Switching to interest only to save money?

patchyX2

We're on a fixed rate mortgage with Santander @1.49% until Feb 2025. Our mortgage balance is ~75k with just under 14 years left.  Our monthly payments are currently £499.

I've seen that Santander allow the possibility to switch to an interest only mortgage and/or extend your term for £75 (possibly £75 for each change?).

I was wondering whether we could take advantage of our low fix and see if we could switch to interest only, and max out our term. That would bring our monthly payments down to ~£93. We could stick that extra ~£400 per month into an account earning more than 1.49% and make some money.

Couple of questions on this:

1) Would Santander let us do this, or do they only allow it if you're struggling to make payments?

2) Would we actually make any money after taking the £75 fee into account? We'd make £288 in total (assuming 4% return on 7.2k), but that's only if we had the full 7.2k in there for the duration of remaining term, which won't be the case. Not sure how to do the sums on this one!

Assuming Santander would allow us to do this, and it would return a profit, is there any reason not to do this?

adamL

At those low numbers, I personally wouldn’t bother. By the time you’ve dealt with Santander, opened said accounts, managed the money etc, you’ll have used a lot of personal time up for very little gain. 

grumbler

adamL said:

At those low numbers, I personally wouldn’t bother. By the time you’ve dealt with Santander, opened said accounts, managed the money etc, you’ll have used a lot of personal time up for very little gain. 

Don't know about Santander, but it take minutes to open a new savings account with many banks.

PledgeX2 said:

2) Would we actually make any money after taking the £75 fee into account? We'd make £288 in total (assuming 4% return on 7.2k), but that's only if we had the full 7.2k in there for the duration of remaining term, which won't be the case. Not sure how to do the sums on this one!

Assuming Santander would allow us to do this, and it would return a profit, is there any reason not to do this?

Use the average balance, i.e. half of £7.2K (if this figure is correct). I.e. you make about half of your £288 figure. You can do better by using regular savings accounts, e.g. 7% at FD (up to £600 p.m. for two of you).

simon_or

Santander won't allow you to switch to interest only.

They may look at it if you're suffering financial hardship. And if they do allow it through that process, it will affect your credit report as mortgage arrears. 

Keep_pedalling

There is zero chance you can switch to IO and keep your existing interest rate. This might be useful for someone struggling on a SVR mortgage but not for you.

amnblog

Overpay, if you can afford it so that you are better set when your current fixed rate ends. 

Interest only is the exact opposite of that. You would just be holding on to debt that you need to service on higher rates later.

MWT

amnblog said:

Overpay, if you can afford it so that you are better set when your current fixed rate ends. 

... or given how low their current fixed rate is, just put the extra cash in a savings account at a higher rate then pay off a lump sum when the fix ends...

jimjames

PledgeX2 said:

I've seen that Santander allow the possibility to switch to an interest only mortgage and/or extend your term for £75 (possibly £75 for each change?).
Assuming Santander would allow us to do this, and it would return a profit, is there any reason not to do this?

How would you plan to pay off your mortgage balance if you aren't paying off any capital? It's viable for BTL as you can sell the property at the end of term but for residential you need somewhere to live.

Sg28

jimjames said:

PledgeX2 said:

I've seen that Santander allow the possibility to switch to an interest only mortgage and/or extend your term for £75 (possibly £75 for each change?).
Assuming Santander would allow us to do this, and it would return a profit, is there any reason not to do this?

How would you plan to pay off your mortgage balance if you aren't paying off any capital? It's viable for BTL as you can sell the property at the end of term but for residential you need somewhere to live.

They plan on paying the difference in payments into a savings account, so once the term ends the money is there to repay. 

Its a perfectly reasonable idea, many people including myself are doing similar. 

My mortgage is fixed around 2% so I dont overpay anymore and the mortgage balance is offset with an equivalent amount in savings paying much more. 

Free money. 


But the interest only route wont work. 

grumbler

amnblog said:

Overpay, if you can afford it so that you are better set when your current fixed rate ends. 

Interest only is the exact opposite of that. You would just be holding on to debt that you need to service on higher rates later.

Absolutely! And overpaying NOW makes sense ONLY if you can't overpay later, when the fix rate expires. Now it makes much more sense to save at 6-7% instead.

jimjames said:

PledgeX2 said:

I've seen that Santander allow the possibility to switch to an interest only mortgage and/or extend your term for £75 (possibly £75 for each change?).
Assuming Santander would allow us to do this, and it would return a profit, is there any reason not to do this?

How would you plan to pay off your mortgage balance if you aren't paying off any capital?

see below

PledgeX2 said:

We could stick that extra ~£400 per month into an account earning more than 1.49% and make some money.