Interest only mortgage with no endowment

Headieboy

I currently have repayment mortgage of around £85k on house valued around £160k with about 16 years left to pay. Wife and I want to move to a bigger house which is valued about £250k. From our combined incomes we could just about afford the increase in mortgage repayments if we extend the term & pay off c.c. and car loan but we don't want to be in 'Spam City' (i.e. all we can afford to eat is spam!). So we're looking at maybe going interest only.

Are banks / building societies willing to lend on mortgages without an endowment or some other method being in place? This would be the family home until our children leave home and the idea would be to then sell up and downsize.

Thanks in advance
Duncan

Rosiesworld

There is a post further down with a reply saying start an endowment/Isa just to satisfy the lender then cancel it.

Headieboy

thanks Rosiesworld.

I think going down the i/o route with no endowment is plain daft & I don't really want to be left with a large debt at the end of 20 years but the difference between repayment and i/o is about £400! I've had a quick Google but can't find anywhere to get a quote for an endowment so that I can compare things properly.

Duncan

dunstonh

endowments are virtually obsolete with no mainstream provider still offering them. The modern option is to use a stocks and shares ISA with a sensible target return of 5-7% p.a. (the lower the target the higher the cost but the lower the risk).

EdInvestor

If you want to open an ISA, use a discount broker such as https://www.h-l.co.uk which will rebate the charges on your initial investment.

Plenty of info on the site about popular funds whoich are good performers.

jamesd

Headieboy, if you're interested in repaying it you should be looking at making contributions to a stocks and shares ISA that are equal to the difference between interest only and repayment amounts. That's likely to leave you with an excess of 25-50% depending on how the investments do. If you're willing to risk not repaying the whole loan from the investments you could contribute 80% of the difference between interest only and repayment. Since you can monitor investment performance over the years you can adjust the amounts you invest as required to stay on track.

If you have independent pension arrangements and particularly if one or both of you is a higher rate tax payer you might also consider a pension mortgage. This uses the 25% tax free sum to pay off the mortgage while the remainder is used to provide a pension, and can stay invested until you want to take the pension income, even after repaying the mortgage. The big advantage is tax efficiency, since the government adds tax relief. However, since you only get back 25% of the money to pay off the mortgage the total pension contributions have to be higher. Assuming you'd be comfortable investing only 80% of the repayment difference and accepting some risk of not repaying in full, a basic rate tax payer would need to be contributing to the pension about 1.9 times the difference between repayment and interest only. A higher rate tax payer would contribute the same but reclaim higher rate tax relief. This is by far the most efficient way to pay off a mortgage, provided the mortgage ends when you're 55 or older and you're happy to pay the extra contributions in exchange for a big pension boost as well as repaying the mortgage.

IFA's like dunstonh are likely to be happy to manage the investments for you and advise you how much you should be contributing to keep on track to repay.

poppy10_2

Rosiesworld wrote: »

There is a post further down with a reply saying start an endowment/Isa just to satisfy the lender then cancel it.

That's very irresponsible - how will you pay the capital off at the end of the term?

Rikki

Make sure you have life insurance in place on you both just incase something unfortunate happens.

This would pay off the mortgage so the one whose left doesn't have to sell up because they can't pay the mortgage.

Teacher2301

I planned to just go for 5 years interest only - 2 1/2 years left - and will definitely go back to repayments - the reason was that my wife looks after our children and my wages just about cover all expenses - hopefully in next two years wife will be back part-time with more money and we can afford repayment mortgage when we re-mortgage. For short time scales - I'd recommend it but not for any longer than say 5 years.