Can anyone give me any advice on interest only mortgages. I'm not in a position to buy a house and pay capital and interest repayments and i was wondering if anyone has an interest only mortgage and what are the pros and cons.

you still pay towards the capital, it's just that it goes into an endowment rather than coming off the mortgage value.

There is no mortgage where you actually do not pay back the capital somehow, that wouldn't make sense as the lender would never get the money back.

With interest only mortgages you don't pay the capital off until the end of the term. Some lenders may insist on an endowment to cover the repayment but not all. However, you are expected to make some provision for the repayment of the capital, either through a regular savings plan or some other method.

They may be useful for the first few years if you can expect pay rises in future years which will allow you to switch to a repayment. They are also useful if you are expecting a windfall from, say, an inheritance which will pay off the capital.

There was an article in The Observer Cash supplement last weekend outlining the pitfalls of an interest only mortgage.

The Observer article (http://observer.guardian.co.uk/cash/story/0,6903,1202793,00.html)

As a general rule, which of the 2 methods would you say cost the most over the average mortgage duration of 25 years? Or do they work out the same?

That depends on how the market is performing. It has been known for peoples endowment to be nowhere near their mortagage at the end of the 25 years.

about 15 years ago the government was recomending endowment mortgages to everyone and their dog.
A lot of those mortgages were misold and there are a high portion now where the endowment does not cover the capital of the mortgage. They were often sold on the basis that at the end of the mortgage the endowment would have performed so well that there would be extra cash in it, which you'd get back.

My aunt and uncle are in this situation, it's not a huge problem for them, but they have to make up the extra 20k when the mortgage finishes to cover the difference.

That said it can work the other way if the market performs well and the endowment is invested wisely.

Personally we have a capital+interest mortgage and will be sticking with this type, although we will change to the combined account style at some point (see virgin one account for an example).

My advice to you is do not touch endowments. As somebody who has been caught in the shortfall scenario we will have a hefty debt at the end of our mortgage period.

Of course you can have an interest only mortgage and fund the repayment at the end of your mortgage with some other investment package.

We have ended up transfering a hefty chunk of our mortgage over to repayment where we pay interest and part capital back each month. It seems more expensive each month but it isn't overall as at the end of the mortgage term we will be debt free and will not be presented with any nasty little shocks.

Also if you are new to the mortgage market do not be LIED to as we were at the start of our mortgage. The Halifax told us that we had to take property insurance out with them. We paid our premium to them for at least ten years before we found at that we could have shopped around and saved a fortune.

Originally posted by CaptainSleep
. I'm not in a position to buy a house and pay capital and interest repayments and i was wondering if anyone has an interest only mortgage and what are the pros and cons.


I think if you are not able to afford a repayment mortgage then an interest only could be the thing. The only reason to go for one of these is if you think prices are still rising because even though you would not pay off the capital, you would gain from price rises.
Obviously if prices become static there would be no gain for you and if they dropped... The forecast is for houses in Sheffield to keep rising for the next year or so.
My son got an interest only mortgage 2 years ago and now has a profit of about 37K. He has a very reasonable life cover policy to go with it but intends to change to a repayment when he can afford to.

Originally posted by vision
I think if you are not able to afford a repayment mortgage then an interest only could be the thing. The only reason to go for one of these is if you think prices are still rising because even though you would not pay off the capital, you would gain from price rises.
Obviously if prices become static there would be no gain for you and if they dropped... The forecast is for houses in Sheffield to keep rising for the next year or so.
My son got an interest only mortgage 2 years ago and now has a profit of about 37K. He has a very reasonable life cover policy to go with it but intends to change to a repayment when he can afford to.

Life cover will only repay the mortgage if your son dies before the end of the term.

Also how do you work out that interest only mortgages give you a property gain? Prices rises as far as I know are not dependant on the type of mortgage you have.

Originally posted by vision
I think if you are not able to afford a repayment mortgage then an interest only could be the thing. The only reason to go for one of these is if you think prices are still rising because even though you would not pay off the capital, you would gain from price rises.


