Interest only mortgages or other short term ways of reducing payments

holyzombiejesus · 12 July 2018 at 8:19PM

Hi,

OK, first of all, I'm pretty much financially illiterate so please bear with me if much of what I say doesn't make sense or sounds stupid.

So... my wife and I have a 2 year fixed term mortgage with Nat West. At the last re-mortgage, we were loaned 106k (house is worth about 125k; we've only had it for nearly 4 years) and have to repay 143k (I think) at 3.8% over 17 years. I am 48 this year and my wife is 35. We've just had a baby (well, 18 months ago) and my wife tried to continue working full-time but it wasn't working so has now gone down to 3 days a week. This has left us with a shortfall of about £500 per month. Her family very kindly gifted us 10k and we have about 3k savings. So, as it stands, we can keep on as we are for about 2 more years. Our current mortgage 'expires' or whatever they do when the fixed term is up this autumn and then we go and see the mortgage advisor that came free with the house(!)

My issue is that even if my wife resumes full-time work in 2 years, we're using up all of our savings. I get quite anxious about things like that and hate the feeling that our safety net is slowly getting taken away. I emailed our MA today to ask if he thought we could get one of those mortgages where you just pay the interest for the next two years but he said no dice. Just forgetting things like cutting back and other ways of reducing outgoings, can people here think of any other options that may be open to us? Thanks in advance.

sal_III · 12 July 2018 at 8:57PM

3.8% for 2 year fix is quite steep, even at 80ish LTV. I'm not sure this is the best deal for you.

If you go for interest only mortgage the Lender will want to know what are your plans to repay the balance at the end of the term.

holyzombiejesus · 12 July 2018 at 9:01PM

Well I'll be getting a new deal in October/ November so will hopefully get something a little better then.
As regards the lender wanting to know how I will repay the full balance, I'd presumably do that by remortgaging again? Or is that not right?
(Thanks for your response, BTW)

holyzombiejesus · 12 July 2018 at 9:03PM

Also, do repayments get substantially smaller if borrowing below 100k?

sal_III · 12 July 2018 at 9:19PM

Considering your age, most lenders don't like mortgages that will take you past 65 - hence I suspect your current 17 years left at 48. If you go on interest only for say 2 years, and remortgage to repayment again it will give you 15 years to repay the same balance. So from the Lender's perspective, if you can't afford it now, how are you going to afford the even higher monthly payment then? Not to mention that once you go on interest only you don't have to remortgage meaning that the Lender is unlikely to accept "remortgage" as repayment plan. Your MA was most likely correct that this is not an option for you.

The rate is mainly based on LTV (loan to value) not the total amount borrowed and your access to a decent Lender based on your credit report.

I don't know your exact circumstances but unless your credit rating is poor and you have other debt 3.8% 2 year fix is way to high and you might have your MA to blame for this, try approaching a different MA, that might be able to get you a better deal.

Thrugelmir · 12 July 2018 at 9:29PM

holyzombiejesus wrote: »

We've just had a baby (well, 18 months ago) and my wife tried to continue working full-time but it wasn't working so has now gone down to 3 days a week. This has left us with a shortfall of about £500 per month.

Then you may need to rethink your long term plans. Downsizing to a cheaper property for example. As each month passes repaying the debt owed isn't going to get any easier. With interest rates currently very low, the odds are somewhat stacked against you.

holyzombiejesus · 12 July 2018 at 9:53PM

sal_III wrote: »

Considering your age, most lenders don't like mortgages that will take you past 65 - hence I suspect your current 17 years left at 48. If you go on interest only for say 2 years, and remortgage to repayment again it will give you 15 years to repay the same balance. So from the Lender's perspective, if you can't afford it now, how are you going to afford the even higher monthly payment then? Not to mention that once you go on interest only you don't have to remortgage meaning that the Lender is unlikely to accept "remortgage" as repayment plan. Your MA was most likely correct that this is not an option for you.

The rate is mainly based on LTV (loan to value) not the total amount borrowed and your access to a decent Lender based on your credit report.

I don't know your exact circumstances but unless your credit rating is poor and you have other debt 3.8% 2 year fix is way to high and you might have your MA to blame for this, try approaching a different MA, that might be able to get you a better deal.

Thanks again. My credit rating was really good, as was my wife's. I wonder if the fact that we added a small amount (to replace the roof) on to the mortgage limited our choice? It's a bit concerning if we've not been advised well.
So our best option for not slowly handing over our savings would be to just hope the MA (or another MA) can get us a better rate? I was wondering if it would make more sense to pay off a small part of the mortgage to take it under a particular amount and then save on interest payments (if that makes sense)?

holyzombiejesus · 12 July 2018 at 9:56PM

Thrugelmir wrote: »

Then you may need to rethink your long term plans. Downsizing to a cheaper property for example. As each month passes repaying the debt owed isn't going to get any easier. With interest rates currently very low, the odds are somewhat stacked against you.

I get what you mean but as soon as my wife returns to full-time hours, we'll be fine (financially). We also get the 30 hrs free childcare in less than a couple of years which will help immensely. It's just this next 24 months and our dwindling savings (that can fully cover the aforementioned time period) that worries me.

GoingOn30 · 13 July 2018 at 9:15AM

You can't really bet on getting the 30hrs free childcare in 2 years, there are no guarantees with what this government will cut next, especially with Brexit round the corner.
As a family you need to be looking at how you can cut your outgoings asap.

sal_III · 13 July 2018 at 9:59AM

holyzombiejesus wrote: »

I get what you mean but as soon as my wife returns to full-time hours, we'll be fine (financially). We also get the 30 hrs free childcare in less than a couple of years which will help immensely. It's just this next 24 months and our dwindling savings (that can fully cover the aforementioned time period) that worries me.

I'm afraid you don't really know how the 30 hours free childcare works. Depending on where you live and the cost of childcare it might only cover 1/2 (or even less) of the cost for full time nursery. Even with the best case scenario 30 hours are little over 3 days so you will have to pay for the rest or one of you won't be able to work full time. I suggest you ask around and check the waiting lists, some areas like London you have to sign up 6-12m in advance to get a spot in the nursery.

Then it's time for school, depending on how long your commute is the breakfast and afternoon clubs might or might not be sufficient to allow for full time job. In some schools the places in these are limited even if you get a spot it costs money. If you miss out on them means that you will have to drop off at 8:30-45 and pickup ad 15:00ish can you do that on your full time job?

Even then kids get sick all the time, does your full time job(s) allow flexibility around that?

It's time to take long hard and realistic view of your finances and make a decision whether you will be able to keep up with the mortgage repayments in the long run? It might be time to cut your losses and downsize, change area, before you dig yourself in even bigger hole.

Pixie5740 · 13 July 2018 at 10:18AM

What are savings for if not a rainy day? Sometimes you just need to put the umbrella up.

Why have you discounted cutting back on other areas? Perhaps a visit to the Debt Free Wannabe board might help free up some money in your household budget.

Interest only mortgages or other short term ways of reducing payments

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