Interest only - are we mad?

xyellowx

The question you need to ask yourself is
if you buy your dream home and somthing happened at work which meant less income would you be in trouble? and would you be at risk of losing the dream home ?
if you answer yes/yes stop where you are and keep it as a dream for now

dunstonh

A repayment would be c1500pcm which we can’t afford.
Interest only is 830pcm, which is fine.

Lets strip out the wishy washy and look at cold hard facts.

1 - Interest rates close to half the long term average. With interest only you should budget on the payment doubling.
2 - Current payment would be £830pm but doubling that is £1660.
3 - You say you cant afford £1500. So, £1660 is clearly not affordable.

Baz_2

How old are you both?

Can you not increase the term to 25 years or so?

Can you not sell the rental property and use that to reduce the mortgage? Are you likely to be together long term?

Its alright being safe and cosy and not taking any risks but if that's your dream house then you have a duty to at least try. But I would never think an interest only mortgage is a good idea.

Chinkle

These are tough times and following your dreams can be a risky business.

However, it seems to me like the answer to your question is staring you in the face. If your girlfriend is as committed as you to the "dream house" as you she should sell her other property.

I'm assuming from the limited information you gave that (ie that the mortgage only has a few years left) that there's about £100k tied up in that. Combined with the £160 equity you have in your current house you'd only need a mortgage of £100 for the dream place* - which you say in your first paragraph you can afford on a repayment vehicle.

Simples!

*rough figures, obviously there's buying and selling costs to consider

VT82

Baz wrote: »

Its alright being safe and cosy and not taking any risks but if that's your dream house then you have a duty to at least try.

I like that. I wish I'd put it in my reply :T

jamesd

Lenders today tend to calculate affordability on repayment basis at 5-6% interest rate. That means that you may not qualify for the mortgage anyway. Find out before making an offer.

It doesn't look as though you can afford to pay the mortgage. If you do go for it, getting a long term fixed rate deal would be the way to go, so that you could be sure that you could afford the repayments for as long as the deal lasts. Using a 25 year mortgage term would help with the affordability calculation.

Selling the other property would help with reducing the borrowing but reduce income. It would help with affordability calculations, because rental income isn't likely to be treated as well as salary, but leave you in a worse position for the monthly payments.

Given how marginal this is, if you go for it, go for high enough borrowing so that you retain at least a year's worth of expenses in savings accounts.

For at least a few years it seems that you would need to rethink just what you're spending to leave yourselves with a chance of paying the mortgage. That may mean cheaper cars, less going out, visiting the money saving boards here and looking for other opportunities to cut costs. After a few years income increases may help to get you some margin.

jockosjungle

Why not sell both houses and then upgrade, there must be a chunk of equity in the rental if it is paid off in 4 years

R

wymondham

Yep, you're mad. Next question ..?

Jackinbox99

I always look at mortgages as short term 2 or 5 year thing. So, I would be tempted to go for the interest only mortgage, as you can always review your situation in a few years time and change it. With a repayment mortgage you will have paid hardly anything off your mortgage over the 2 or 5 year period unless you have been making serious overpayments. On the other hand, the house value may have increased, so you`ll have gained money!

The way I see it, is that you have a load of capital in the property and the other house you can fall back on, so if you end up loosing your job, you can always sell the house, clear your loan and get somewhere else. Personally however, id make sure your monthly mortgage payment is something you can easily afford. Maybe get a 40 year mortgage instead of the 11 year one, so you drop your monthly payment down to 400quid or something. That way if you have job problems, the chances are you can still pay the mortgage. If you have money spare you can still overpay the mortgage to try and bring it down - or save the money in a seperate savings account for a rainy day. After all, in a couple of years time you can remortgage and if your situation changes you can change the term & conditions!

thaylock

Can't make your decision for you but house prices will continue to drop over the next year or so - so hold tight (paying an interest only mortgage is madness - this is something only BTL landlords & desperate people do).