Interest only - are we mad?

Nick2000

Hi, any advice from the financially savvy is very welcome…

My girlfriend and I want to buy a bigger house, but we can’t afford it, if it is a repayment mortgage. Should we opt for an interest only or should we stay put?

These are the figures;

We currently live in a nice, but small, 3 bedroom house in a good area. The outstanding mortgage is 70k. The house is worth 230k.
The mortgage will be paid off in 11 years.
I could re-mortgage and use the money for a loft conversion and new bathroom.
This would take the mortgage to 100k. It’d still be paid off in 11 years and the repayment would be c1000pcm.

Or we could move to our dream house. It’s in the same area and costs 360k
The outstanding mortgage would be 200k.
We’d have to increase the period of the mortgage to 16 years.
A repayment would be c1500pcm which we can’t afford.
Interest only is 830pcm, which is fine.

As an added factor – my girl friend has a house that she rents out. It’ll be paid for by 2014 and is worth about 125k.

Money is not a problem as long as we both stay in work. My job isn’t quite the public sector, but it’s not far off. My girlfriend is self-employed.

Should we risk it and move? (I am normally very cautious)

somethingcorporate

How would you intend to pay it back? considering rates are at an historic all time low when they go up could you still afford it?

Sounds like you may be over-stretching yourself here.

Good luck, we all know how tempting that dream home can be but it sounds like you have got your head screwed on

nomoneytoday

Can you afford it if/when interest rates go back up?
How will you pay off the capital in 20 years?
What if you have children or other commitments then?

katsu

I don't understand how you plan to pay for the dream house if you have an IO mortgage? IO is basically just renting but with an agreed price to buy the house eventually, and all the home ownership risks.

Personally I feel it sounds like a bad idea to have an IO mortgage with no repayment vehicle, so I'd say don't do it unless you know how you will repay the capital.

In terms of your current house - do you really need the extra room? Just a thought.

Yorkie1

My immediate reaction was the same as others'.

Firstly, how will you pay off the capital at the end of the mortgage? I think I've read on here that it is generally more expensive to take out IO plus fund a different repayment vehicle, than just to have repayment mortgage. The rented house, if sold at end of its term, will cover less than 2/3 of the mortgage amount at present proportions.

If the interest rate goes up, how will you fund that? It will also impact on your ability to put money away to repay the capital.

Sounds like a risky venture at present, to me, especially given the associated uncertainty in the job market related to public sector.

sebtomato

Yorkie1 wrote: »

I think I've read on here that it is generally more expensive to take out IO plus fund a different repayment vehicle, than just to have repayment mortgage.

Since you are not repaying the capital with IO mortgages, the amount of interest paid each month is constant/the same (as long as the interest remains the same).

For a repayment mortgage, the capital due decreases each month, and therefore the interest to pay also decreases (since it's calculated on capital left to be paid).

It's ALWAYS more expensive to go for IO mortgage, if you consider the amount of interest paid to the bank. Even if you have a repayment vehicle in place (such as a savings account), it is likely to earn less interest after tax than the interest rate paid on the mortgage.

Thrugelmir

Money is not a problem as long as we both stay in work. My job isn’t quite the public sector, but it’s not far off. My girlfriend is self-employed.

My question to you, as a cautious person normally. Do you want to own £460k of property in an uncertain market, where interest rates are likely to rise, pay rises are likely to be subdued at best and there is a possibilty that your g/f's tenant could even lose his job ?

Dreams are wonderful but reality isn't built on sand that an incoming tide will wash away.

Why the rush?

getmore4less

Think long term and retirement, no debt and have replaced earned income with investments/pensions


Interest only puts a greater reliance on future earnings to reach the goal.

hillcats

I am in agreement with others, you openly admit that you cant afford the repayment mortgage on the bigger property, this in its self should answer your own question... I would say NO !
Stay where you are and pay off your existing mortgage and then you will have complete piece of mind, no matter what happens with interest rates or the property market your property is at no risk and your family will keep a roof over their heads.

getmore4less

Whats the gross yield on the rental?


Best option might be sell it now and focus on one property.

VT82

When it comes to getting your 'dream home', I think your own considered opinion will be more important to you than anyone on here's opinion.

You need to decide how important it is to you. I don't think anyone on here can tell you that. Would your girlfriend sell her buy-to-let to enable you to buy it?