Interest only mortgages

Sat down tonight with the missus and worked out household finances. Despite recent pay rises for both of us and secure professional jobs, all that is left at the end of the month is the change you get in your pocket from a night out and a kebab.

I worked out that the mortgage is the worst offender (up by an extra £200 due to the expiry of fixed rate) followed by childcare for 1 baby and 1 toddler (£500 a month). The childcare costs are unavoidable as they enable both of us to work although it may be cheaper with a childminder.

The mortgage is in my sights. What are the pros and cons of switching to an interest only mortgage? This is based on the following theory:

- what is the point of paying money into a market that is in freefall anyway? The bank may end up with both the money and the house (not quite that bad but worth thinking about).

- why not put as little money into the house as possible and put some money elsewhere? This could be as a cushion to hide somewhere in the event that things ended up in the abyss with repossessions on every street, or as a sum to fund another house purchase to take advantage of lower prices?

Is this completely deluded or financial good sense?

I read a convincing article in the Telegraph that attributes the rapid fall in house prices to lower inflation - last time around, inflation was higher and the loss in value was masked.
Obviously this can't be taken as proper financial advice because there are all sorts of laws involved and various disclosures, I could lose my job blah blah blah (times like this that it's great arrse is annonymous :D)

Whatever you do DON'T stay on a standard variable rate.
Being on a bank's standard variable rate is always going to be very expensive, from what you have said the best option is to shop around for the cheapest capital and interest mortgage you can find and compare this to what you are currently paying.

That said, interest only mortgages are an option, as long as you fully appreciate what you are doing. If you have say 5 years left on your mortgage and choose interest only, then in 5 years time you will be expected to pay back the amount outstanding in a lump sum. This could be with cash (from whatever else you have put your money into), a new mortgage or if neither of these are possible then the bank could technically take your house as your mortgage is secured against it.

Tread carefully!

*edited for cr@p spelling

Whether interest only is the right solution depends on a number of factors –
Your age and your partner’s age
The loan size as a percentage of the value of your property
Likelihood of future property moves
Other financial commitments etc

Therefore it sounds like you need to get some mortgage advice and quotes. Forces Financial offer a complete mortgage service for first time buyers, remortgages, buy to let and overseas properties.

Our experienced mortgage advisors will search a panel of lenders to find you the mortgage that is right for you. Our services are free and we offer independent advice.

If you would like help with your mortgage call us on 00800 11 22 33 01 and select Option 8

Forces Financial is a trading name of Harmans Ltd who is authorised and regulated by the Financial Services Authority. Registration Number 221363.
Registered Office: Globe House, 24 Turret Lane, Ipswich, Suffolk IP4 1DL. Registered in England Number 04229567.
I have a 'one account' and have found it to be fcukin brilliant, have managed to shave years off my mortgage without trying too hard ... well worth a look IMHO (and I am not a financial advisor so don't take this as financial advice etc etc blah blah)
I think I'm going to do what my sponging tenant and his neighbours do. This morning the council who are compulsory purchasing my two up, two down dump up north informed me they are giving the drugged up fly by night a compensation package to re house him which includes first come - first served choice of renovated housing, all removal and legal fees paid and a cash lump sum of £4500! That'll keep him in smack for a few days. OK, I'm doing OK out of it too but I've paid my way and it is my fcuking house. Seems hard working types pay while stay at homes get paid.

As with the other comments - seek advice, don't forget changing Mortages likely includes hefty fees, I suspect that rates will come down within the next year, so might be worth sitting tight.

So practical questions ideas.

I assume that you already use (if you are HM Forces) the childcare voucher scheme, if not it might save a few quid a month on childcare.

Other things, depending on length of contracts you signed for Mobiles, Internet, Sky, SKy Plus ect can you let one more these go to free up some cash?

Pleanty of people I know the States have given up on Cable and use Netflix instead to save cash.

Look at all your outgoings, if you have other debts, see if you current mortgage provider will give a months mortgage holiday and use that cash to clear a Credit Card.

I suppose what I am saying is, in the long term a house over your head is good thing, not sure how big your mortgage is, going interest only means you will never build an asset. Don't look at what the house is worth now unless you are planning to move, the value of an unrealiase (unsold) asset is alway ZERO until you sell and then it worth what you sold it for. In reality, the capital payement rather than the interest is like a saving policy - linked to the final (sale) value of your house.

I would caution against interest only and ask what can you give up for a year or two, until we know where we all stand with regards to the economy and the Credit Crunch.

Good luck and drop me a pm, if you want other ideas, suggestions.


slightly off-topic but ....

are you getting childcare vouchers? With £500/month of childcare, if both you and your wife get childcare vouchers you're gonna save a bit of tax each year (upto circa £500 for basic rate taxpayer getting the full wack of childcare vouchers)

Depends if your employer(s) do 'em but well worth a dabble!
Again this isnt advice; you should get some.

I have an interest only mortgage. I thought that they were for people who would come into cash later (inherit, bonus etc) and in the meantime wanted to have lower monthly payments by not repaying capital.

They must be risky. If you borrow say 100k repay the interest but no capital and at the end of the period you will still owe 100k. You are exposed to housing market risk. If the house is only worth 95k, you will owe 5k. The assumption that housing markets will always go up is a fairly large assumption to make

I'd also assume that paying interest only and 'investing elsewhere' is dangerous; almost like an endowment and we know what happened to them. I do know people who have done this and still do. However, these guys are professional money managers and know what they are doing.

Interest only also are not as cheap as you think. In a standard interest and capital mortagae, you pay mostly interest in the early years (as they lender reasonably wants its margin) and as time go's on, more of your monthly repayment is toward paying off the capital. So from the offset, the difference isnt as great as you'd imagine (I got quotes for both and was surprised. In the end, I went interest only because my pay structure is low base and bonus.)

The other point to think about is whether renting would be cheaper, esp now that so many people have buy to let morgages on properties that are empty. The cult of home ownership is a very anglo-saxon thing and many other countries don'thave anywhere like our levels.

As I say, get advice. An IFA might not be the only answer as they might try to sell you something (no disrespect to the good ones...). A good CAB might also be worth talking to...

best of luck

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