Which option would you take? Repayment or IO?

RenovationMan

I took the interest only option so that I could afford a much nicer home. While it means that I pay more stamp duty, etc. it also means that I will move less often and therefore save more in the long run.

A mortgage is for an awful long time, so just because you start on interest only doesn't mean you're on it for life. You can either use it initially to give you breathing space when you first buy a house and then when you remortgage you go repayment, or you use it like I have to jump further up the ladder.

I'll probably never pay this house off, but it doesn't matter because I'll never want to retire in our huge family home, it's way too big! I intend to pay down the mortgage to a more comfortable LTV and then sit back and enjoy it. Over the next 23 years it will grow in value, while the debt remains the same. I can then sell up and bank the equity gains tax free and downsize to a smaller retirement home and be completely mortgage free.

Thrugelmir

VT82 wrote: »

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.

On a mortgage balance in excess of £200,000. A 2 point base rise will cost a minimum £333 per month in additional interest. So if your are unable to meet the committment for a repayment mortgage now, what happens then?

To be struggling for £220 a month would be a major concern.

CapJ

RenovationMan wrote: »

I'll probably never pay this house off, but it doesn't matter because I'll never want to retire in our huge family home, it's way too big! I intend to pay down the mortgage to a more comfortable LTV and then sit back and enjoy it. Over the next 23 years it will grow in value, while the debt remains the same. I can then sell up and bank the equity gains tax free and downsize to a smaller retirement home and be completely mortgage free.

Counting on house prices always increasing in value is a dangerous investment strategy

dannymccann

Mortgages 30 years plus are still available, we are on a 2yr fix at 4.89% on 104k, 75% LTV over 40 years as the initial term. We are both 22 years old. Monthly cost is £494, we are starting to overpay £200 a month from July though, shaves off over 15 years from the term and £50000 interest :eek:

RenovationMan

CapJ wrote: »

Counting on house prices always increasing in value is a dangerous investment strategy

Yet whenever I ask even the most cautious person on here "Do you think that my house will be worth a lot more in 23 years time than it is right now?", every one of them says "yes". I'm happy to get more opinions though:

Do you think my house will be worth more or less in 23 years?

To get back to the OP's question. I'd add that I have always had interest only mortgages and I have moved three times in my life. My starter home was a 2 bed terrace, my second home was a four bed detached and my current house is a 5/6 bed grade II listed stone built farmhouse. My next house will be a retirement cottage. I never understand why anyone gets a repayment mortgage, especially when they're first starting out. You never pay off the mortgage on your first homes, they're just rungs on the ladder. By going interest only, you can jump up the ladder a couple of rungs at a time.

During good times, you can make overpayments and during bad times, you can sit tight on interest only with minimal outgoings. All you need to do is remember that your retirement home needs to be mortgage free.

I know that some people are not so disciplined that they will make overpayments during the good times, but then these are often the sort of people who run up other debts anyway, even if they have a repayment mortgage.

harmony83

Thanks for all of your replies! Given us lots to think about.

In terms of getting an interest only mortgage....do many banks still offer this post credit crunch? Any recommendations?

And if we have to prove how we will pay the repayment back....how do you go about doing this? Is it simply opening an ISA and saying you're going to be paying xxx into it? Do they follow up on whether you actually do this or close the ISA?

Is proof often asked for now? On our first property I know we weren't asked at all (but that was pre credit crunch!).

RenovationMan

harmony83 wrote: »

Thanks for all of your replies! Given us lots to think about.

In terms of getting an interest only mortgage....do many banks still offer this post credit crunch? Any recommendations?

And if we have to prove how we will pay the repayment back....how do you go about doing this? Is it simply opening an ISA and saying you're going to be paying xxx into it? Do they follow up on whether you actually do this or close the ISA?

Is proof often asked for now? On our first property I know we weren't asked at all (but that was pre credit crunch!).

I got my interst only mortgage about 3 months or so ago (£300k interest only) and they didnt ask for any proof of a repayment vehicle (this was through a high street bank). I went through a mortgage broker and he said that they rarely do, but if they did he'd start the paperwork off for an endowment and show them that, but not actually go through with it. Naughty, but then even if you did have a repayment vehicle, the bank never checks if it's on course to repay the mortgage or even if you're still paying into it.

sebtomato

harmony83 wrote: »

Thanks for all of your replies! Given us lots to think about.

In terms of getting an interest only mortgage....do many banks still offer this post credit crunch? Any recommendations?

First Direct offers some interest only mortgages on some of its mortgages, like the offset trackers. However, those mortgages can only be taken as interest only, instead of repayment, with the lowest loan to value ratio (65%).

They ask how the capital will be eventually repaid (savings, expected windfall etc) but it is done just as a matter of principles. Savings could be at a different bank, so they would have no ways of checking anyway.

CapJ

RenovationMan wrote: »

Yet whenever I ask even the most cautious person on here "Do you think that my house will be worth a lot more in 23 years time than it is right now?", every one of them says "yes". I'm happy to get more opinions though:

Do you think my house will be worth more or less in 23 years?

I don't know. That's the problem. In real terms I would be almost certain they will be worth less. In nominal terms it is difficult to tell. House prices going up forever in real terms is impossible when you sit down and calculate what that means.

_Andy_

RenovationMan wrote: »

I got my interst only mortgage about 3 months or so ago (£300k interest only) and they didnt ask for any proof of a repayment vehicle (this was through a high street bank). I went through a mortgage broker and he said that they rarely do, but if they did he'd start the paperwork off for an endowment and show them that, but not actually go through with it. Naughty, but then even if you did have a repayment vehicle, the bank never checks if it's on course to repay the mortgage or even if you're still paying into it.

So your broker and you committed fraud? Nice.