Interest only by choice?

D123456789

I chose an interest only mortgage in 2010 - a tracker - the rules were different then. It worked well for me as I had surplus money to spend on renovations, during maternity leave, and on nursery fees. I have the provision for unlimited overpayments and since the interest rate has increased I am now overpaying,

@El_Torro have you found a lender that will consolidate your residential mortgage into your BTL? 

dimbo61

You can only save just over £1,000,000 into a pension without getting hit with a big tax bill.
However you can only take 25% tax free so about £250,000

Jonboy1889

dimbo61 said:

You can only save just over £1,000,000 into a pension without getting hit with a big tax bill.
However you can only take 25% tax free so about £250,000

That’s changed now I think 

El_Torro

D123456789 said:

@El_Torro have you found a lender that will consolidate your residential mortgage into your BTL? 

Not yet. I still have 2 years left on my fixed rate mortgages.

PixelPound

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%. 

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.

Not sure it's anything like that. It all depends on what you earn in regards to the student loan - Say you've recently graduated with a £50k debt. If you earn £30k pa you pay £18pm far less that the £229 in interest (at 5.5%) that would be equiv of paying interest only. So you'd need to be earning £58Kpa before you reach paying the full interest (though probably more because by that time your loan is no longer £50k 

silvercar

We took an IO mortgage in the 80s because the broker we saw in the estate agents said there would be a fee if we didn't!
Instead the broker sorted an endowment policy for us. (so many red flags, but we were young and naive.)

Then we moved, as we already had the endowment running it was not worth cancelling we were told. So we continued on IO, increased the mortgage and took a second endowment on the difference.

Early 90s and we moved again, to where we thought we would stay. The jump in mortgage required stretched us as by now we had kids in tow, so we went IO again. Now with a 3rd endowment policy! At some point in this house we moved the IO to an offset, still IO but it enabled us to build a savings pot in case the endowments didn't perform well. 

Then we decided that our forever home wasn't forever and moved again. Luckily the lender agreed to port the mortgage across and allow us to borrow more. They also no longer required IO mortgages to be backed up by endowments, so we didn't need a 4th one! Instead the chain collapsed and to resurrect it we bought out the other end of the chain with a BTL mortgage. We are in early 2000s by this point.  

Unbeknown to us our 5 yr fixed rate offset mortgage, that was at 5%, had a present in the tail. It was actually 5% fix followed by a BoE base rate lifetime tracker at base +0.7%. The BTL was also a lifetime tracker.

So for the last 15+ years we have had interest only mortgages tracking a very low base rate. This has enabled us to put money into the offset savings account. Gradually building up enough to repay the mortgage when it finishes in a few years time. The endowments all matured, working out an average of about 80% return against expected value, so that went in the pot too. 

Still in our 50s (just) , so we could remortgage when this one ends or we could clear it.

Lumps and bumps along the way, including a mortgage rate of 13% in the early days, where the mortgage payments were greater than our income, we should come out of it fine. 

michaels

IO all the way for us, top paying savings accounts have always exceeded or at best matched interest rate payable on mortgage so the more capital we have built up not in the mortgage the more profitable the mortgage has become.  Currently it earns us about £700pm but this will drop to £200pm in October when our new fix starts.

TheAble

nic_c said:

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%. 

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.

Not sure it's anything like that. It all depends on what you earn in regards to the student loan - Say you've recently graduated with a £50k debt. If you earn £30k pa you pay £18pm far less that the £229 in interest (at 5.5%) that would be equiv of paying interest only. So you'd need to be earning £58Kpa before you reach paying the full interest (though probably more because by that time your loan is no longer £50k 

As a grad though you'd hope to do a bit better than 30k, over time anyway. And in the meantime, while you're working your way up to 58k, the balance is growing.

SouthLondonUser

Interest-only mortgages can make sense in some circumstances.

However, most people are financially illiterate, not to say just outright dumb, and fail to understand the pros and cons of interest-only.

Additionally, banks are afraid they'd be sued by people who will then claim they hadn't appreciated they''d still have to pay back the full balance.

All of these are reasons why access to IO mortgages is severely restricted (and rightly so).

I get the impression that many lenders which still do IO don't advertise it clearly on their websites, preferring applications via brokers, as they're afraid they'd get flooded with applications which do not meet the standards.

Interest-only makes sense when:

• regardless of your income, you are reasonably certain to get returns higher than your mortgage rate if you invest the same money elsewhere. Till a few years ago, it was a no-brainer for those who could afford it; now you'd need to get post-tax (and I stress post-tax) returns > 5 - 5.50% on your investments. Good luck with that; I mean, you can, but it's by no means certain, and you could well end up making less
• you want to minimise your monthly outgoings and maximise savings; this makes sense if your job/income is unstable and you think you'll need access to savings if you lose your job or your business has a bad year
• you are reasonably confident than in 10-20 years, eg when the kids leave the house, you will downsize to a smaller property. In theory it's perfectly logical, in practice this approach is full of difficulties, and it's why many (most?) lenders don't allow you to have "sale of property" as a repayment strategy
  

Flugelhorn

we had IO offset for some years - much of the time it was fully offset (even if sometimes the money was earmarked for HMRC) - was great as all capital got repaid fairly quickly . Sold another property after a few years and that permanently offset the whole mortgage - suited us to have it in case the money was needed.