Basic Advice needed for Interest Only mortgages

slater14

Interesting - obviously, not knowing the area, I have found properties in the £850pm bracket in somewhere called "Calcot" and found 2 properties, one for sale and one for rent... its not quite 125k is it?

http://www.rightmove.co.uk/viewdetails-5263097.rsp/svr/3005;jsessionid=FE8F40BEC6AB3B08F7B2226999D56894?pa_n=33&tr_t=buy

http://www.rightmove.co.uk/viewdetails-6362543.rsp/svr/3002;jsessionid=2BD258176E20F7CF474A79A58D1274D0?pa_n=1&tr_t=rent

Maybe you can post something similair to highlight your assumptions?

mango1966

This is the first time i have ever really used this forum and it is great that people are so generous as to offer their views and advice.

I am glad i did as I'm picking up bits all the time that will help when the time comes... few months yet thank goodness!

Perhaps i can expand a little on our situation. We are looking to buy a property around the £200/220,000 mark (that being an estimated maximum we can be loaned with a joint income of around £55,000). We will only have a 5% deposit, leaving us with a mortgage somewhere in the region of £200,000.

As you can imagine, our repayments per month will be high in relation to our salaries so to gain that valuable step without having to live like hermits the interest only option seemed like a real possibility.

With this i assumed that to cover yourself on this option you would have to set up an insurance policy.

What, in theory (for my sake please imagine a world where property prices never go down) is the problem with paying off just the interest, and when time comes to sell in a few years - just paying it back and using any money made towards the purchase of a new property. In this ideal world (albeit for only 5 years or so before moving on) would i even need to set up an insurance policy/endownment

Then, who knows it may be more convenient to switch to a repayment mortgage.

As you can probably tell i am a bit of an amateur but if i don't grasp the basics first i can't really begin to understand the finer points of house buying

Thanks

sshnuke

i'm afraid i'm another of those that wouldn't go near an interest only mortgage with a barge pole.

slater14 pointed out the most basic point about interest only mortgages. purchasers usually fall into the trap of :

slater14 wrote:

shifting the debt over a longer peiod so that it appears to be affordable.

by the time you've taken out an interest only mortgage along with a decent savings policy - which is a must - you'll find more often than not that a regular mortgage is cheaper.

i used to help first time buyers buy homes and though i hate to give it, the best advice i can give is to lower your sights. Concentrate on getting on the housing ladder with something that is a little more affordable. i know it's difficult but it can be done. Take away the whole "dream home", "perfect for us" element out of your prospective purchase. Look for something "comfortable" which will be a nice little earner in a few years time.

Rik_3

The Motley Fool has a lot of info on various ways to approach your house purchase.
Check out:-
http://www.fool.co.uk/mortgages/articles/mortgagebasics.htm
which also links to their main home-owning page.

Rik.

mango1966

Please take time to view my last post...just a couple above

After further research I have been made aware of the fact that most of the first years of a repayment mortgage you mainly pay off the interest anyway (rather than capital).

Therefore if we were looking to get on the ladder, stay in the property for 3-5 years and then switch mortgage (and home?) to a repayment one isn't this a good way of doing it whilst still having a little extra money to decorate etc?.

As usual, advice much appreciated :beer:

lipidicman

My basic advice would be that if you cant afford a regular repayment mortgage then you are overstretching yourself, and this is a sure route to get yourself into trouble

In my opinion it is a bit like the stockbrokers in 1987 who had never seen the markets fall. In October they got a bit of a shock! In the housing market a lot of people think 'negative equity' is a historical term - but be careful!

mango1966

lipidicman wrote:

In my opinion it is a bit like the stockbrokers in 1987 who had never seen the markets fall. In October they got a bit of a shock! In the housing market a lot of people think 'negative equity' is a historical term - but be careful!

I do see your point about falling into negative equity. One of the reasons we are 'stretching' ourselves to buying a 2 bed place is, should we have to ride out a slump, we have a spare room should we decide to start a family.

lipidicman

But if you have to ride out a slump, then your short term thinking with the interest only mortgage wont work. You will have to keep making interest-only payments or hope you can afford to move to a repayment mortgage. If you are starting a family this would be unlikely even if you get salary rises (expenisive those kids!)

I wouldnt do it. I think, if you cant afford the repayment mortgage, you cant afford the property. I dont think I am alone here?

mango1966

I'm sure you're not alone, and to a certain extent agree with you entirely. So, I'm guessing you would advise perhaps a longer term repayment mortgage over an interest only to start chipping away?.

How much capital would you end up paying back in the first 5 years of a repayment mortgage though?, are there graphs or something to illustrate this?.

John_M_Business

Hi there

Just to add some thoughts. We got an Endowment policy six years ago, and have found it to have worked fine for us. We were estimated 7% yield and so far it is running at 7.1% having performed reasonably well through tough market conditions.

The advantage of Endowment is that in the short-medium term you will be paying less in total combined with an Interest Only mortgage (compared to a repayment). However in the medium-long term you will be paying off more than if you were on a Repayment mortgage. But it might be at the future point you will be able to afford to pay more, and, in any case, given inflation what you are paying back in the future should be of less 'worth' in real terms then if you were paying it off now.

However, with repayment you have the certainty of knowing that in 25 years (or whatever term you choose) you will have paid back everything. Whereas with Endowment, as long as you a realistic, you are as likely to have a little 'left over' or be a little short of where you hoped to be.

Whatever the case, if you are looking to buy now, then I would strongly recommend that you choose one of the two repayment options (direct repayment or endowment) as, if the market softens further, you might start effectively losing your deposit.