Interest Only Mortgage Availablity

TheSandman

I can imagine some rolling their eyes, it's been raised often lately....


Basically I'd like to ask what the chances are of obtaining an interest only mortgage between 2 and 5 years from now based on the following;

1/ The repayment vehicle is already at the level needed to pay off the mortgage ie if I have £150,000 between a S&S ISA and regular investment account would borrowing £150,000 IO seem plausible?

2/ A sizeable deposit - At least 40% of the purchase price, possibly 50% and at least £75,000 (seperate from repayment vehicle)

3/ Easy affordability - Mortgage payments around 25% of NET income with very low outgoings (no car, no train pass, non-smoker, no dependants)


The reason I ask is that obviously there seems to be a reluctance from lenders to continue lending on these terms and the FSA seem to be encouraging their demise but this is from an outsider's perspective with no experience. Anybody more involved and long in the tooth want to give their opinions as to whether this is a blip? a real step change? and would any lender currently consider this aceptable?


Thanks

kingstreet

TBH I'd just get an offset product and pay no interest.

God knows what will be happening in two to five years. Who saw the mess we're in now back in 2007/8?

TheSandman

Thanks for the reply,


I feel the issue with that would be my income multiple.

If I was being reasonable I would tell a lender my income is an equivalent c.£32,000. It would give them a headache though because it's made up of part time work, capital gains, dividends and what would be lodger income that together make £2,000 NET.

It is more than this though; the dividends come in slightly higher, capital gains are a conservative 5%, plenty overtime at work and I like to pick up some temporary full time work for a week or two a few times throughout the year.

I have the impression a lender wouldn't lend me a high multiple on a traditional repayment but on interest only they would lend against whatever I currently had in my 'repayment vehicle' as long as I had a good deposit and affordability. Am I wrong on that?

kingstreet

If you have an income issue, you'll struggle to get any mortgage, offset, interest-only or repayment. Lenders are specifically instructed to carry out affordability assessments based on a repayment mortgage.

The question will be "why not simply use the savings and have no mortgage?"

TheSandman

It would seem more sensible but the sum in the repayment vehicle would be in equity income funds.

So say I have 150K and borrow 150K. The yield right now is a shade over 4% and I haven't chased an unsustainably high yield. If I could borrow at 5% fixed for 10 years I'd expect the NET dividend payments to match and overtake the mortgage payments after 7 or so years giving me around 20 years of dividends greater than the mortgage interest payments.

I could also add to that an expected capital gain after 25/30 years.

I've purposely smoothed out expected returns and after 10 years at the fixed rate I could re-evaluate my options based the interest rates at that time.

Thanks for your help though, I think I'm going to need to re-think this.

Thrugelmir

TheSandman wrote: »

So say I have 150K and borrow 150K. The yield right now is a shade over 4% and I haven't chased an unsustainably high yield. If I could borrow at 5% fixed for 10 years I'd expect the NET dividend payments to match and overtake the mortgage payments after 7 or so years giving me around 20 years of dividends greater than the mortgage interest payments.

I could also add to that an expected capital gain after 25/30 years.

Pure speculation.

There's no guarantee that shares will provide such a return either in income or capital gain.

kingstreet

This is the kind of criteria you'll be up against in getting your plans accepted as an interest-only repayment method. This is the restriction used by Lloyds Banking Group today;-

We will compare the value of the ISA/OEIC/Investment Bond with the amount of interest only lending required, taking into account the remaining term of the mortgage and future market volatility.
The valuation we will assign to the investment is 80% of the current value which must be greater than £50000

This may not apply in the timescale you mention.

TheSandman

Thrugelmir wrote: »

Pure speculation.

There's no guarantee that shares will provide such a return either in income or capital gain.

You're right, it is pure speculation and there is no guarantee.

However, for the calculation in my previous post I used a figure for dividend growth of 4% - I don't see that as over optimistic.

There may be no guarantee but I see the chances of seeing a loss in capital after 25-30 years as slim - in the extreme. This isn't a trading account subject to poor personal judgement, this is a diversified portfolio of global income funds, trackers and defensive shares.

Kingstreet - thanks for that bit of information, 80% is close enough to where I'd like a lender's offer to be. This is still all hypothetical at the moment anyway, there is probably a lot still to unfold in the lending market in the next two years.