But how wouldn't you still benefit from price rises if you had a repayment mortgage? Surely if you took out a repayment mortgage of £100k on a house worth £110k, and in 25 years time the house was worth £500k, you'd still only have paid £100k+interest for the mortgage?

indeed.
the interest only mortgage would only be advantageous over a capital mortgage if the investment in the house were purely a short term investment. And to be honest i'm not sure you'd see much benefit in terms of profit (if any), the difference would be lower outgoings whilst you waited for the market to develop and the time to sell to come around.

This is all mute if it's your first house anyway, as unless you plan to live in a cardboard box once you sell up, you immediately have to invest the profit in your next house, which in the time you were paying the first mortgage has gone up by a similar amount. Leaving you no better off overall.

Originally posted by t020
But how wouldn't you still benefit from price rises if you had a repayment mortgage? Surely if you took out a repayment mortgage of £100k on a house worth £110k, and in 25 years time the house was worth £500k, you'd still only have paid £100k+interest for the mortgage?

I didn't say that you wouldn't benefit from a repayment mortgage
if prices rise, obviously the profit would be the same. My point was that as Captainsleep said that he could not afford capital
repayments then his only way to buy a house and thus benefit from the rising market would be an interest only mortgage.

[QUOTE]Originally posted by Mo
[B]Life cover will only repay the mortgage if your son dies before the end of the term.


I know this. My point was that he did not have to buy any other repayment vehicle such as an isa or endowment to cover the capital as you were mentioning earlier. Also, please read my reply to t020 as reply to your other comment.

What about the new "Muslim" mortgages (its against Islam to pay interest apparently)? Basically the bank buys the house and holds it in the banks name for a set period of time, e.g. 25 years, and charges the person with the "mortgage" a monthly rent fee. At the end of the 25 years they buy the house off the bank for the fee that was originally paid for the house. IMO, this is totally stupid! This is just an interest only mortgage but with the interest called "rent" and the deeds being in the banks name for the duration. I also tested it on the HSBC mortgage calculators and over 25 years it actually worked out almost exactly the same as the interest only option - just £2k more on an example of a £100k mortgage. The "rent" is also liable to increase when interest rates increase (!). Am I not the only one who thinks this is just a stupid idea???

Originally posted by vision
Originally posted by Mo
Life cover will only repay the mortgage if your son dies before the end of the term.


I know this. My point was that he did not have to buy any other repayment vehicle such as an isa or endowment to cover the capital as you were mentioning earlier. Also, please read my reply to t020 as reply to your other comment.

I'm pretty suprised that a bank will lend on this basis. Your son obviously has no intention of ever actually owning the house outright. Or at least, no visible indication to the bank that he does, as he is providing no way at the moment to pay off the capital and at the moment is just treading water with regards to interest.

Just on a bit of a tangent, does anyone know anything about cash back mortgages? Like so many other people my age (25), I am desperately keen to get on the property ladder but am not in a position to pay the extra few grand in legal fees, estate agent fees and the like at a time when my boyfriend and I will also have to think about buying all our furniture.

I have heard that to counteract this problem, cash-back mortgages are getting more common where people borrow say, 105 per cent in order to give them a helping hand with all those extra costs. Are these are a con? Or a fesible way of getting on the property ladder? Thanks x

I bought my house in July on interest only mortgage, simply because I'm a poor student and my boyufriend an apprentice now, but after the offer period ends, we'll be better off and can change to repayment.

We looked into 100% mortgages, but it was the case that we would only be able to afford a cheaper house and the monthly payments on interest only were more expensive that the repayment charges on a house £10,000 dearer. (By quite a bit as well, about £120 per month more)

I'm pretty suprised that a bank will lend on this basis. Your son obviously has no intention of ever actually owning the house outright. Or at least, no visible indication to the bank that he does, as he is providing no way at the moment to pay off the capital and at the moment is just treading water with regards to interest.

A lot of people are now getting interest only mortgages in across the country, they are also not investing into an endowment. Now that house prices have no relationship with earnings, many feel that it is the only way to get onto the property ladder.

After the term of the mortgage expires, the mortgage is expected to be repayed. Many hope to do this with equity built up over the period of the mortgage.