Interest only by choice?

housebuyer143

I thought this would be interesting to discuss. Who here has an interest only mortgage on their residential property by choice and why? 

I choose to have mine on interest only so I can comfortably enjoy a larger house while I'm young and need the space. It enables me to build larger savings for living my life and general investments. 
When I'm older I plan to downsize or switch to a lifetime mortgage or something similar so it's only paid back on my death. 

I used to be so against the idea of interest only but in recent years my thinking changed entirely and I love it.

Edit - to clarify, I could easily afford the house on repayment even at my current eyewatering rate of 5.5%+ but it doesn't make me feel comfortable. I prefer the money in investments rather than rushing to pay off my house or that being my sole aim. 

ACG

I dont think that is choice. 
That sounds like it is necessity to be within your means and do everything you want...If you had an extra £20k a year for example, I am assuming you would be on repayment. 

To be completely honest with you, I had no strong feelings for or against. But a few years back my gran got dementia and has ended up in a care home. It is currently £1,500 per WEEK for a nice home (we visited some cheaper ones and I am not sure I would wish some of them on my worst enemy). She had savings, enough to last maybe 2-3 years. 

Her house has been rented out for around £1,500 per month but even with that rental income and her pension income her savings have gone. Her house is worth around £450k. We are currently at a stage where that will probably need to be sold within the next 12-18 months. 

If she had kept a 50% mortgage, she would have around 2 1/2 years worth of care fees. However because she has paid it off, she has around 5 years worth. 

I dont know how long she will live for, for a 90 year old with dementia she is looking in pretty good shape (funny what £1500 a week can get). I think she may still be around in 2-3 years though. At which point we either have to move her (we wont) or we all have to chip in (which is what we will do). 

So from the experience I have had, I would say repayment. Your kids will thank you for the inheritance or you will thank yourself when it comes to later life if you need care/care home. 

El_Torro

I'm a great believer in not paying off your mortgage too fast and letting investments do the heavy lifting. However I think that going interest only in order to fund a lifestyle you otherwise wouldn't be able to afford could be a problem. If it works for you and your future self is clear on how to pay it off then fine, I wouldn't recommend it for most people though. Remember that as we get older our desire to downsize diminishes. ACG's point about care home fees is very valid too.

Personally my BTL mortgage is interest only. My plan is to transfer my residential debt to my BTL as soon as possible, leaving a big interest only mortgage on my BTL and no mortgage at all on my residential property. 

housebuyer143

ACG said:

I dont think that is choice. 
That sounds like it is necessity to be within your means and do everything you want...If you had an extra £20k a year for example, I am assuming you would be on repayment. 

To be completely honest with you, I had no strong feelings for or against. But a few years back my gran got dementia and has ended up in a care home. It is currently £1,500 per WEEK for a nice home (we visited some cheaper ones and I am not sure I would wish some of them on my worst enemy). She had savings, enough to last maybe 2-3 years. 

Her house has been rented out for around £1,500 per month but even with that rental income and her pension income her savings have gone. Her house is worth around £450k. We are currently at a stage where that will probably need to be sold within the next 12-18 months. 

If she had kept a 50% mortgage, she would have around 2 1/2 years worth of care fees. However because she has paid it off, she has around 5 years worth. 

I dont know how long she will live for, for a 90 year old with dementia she is looking in pretty good shape (funny what £1500 a week can get). I think she may still be around in 2-3 years though. At which point we either have to move her (we wont) or we all have to chip in (which is what we will do). 

So from the experience I have had, I would say repayment. Your kids will thank you for the inheritance or you will thank yourself when it comes to later life if you need care/care home. 

It is definitely a choice, as repayment would be easily affordable, I just prefer not to put my money into the house 😂 
I didn't consider the care home aspect but then again all being well I will have lots of income in retirement from other means so it's wouldn't be the house as my only asset or way to pay for care. 
No one knows that the future holds but I prefer money in my bank as opposed to in my property. 

simon_or

I'm in a similar camp. Interest only with a mix and match of repayment vehicles, one of which is my SIPP. Not that I ever intend to repay it from those vehicles.

I'm currently at 55-60% LTV (not sure precisely where we are in truth as the indexed value is probably inflated) and plan to slowly whittle it down to 40-50% by the time my wife turns 55-60 and then convert it to a lifetime mortgage paid off upon death.

We don't plan to leave the house to our children so aren't concerned on that front. We'll do all we can to give them a good education and standard of living up to adulthood, and be there for them in case they need our help, but any inheritance would be a bonus!

My reasons for going interest only are mainly that imho my spare cash is much better used to pump into tax efficient (and more easily accessible) savings vehicles like SIPPs and ISAs than paying off capital on my mortgage.

A secondary benefit is being able to be more flexible with our finances and income streams as only a small portion of our income is from permanent employment.

Finally for me a house's utility is in the services it provides us and that doesn't change irrespective of how much equity we have in the property. Beyond that, it's just a store of value.

