Benefits of interest only mortgage?

[Deleted User]

Hello,
I am a first time buyer, looking into mortgages before I place an offer for a home I have my eye on. I wondered what would be the benefits of an interest-only mortgage and under what circumstances would this be preferable to the capital mortgages? Thank you in advance!

Billy_B_North

Flexibility. You can pay only the interest or often you can pay up to 10% of the outstanding amount each year.
The downside is that the imprudent can not pay any of the capital back and be kicked out of their home when the term ends.

Caz3121

there are fewer interest only mortgages around. Many have a higher income requirement and a higher deposit % required.
worth a read here https://www.onlinemortgageadvisor.co.uk/interest-only-mortgages/interest-only-mortgage-criteria/#can-i-get-interest-only

[Deleted User]

Thank you both! You're right Caz, I've just noticed an income requirement of £100k with HSBC. Strange as I was sure an ex-colleague had this type of mortgage (and definitely wasn't earning near £100k) but maybe the criteria have changed in recent years. 

getmore4less

benefits are when you can get one is lower payment so you can invest elsewhere.

For  high rate taxpayer pension can be much better than paying the interest.

For most starting out their LTV is high and that comes with high rate and you really want to be getting down to 75% or lower ASAP  as that is where the rates currently get sensible.

As has been pointed out you could forget to make capital payments and end up with a debt, or not save and have a bigger mortgage next time that if you had overpaid or saved.

An alternative if young enough is to take a longer term as that tends to I/O
eg £100k  at 2.4% is £200pm IO
here is the table for rate term payment for £100k  it scales with mortgage size.

rate/term	10	15	20	25	30	35	40	I/O
1%	£876.04	£598.49	£459.89	£376.87	£321.64	£282.29	£252.86	£83.33
2%	£920.13	£643.51	£505.88	£423.85	£369.62	£331.26	£302.83	£166.67
3%	£965.61	£690.58	£554.60	£474.21	£421.60	£384.85	£357.98	£250.00
4%	£1,012.45	£739.69	£605.98	£527.84	£477.42	£442.77	£417.94	£333.33
5%	£1,060.66	£790.79	£659.96	£584.59	£536.82	£504.69	£482.20	£416.67

davidmcn

Deleted_User said:

I was sure an ex-colleague had this type of mortgage (and definitely wasn't earning near £100k) but maybe the criteria have changed in recent years. 

As in they took one out recently for a new owner-occupier mortgage? Lots of people still have ones they took out in the past. Or they're also popular for buy to let mortgages.

[Deleted User]

davidmcn said:

Deleted_User said:

I was sure an ex-colleague had this type of mortgage (and definitely wasn't earning near £100k) but maybe the criteria have changed in recent years. 

As in they took one out recently for a new owner-occupier mortgage? Lots of people still have ones they took out in the past. Or they're also popular for buy to let mortgages.

I think they'd had this one for several years but for a new owner-occupier mortgage (as opposed to buy to let). 

[Deleted User]

Years ago - pre the financial crash which triggered new mortgage rules on affordability checks et , many people took out massive ( then ) interest only mortgages on a self certify ( just tell them your income yourself) as long as you had a 20% deposit...... you could basically borrow what you liked. At that time lenders had their 20% buffer so they were protected. 

This gamble paid off for some, but for others it was one of the main causes of the Northern Rock crash - and hence all that was stopped. 

I was one of those people whose big gamble paid off. As a single mum, I could NEVER have bought the house I am in today without it. In Greater London, houses were going up and up so my equity was getting bigger.

After 10 years of interest only, I converted it to a capital repayment but paying it off means my kids are going to pay 40% inheritance tax on the part over the limit. 

I really wish those mortgages were still available, as I would be in a house worth a couple of million now and just pay the interest ( and maybe the odd overpayment ) and then when I die, my kids would share the equity Id already built up before, plus increase in value. 

But alas they are not  
Hope that gives another perspective on things  

[Deleted User]

Densol said:

Years ago - pre the financial crash which triggered new mortgage rules on affordability checks et , many people took out massive ( then ) interest only mortgages on a self certify ( just tell them your income yourself) as long as you had a 20% deposit...... you could basically borrow what you liked. At that time lenders had their 20% buffer so they were protected. 

This gamble paid off for some, but for others it was one of the main causes of the Northern Rock crash - and hence all that was stopped. 

I was one of those people whose big gamble paid off. As a single mum, I could NEVER have bought the house I am in today without it. In Greater London, houses were going up and up so my equity was getting bigger.

After 10 years of interest only, I converted it to a capital repayment but paying it off means my kids are going to pay 40% inheritance tax on the part over the limit. 

I really wish those mortgages were still available, as I would be in a house worth a couple of million now and just pay the interest ( and maybe the odd overpayment ) and then when I die, my kids would share the equity Id already built up before, plus increase in value. 

But alas they are not  
Hope that gives another perspective on things  

Thank you, it certainly provides perspective! Yes, it would definitely be a great option, if it was still available. Having looked into it, it doesn't seem to even be a possibility at my salary level so that makes the decision easier! Capital repayment it is...if I bag the house that is!

dimbo61

It's a bit boring having a normal residential mortgage but you will own your home at the end of the term and the Interest you pay decreases each month as you pay more of the capital off.
If you can overpay each month you will also clear the debt quicker and pay less Interest 

[Deleted User]

dimbo61 said:

It's a bit boring having a normal residential mortgage but you will own your home at the end of the term and the Interest you pay decreases each month as you pay more of the capital off.
If you can overpay each month you will also clear the debt quicker and pay less Interest 

Thank you. This is the conclusion I've reached too, it seems like the most viable option and I think it would be good to overpay in those months I'm a little more 'flush'.