Interest Only Mortgage question

GillianY1

My husband and I have had our mortgage since 2003 and have always had a repayment mortgage.
Our current fixed rate is coming to and end on 30th June and I was thinking about changing to interest only to free up a bit of money every month to pay off my existing debt. I have looked at the HSBC Fees Free Lifetime Tracker and the interest only payment on a mortgage of 96k is about £240 per month. Comparing this to the £610 I currently pay each month on my repayment, I would use the excess to pay off my credit cards and would be debt free within 18 months. After paying off my debt in 18 months I would want to switch back to Repayment and hopefully reduce my mortgage term and pay it off quicker.
As I have never taken out an interest only mortgage I was wondering if all lenders require you to have some kind of Repayment Vehicle in place to pay off the mortgage at the end of the term. As I only want to take it interest only in the short term is there any way of taking out an Interest Only mortgage without having a repayment vehicle in place?

Thanks

anh1904

Not all lenders insist on a repayment vehicle (you can declare on the application that you will continue to work for as long as you have the mortgage for example) but they are not duty bound to offer you interest only on high LTVs - you will need to convince the mortgage advisor that you are worthy and have the means to make capital repayments in due course.

JimmyTheWig

They will, I believe, factor in any repayment vehicle payments into their calculations on affordability.
They will also factor in interest rate rises.
So while you and I know that you should have no problems in following your plan, the bank may not be so sure.

Remember that the credit crunch means that there is less money for banks to lend out. That means they can pick the customers that they want (i.e. the safest).

I don't know what debts you have or have had recently and how you have dealt with them (i.e. if you've missed payments, etc) but this might make it hard to get the best deals.


Don't lie during the application process. But don't feel you have to tell them every detail. For example, if after the debts are cleared you will be using a cash ISA as a repayment vehicle then I see no reason not to tell them that you are using a cash ISA as a repayment vehicle.
If they want to see this set up, set it up and make one payment into it.
They _won't_ need to see evidence that you are paying into it every month. That is your responsibility.

But be sure that you know what you are doing before you get yourself into this. If you stick to the repayments as planned you will save lots of money as the APR on your mortgage will be tiny compared to your other debts. But if you get it wrong and only service the mortgage each month and don't pay off the debts then you are creating a biger problem for yourself.
It requires an element of self-control. Only you can judge whether that is the right step for you.

GillianY1

Thanks for your reply. We have a LTV ratio of 70% and have 17 years left on our original 25 year mortgage. We have a joint income of £51k per year.
I was just wondering if anyone knew if HSBC insist upon a repayment vehicle being in place as standard for an interest only mortgage?

GillianY1

Thanks JimmyTheWig. My debt is currently just under £10k and I have no missed payments on my file. I would like to get this paid off quickly so that I can start reducing my mortgage quicker and pay it off a few years earlier than I had originally planned. I would definitely be strict with myself about making the payments as I am fed up paying money into my debt every month when I think I could be saving it every month or getting mortgage free quicker.
I think it is probably best for me to phne and speak to someone at HSBC and perhaps as you suggested set up an ISA and make a couple of initial payments into it.

kwaks

Whilst your plan sounds good, can I suggest you shop around A bit on the interest only.

Currently taking one out on 150k that will cost 336 a month and also gives me an offset account.

JimmyTheWig

You sound like you know what you are doing.
If you are confident in sticking to your plan, and feel safe enough in your jobs, it might be worth seeing if you could add the £10k onto the mortgage and pay off the debts straight away. Don't know if HSBC will allow this, though.
The important thing, if you do this, is to adjust things so that your monthly mortgage payments become the same as your current monthly mortgage payment plus your current debt repayment. That way you could stick to a repayment mortgage and actually reduce your term.


***** BUT *****

I am only suggesting this as a plan because you sound like you are going to stick with your plan.
For some people it would be a terrible idea.
It means turning unsecured debt into secured debt - which means if you don't pay you can lose your house.
And it means turning short term debt into long term debt - which means unless you up your repayments as I've suggested it will cost you a fortune to repay over the years.

It also depends on whether HSBC will allow you to increase your mortgage to pay off existing debts (Santander don't, I believe) and whether adding the £10k will put your LTV the wrong side of a relevant cut-off point.

GillianY1

Heard from HSBC yesterday and they have declined our mortgage application saying we did not pass the credit check

I checked my credit file this morning and my score is coming back at the high end of good bordering on excellent. I have one late payment in April (paid my Next bill a week or so late!) but nothing else on there. My husband has a couple of late payments on his credit file, but as I am the main income earner in the house I didn't see this being a huge issue.

Can anyone advise if HSBC are particularly strict when it comes to accepting mortgage customers? I am a bit worried about applying elsewhere now as I don't want too many credit checks on my file at once.

kingstreet

HSBC has the best deals and is cherry-picking the best applicants.

Thrugelmir

The fact that you have unsecured debt will flag up to any underwriter why you would like an interest only mortgage. So highly probable that HSBC will decline your application on that basis.

So why not approach them for a repayment mortgage? No guarantees though of acceptance.

May not reduce your outgoings by as much but would allow you to accelerate repayment of unsecured debt.

Pay a visit to the Debt Free Wannabe board. Lots of support and advice on there to help tackle your issues.

opinions4u

GillianY1 wrote: »

I have one late payment in April (paid my Next bill a week or so late!) but nothing else on there. My husband has a couple of late payments on his credit file, but as I am the main income earner in the house I didn't see this being a huge issue

You need to take paying your bills on time more seriously. It is a big issue.