I'm 28. I think everyone should take out the longest mortgage possible and just overpay to get the term down, but I'm very disciplined with my money. But this would be an option for you if your income is going up in a couple of years anyway.

I haven't looked at mortgages in the past few weeks as I have dropped the idea for now, but I didn't like the look of the building society mortgages, as they all had high SVRs as their reversion rates (over 5% instead of the usual 3-4%). I preferred the look of trackers, purely because they were the ones most likely to stay tracking BBR for term instead of reverting to SVR mortgages. But then I was looking at under 80% LTV mortgages, so I wouldn't know about best buys for 85%. The reversion rate will be particularly important for an 85% mortgage, as if prices go down in the 2 years, you may be stuck on this for longer than you want to be.