It's definitely not for everyone and I fully see why someone would value being mortgage free.

But, all said and done, in spite of all my planning, who knows whether it'll work out in the end. If my mortgage interest rates go up to 7% or beyond, then I'll probably be furiously paying off capital!

TheAble

simon_or said:

But, all said and done, in spite of all my planning, who knows whether it'll work out in the end. If my mortgage interest rates go up to 7% or beyond, then I'll probably be furiously paying off capital!

I think this is a pertinent point. A £500k I/O mortgage at 1% is a very different proposition to the same at 7%. 

To draw a probably poor parallel, this is where the whole "don't pay off your student loan because it will get written off in the end" argument falls down. It may well get written off in the end, but by virtue of its size and the interest it's attracting you'll probably pay back of a multiple of it before that happens.

dimbo61

For most people  the idea of an Interest only mortgage is not an option as Lenders have some tough criteria for allowing IO in the first place.
IE many lenders require income of £75,000+
Debt is debt and right now many home owners are finding out the days of cheap borrowing are gone.
With huge mortgages and rates going from 1/2% to 5/6% and maybe more rises lots of home owners are worried about keeping a roof over your head.
I am sure there are lots of clever investors  on this site who will make money but you need your pensions to maintain a good standard of  living in old age 

simon_or

TheAble said:

simon_or said:

But, all said and done, in spite of all my planning, who knows whether it'll work out in the end. If my mortgage interest rates go up to 7% or beyond, then I'll probably be furiously paying off capital!

I think this is a pertinent point. A £500k I/O mortgage at 1% is a very different proposition to the same at 7%. 

Very true. Currently on a low-ish fix but it'll end in a couple of years.

Fingers crossed we should still be able to service a 7% rate comfortably but at that point it would just make sense to divert all spare cash into the mortgage and perhaps even cash out some of the S&S ISA to make capital overpayments.

simon_or

dimbo61 said:

I am sure there are lots of clever investors  on this site who will make money but you need your pensions to maintain a good standard of  living in old age 

That's a good point and one of the benefits of my interest only strategy (so far) has been the ability to pump as much into my pension as I can with the upfront tax relief that that involves.

ACG

housebuyer143 said:

ACG said:

I dont think that is choice. 
That sounds like it is necessity to be within your means and do everything you want...If you had an extra £20k a year for example, I am assuming you would be on repayment. 

To be completely honest with you, I had no strong feelings for or against. But a few years back my gran got dementia and has ended up in a care home. It is currently £1,500 per WEEK for a nice home (we visited some cheaper ones and I am not sure I would wish some of them on my worst enemy). She had savings, enough to last maybe 2-3 years. 

Her house has been rented out for around £1,500 per month but even with that rental income and her pension income her savings have gone. Her house is worth around £450k. We are currently at a stage where that will probably need to be sold within the next 12-18 months. 

If she had kept a 50% mortgage, she would have around 2 1/2 years worth of care fees. However because she has paid it off, she has around 5 years worth. 

I dont know how long she will live for, for a 90 year old with dementia she is looking in pretty good shape (funny what £1500 a week can get). I think she may still be around in 2-3 years though. At which point we either have to move her (we wont) or we all have to chip in (which is what we will do). 

So from the experience I have had, I would say repayment. Your kids will thank you for the inheritance or you will thank yourself when it comes to later life if you need care/care home. 

It is definitely a choice, as repayment would be easily affordable, I just prefer not to put my money into the house 😂 
I didn't consider the care home aspect but then again all being well I will have lots of income in retirement from other means so it's wouldn't be the house as my only asset or way to pay for care. 
No one knows that the future holds but I prefer money in my bank as opposed to in my property. 

Thats fair enough I think. Nobody knows who will need care or how long for, my gran was about 80-81 when showing signs about about 83-84 when she went into a home.

Her income is not enough to support where she is, her assets have been but its amazing how quickly it goes. 

If your income will be enough then I suppose it makes no odds. 

Personally, I was overpaying my mortgage - being self employed I stretched the term and overpaid when income allowed. Realistically I am in for a rocky year or 2 and thats fine I am prepared for it. But my mortgage is about 40% LTV, I could pay it down to around 25-30% LTV tomorrow if I wanted to, but then I would have no savings. I suppose everyone is different. 

I suppose I am a typical male... I hate having commitments. So the sooner I can clear my mortgage the better. Thats when I will feel like I have my freedom back. I am hoping by 45 I can clear my mortgage. 

lookstraightahead

I truly believe it's how mature you are with money. 

If you use the money wisely and you know you're not going to be left with a mess at the end that's fine. If you pay interest without another thought as to how you will pay off your mortgage it's not fine.

getting older has a tendency to creep up on us without even realising. And also it's ok to enjoy life all through your life, not just when you're young. Also (sorry lots of alsos) people buy space they never need and I can't fathom why they'd pay to have rooms sitting empty