Interest Only Mortgages

lea123e

Stupid question perhaps but here goes anyway........

I am looking to buy a house shortly and had been dead set on having a repayment mortgage and also make yearly overpayments(10% p.a.) to reduce the loan length, however, I am now thinking would it actually be better to have an interest only mortgage as the lower monthly repayments would allow me to save my overpayment amounts much more quickly than with a repayment mortgage.

I realise that i may be missing something huge here so any constructive feedback would be greatly appreciated , many thanks.

Engeroosi

A repayment mortgage is just an interest only mortgage but with compulsory overpayments to clear the capital!

dimbo61

Couple of things you may have missed !!!!
1 lenders dont like Interest only mortgage and require you to have a repayment vehicle in place EG endowment, ISA, pension
2 you will need t put down a 25% deposit with lots of IO mortgages
3 you dont pay off the capital so still owe the debt in 20/25/30 years time when you are due to retire
4 You are going to repay/overpay the IO mortgage and therefore clear the debt over time I hear you say!
But how many people are now coming on this forum with stories of mum and dad still owing thousands whilke now getting a pension
5 some lenders only do repayment mortgages for the best deals

joedenise

If I knew then what I know now I would never have taken an interest only mortgage. We have made some overpayments over the last few years but prior to that we didn't even know we could make small overpayments because the first mortgage we had you could only make overpayments of a minimum of £500 (that was 20 years ago!) and because we had 2 kids still at home at that time we never seemed to be able to get together £500, by the time we had saved a couple of hundred the washing machine would break down and bang went the savings. We were also on a 14% fixed rate, which was good at the time - interest rates were up to 16% at that time!

But since remortgaging a few years back we are able to make small overpayments at any time and about once a week I "round down" what is in my current account to make a small overpayment, so could be something like £2.20 or £45.99! I also make a regular £100 per month overpayment. By doing this we are hoping that what we actually owe when the endowment pays out (which is nowhere near what we were told it was likely to be!!!) we'll have enough to pay out what we owe plus a few thousand pounds over.

The point of this post is to say Repayment every time.

Denise

PS Sorry for the long post!

goobergirl

Hi

I we have an interest only mortgage but you must be disciplined to make your overpayments if you don't have an 'investment vehicle (s)' to pay it off after your set term.

The bank accepted my and OH's pension 'lump sums' on retirement as investment vehicles but we have no intention of using them to pay the mortgage off as we plan to have it paid before we retire.

Ironically when we took our current mortgage out (end of 2008 as credit crunch hit) the bank would not lend us the amount we needed on a repayment basis, even although we could more than afford it!!!!

Anyway if you are sure you have a plan in place (that you will stick to) to pay it back IO can be fine, otherwise go repayment.

lea123e

Luckily I am very disciplined with money and can afford to put away the overpayment money, and being aware that if i dont overpay i will still have all of the capital outstanding at the end of the term is more than enough motivation for me!
My main point was that having £100 per month extra which has been freed up by choosing IO, would be very useful and allow me to save those overpayments much more quickly than repayment.
Thank you for the useful contributions

SAMMYE_2

https://forums.moneysavingexpert.com/discussion/3292590

This post should put you off :eek:

lea123e

Still not put off, sorry!

LilB_3

We have an IO mortgage and it's all we've paid for the last 11 months.

We plan to start our 2nd mortgage year overpaying (what would be the repayment mortgage amount) plus saving up the £500 lump sums when we can.

It's useful in that the maximum you will pay is only the interest should you come into difficulty but at the same time it can seem like you're 'renting' your home, so it's important to over pay when you can.

As long as you have your head screwed on, I wouldn't be put off by them but do research up to your eyeballs, they aren't for everyone!

shortchanged_2

LilB wrote: »

It's useful in that the maximum you will pay is only the interest should you come into difficulty but at the same time it can seem like you're 'renting' your home, so it's important to over pay when you can.

As long as you have your head screwed on, I wouldn't be put off by them but do research up to your eyeballs, they aren't for everyone!

But that is the danger. If you can only barely survive by paying interest only from the start it means you haven't actually got a lot of leeway on the mortgage.

Think about it as affordability, although I'm sure the banks are much more cautious about lending on IO mortgages than they were a few years ago.

Basically what I am saying is when you take out the mortgage ensure you can afford a repayment mortgage of the same value and also factor in interest rate rises on top of this because they will come eventually.

LilB_3

shortchanged wrote: »

But that is the danger. If you can only barely survive by paying interest only from the start it means you haven't actually got a lot of leeway on the mortgage.

I don't think the OP is intending on paying the minimum amount from the get go. I understood the OP as paying the interest only whilst saving alongside and also paying 10% pa in overpayments.

We can afford the mortgage and more. Were you referring to myself as barely surviving? If so, it is not the case.