need advice on whether to switch to repayment mortgage

Denis222

Hi every one,
I am hoping to get your help with some advice on my financial situation:
- Home owner: Interest Only, loan amount for my mortgage: £125,000, 10 years left before paying the capital
- current plan for paying the capital: Pension lump sum, the figures show I can cover £125,000 at the standard retirement age (65)
- Other loan: £53,000 personal loan (home improvement), am paying £1100 per month, to be paid off in 5 years.
We are a household with two incomes (my wife and I). My wife however may not be able to continue to work beyond 5 years from now. So my plan so far was to sit tight, paying off the personal loan in 5 years, then with or without help from my wife's salary paying more towards the mortgage on a regular basis, so that by 65 I have less to pay from my lump sum.
However recently I have been advised by a financial adviser to remortgage, switch to repayment and to add the £53,000 to the loan. He says with 2.39% currently available APR, I will be paying £1669 monthly for 10 years and will clear the whole thing by the age of retirement. His calculation is correct as long as I can see from mortgage calculators and it will save me a total of around £30,000 (comparing to my current plan of remaining on interest only).

This seems reasonable by numbers, but if my wife does not continue to work after 5 years I may not be able to keep up with the unpredicted monthly payment (it can easily rise depending on economy).

So I need to decide, whether to stay safe, continue with my current plan, eventually paying the mortgage from my pension, and in this way paying £30,000 more; or to switch to repayment and add the personal loan to it, take the risk, hoping that my wife will be able to continue to work after 5 years and even if not, I may be able to afford the monthly payment.
I know this is a very subjective and personal scenario, but any advice will be very helpful for me, as currently I feel I cannot decide!
Many thanks
Denis

getmore4less

Not enough information

How much is the house worth?
What rate is the current mortgage?
What rate is the current loan?
Current payments on both?
Current lender for the mortgage and loans

Tax situation any high rate left you could sacrifice into the pension.

Denis222

Hi, thanks for your reply:
- How much is the house worth? around £220,000
- What rate is the current mortgage? 3.61, I am on variable rate now, can move to a lower APR with fixed rate but need to decide about the above first. 
- What rate is the current loan? around 6.9
- Current payments on both? £376 pm for mortgage, £1100 pm for loan 
- Current lender for the mortgage and loans: mortgage RBS, loan RBS and Tesco
(let me add also that I have around £10,000 in savings just now, am thinking of buying a buy to let flat (Falkirk) to help with income and possibly contributing towards paying off the mortgage in 10 years.
Thanks again!
Denis

getmore4less

Have you looked at the potential issues with managing a BTL. 

Won't be home till later to do the number crunch. 

RelievedSheff

Your repayments don't need to be unpredictable. You can fix your rate for the ten year term if it works out to be the better option.

MovingForwards

I wouldn't be using a pension to pay the mortgage off, that would be better off saved for retirement.

Can you make overpayments to start clearing the capital?

If you can remortgage to save money on your monthly payments, use some of that saved money as overpayments to bring down how much is owed, with a view to clearing the remainder when you are down to one income.

Thrugelmir

Overpay the new mortgage while your wife is still working. Buying a BTL may simply compound your problems. 

grumiofoundation

Switching from paying 6.9% to lower interest mortgage (2.4%) on the 53000 would save you ~£6000 in interest in the next 5 years which would go towards paying off capital. 

Although you would pay £200 more on the new mortgage for the next 5 years compared to personal loan plus IO that is going towards paying off the capital.

If you are worried about being able to afford the repayment mortgage in 5 years time can you switch to a part repayment/part interest only or get a mortgage term that takes you beyond 65?


One thing I don't understand - if you are worried about being able to pay the repayment mortgage why on earth would thinking about taking out a buy to let mortgage?

Petriix

Definitely remortgage ASAP. Take a longer term that leads into retirement: as long as you pass the affordability criteria, it will give you an lower *minimum* monthly payment which you can fall back on when your wife stops working; while she is still working you should *overpay* by as much as you can.

Denis222

Many thanks for all the help. I see that overall the advice is to switch to repayment. I need to do some thinking before making that decision but the points above sound reasonable.
Re BTL, I had a flat on BTL which I sold recently with small enough money gained to get another one in a better place maybe in Glasgow. The rent normally covers the monthly payment for mortgage (appreciating there is no guarantee for regular payment, I say that based on experience!). So that can be another help with income plus hopefully some investment for retirement. I will drop the idea if I do not find a reliable place.
I hadn't thought about getting repayment mortgage for a longer term (beyond 65), thanks for the tip! I will explore this.

getmore4less

ok lets look at the numbers 
10 year to deal with from now.
house £220k
amount rate payment  amount left interest(10y)
£125k  3.61%  £376.04pm £125k £24,103   
amount rate payment amount  left interest(5years)
£53k   6.9%  £1046.96pm £0  £9,818
total interest £33,921
total payments  £1,423pm

Something well wrong with your numbers if you think you can save £30k  there is only £32k in interest with what you have now

anyway proposal is a 10y loan at 
amount rate payment  amount left interest(10y)
£178k 2.39% £1669.12 £0 £22,294.

Saving is about £11.7k with that option over doing nothing

LTV on the IO portion is 57% combined 81%
RBS have the following retention deals for your main mortgage
2y 1.64% (£0 fee)
5y 1.49(£995 fee)

if switch to the IO 5y deal over 10y (assume that rate will still be available)
amount rate payment  amount left interest(10y)
£125995 1.49% £164.14 £125,000 £18,702

Then add the monthly saving(£211.90) to the loan payment
amount rate payment  amount left interest(4y1m)
£53k   6.9%  £1258.86 £0  £7,858

Total interest £26,560   but retains the IO on the mortgage to overpay and give flexibility.
There is 11 months  of £1258.86 available up to the 5 year point anyway.

if we use the payment that the new proposal has(less IO mortgage payment)
amount rate payment  amount left interest(3y4m)
£53k   6.9%  £1504.98  £0  £6394
total now £25096   
This is now only £2,800 off the proposal before the overpayments on the IO mortgage that will bring it closer.
if we just use that money for the  for the extra 1y 8m on that IO option above from 3y4m

using the £164.14 payment till  3y4month,
125,995  1.49% £164.14  £125,680  £4932 
then run the full payment to 5 years another  1y8m
£125,680 1.49% £1669.12 £95,060  £2762

Then revert to the £164.14 for the next 5 years(overpayments will reduce this even more)
£96060 1.49% £164.14 £92,190  £3,960

total interest £18,048, 

this is now less interest than that 10 year proposal and retains the IO flexibility for the next 5 years
(mortgage is also down from £125k to £92k

I would check with RBS what they would let you do with the loan to get the rate down and still have some IO to keep your flexibility.

Problem with combining is you mess up your LTV and the getting the best rates under 60%