What are the downsides of an interest only mortgage?

Iceman70

My wife and I are in our 50s and we want to extend our house, partly to accommodate aging parents. This is our forever home and we do not envisage selling before it comes time to downsize. The extension will be between £200k and £250k, but this still only equates to an LTV of about 30%.

Looking at repayment mortgages this would be about £1500/month, while for interest only we would be looking at about £260/month.

We have one child about to start university, with all those associated costs, and want to still have some disposable income to be able to have some lifestyle enjoyment during our 50s and 60s, before we are too old to enjoy it.

I don't see too much difference in taking an interest only mortgage at this stage, compared with some of the equity release schemes. Only difference, which is a positive to my mind, is that we are not continuing to accrue debt as long as we are paying the interest only mortgage. 

In my mind we will look at downsizing, albeit still to a nice house capable of accommodating grandchildren, etc, when we get to retirement age, so would pay off the outstanding mortgage with sale proceeds at that point, and may even have some cash from inheritance prior to that (although the in-laws are hinting at cutting out the middle and leaving it straight to the grandchildren!).

I am conscious that I can be somewhat blinkered, in a rose-tinted spectacle way, sometimes. But I do want to be able to live my life and not be totally saddled with debt repayments at a time when I still have some health and energy to enjoy life.

What am I missing? Are there other risks or downsides of an interest only mortgage I should be considering?

K_S

@iceman70 For low-LTV high-property-value clients in your position, I/O is often quite an attractive proposition, for some of the reasons you mention and often for higher/additional rate taxpayers to free up more cash to add to the pension pot before hitting 55.

There are risks to a downsizing repayment vehicle strategy, namely what happens if downsizing is no longer an option at the end of term, what happens if you need to retire early for whatever reason, what if your parents are still living with you at the end of term, what happens if rules/circumstances change and you are unable to refinance at end of fixed term or end of full term, etc.

MWT

The only part you may not be fully considering is the difficulty of getting one...

See what the brokers have to say, but as you are pre-retirement, and consequently not looking at the 'RIO' type products as you wouldn't qualify for at least some of them anyway as not currently receiving a pension and potentially too young, you are really just looking for a 'normal' interest only product and those are much harder to obtain these days.

You have the LTV on your side though, but I suggest you get with a good broker and discuss this plan in more detail...

normanna

if the in-laws are moving in will they be selling their property and contributing to the extension as surely they wouldn't want all the cash from their house sale and all the benefits of your paid-for extension? if they can afford it.  

You've said it's your forever home but perhaps take a step back and see if there is a more suitable property that would accommodate you all without having all the stresses and strains of extensions etc.