Basic Advice needed for Interest Only mortgages

mango1966

My partner and i are looking at mortgages and have to admit it does baffle us somewhat. We look limited to an interest only mortgage (coming from the South East, actually repaying the damn thing isn't really an option!).

It seems we ought to look at setting up an endowment (which i assume endowment plus an I.O mortage doesn't equal the amount you would pay off on a repayment mortgage p/m or what would be the point?!)

Are there any other options that people can recommend over an endownment, why?

When do i attempt to get one in relation to the rest of the whole scheme of buying a house?. Do you need to have one offered in principal for when you get the ball rolling, or is it independent of the buying process? (i.e up to you to set it up and has no bearing on the actual purchase)

One last thing, anyone know how long a mortgage offer lasts?. I would quite like to have one offered for when we go hunting but wasn't sure in principal how long it is valid for?

Sorry if all these are very basic questions that a monkey should be able to answer but there is so much to think about and consider, any advice would be much appreciated

lipidicman

mango1966 wrote:

Are there any other options that people can recommend over an endownment, why?

Paying off the mortgage!. If you can afford to pay into an endowment then you can afford to start chipping away at the capital. With a repayment mortgage most of the payments at the start go towards interest. So even small payments to the capital help.

Endowments are not performing well now. In the future, who knows? Do you want to take this risk?

dougk_2

If the initial repayment is the problem, then a interest only mortgage with no repayments to the capital is a solution for the early years.

This means you will always owe the amount. Some people are not worried about this as they plan to pay the loan back through various different means for example:
When selling the house, from shares ISA's, from expected inheritance etc etc.

If the house purchase is a long term thing then maybe for the first 2 or three years you pay no capital back and then once you are settled in the new house , you wages have increased etc then you start to make repayments.

Chances are that you will move, change jobs , get money , loose money and the like and each time you should review your current situation with the aim of reducing the debt as quickly and as comfortably as you can.

Well thats my take on it!

meanmachine_2

OK, so you're baffled by mortgages, that's fine. But you can't have failed to notice all the hoo-ha in the press about "endowment" mortgages, can you?

I wouldn't go near one with a 50 ft barge pole.

If you can only afford an interest only mortgage now, that doesn't mean you're tied to those terms for the rest of your life. You can switch lenders, or switch terms at any point, provided there isn't some kind of penalty attached.

But remember, just because you *think* you can afford a big mortgage now, you have to plan ahead, and also be able to pay the debt when interest rates rise. Your mortgage payments should never be more than 40% of your income. If they are, you're overstretching yourself.

lipidicman

dougk wrote:

If the initial repayment is the problem, then a interest only mortgage with no repayments to the capital is a solution for the early years.

Yes but the OP was talking about setting up an Endowment - though he may have meant in the future

dougk_2

Its my view that the problem with endowments was the over estimate made in how much your investment would increase, hence the premiums asked in the past were too low to produce the results.

I think if you were to take out an endowment now the risks of not meeting the target amount are lower, but the premiums are higher. When I last looked the monthly figure difference between the endowment premiums and a repayment mortgage were negligable, where as a few years back it was cheaper to have an endowment and an interest only mortgage.

Mean Machine is right you have to plan ahead and only borrow what you feel comfortable paying back and you cannot always predict the future. In this sense Fixed mortgages may suit as it allows youto plan ahead what your payments will be for x number of years.

I disagree with the 40% of income mean machine has stated, in my view its better to base it on the amount of disposable income you have available.

slater14

Is it just me that can see the inherent problem with Interest Only mortages?

What is Martin's first rule of saving - CLEAR YOUR DEBTS

I'm pretty sure he doesnt advise shifting the debt over a longer peiod so that it appears to be affordable (only when you are in dire financial difficulties is this suggested).

We need to get into the pysche of the poster - WHY do you NEED to buy something which you can see you blatently cannot afford?

I havent seen anyone advocating paying off only the intererst on your credit card leaving the debt outstanding every month as a sensible thing to do...how does this situation differ?

dougk_2

erm... slater14

That is exactly what stoozing is....paying off the interest only (and a small sum) and keeping the balance.

It appears the OP is planning long term rather than short term which is to be admired.

Whether right or wrong houses can be viewed as a long term investment (with the exception of things like antiques and paintings there are few "investment" oppourtunities that are not risky).

lipidicman

Dougk, yes stoozing is paying off the interest only (and a small sum) and keeping the balance

BUT the crucial difference is that the interest rate is 0% (or at least lower than your savings rate).

Trying to stooze against a mortgage is a dangerous idea!

dougk_2

but it can be done!

Not something I would try but - if you are on a discount rate for instance (say 4%) and you are a non-tax payer then you can still make 1.5 to 2%.

Also if the mortgage is cheaper than the rent (and you have little or no savings) then buying a house can be classed as Money Saving. (to answer critics who say buying a house is not money saving)

For example here in the south (near Reading) you can get 1/2 bed houses or flats for around £125k - therefore Repayment mortgage circa £750. Renting the same would cost you about £800.

Note that is a repayment when really the comparison should be made to interest only @ £550 as then it would be equiv. to not owning the house inthe end which is what happens with renting. So potentially (before paying for repairs etc) you are saving £250 a month by buying rather then renting.

lipidicman

Count in the cost of buying and selling and the fact that prices could drop and you could be in trouble!