Does anyone know owt about these?

We're wanting to buy a new property, but our money is tied up for the next 5 years or so. Just contemplating the different options and was wondering whether an interest only mortgage, which is MUCH less per month than repayment would be a good way around the problem. I'm aware that that means nothing is getting paid off and you still need to find the money. Also wondering if you can combine the 2.

Any ideas would be most welcome- before we get interrogated by the financial advisor and get totally put off!!   

Right you can have two mortgages that are " normal" mortgages if you have the income to cover them. If you don't then generally people have  one as a Buy to Let so that you earnings are not taking into the calculations , the figure used is the estimated rental income.

If you have a good credit rating and the rental income will cover the loan amount ( which is usually interest only) then there is no problems doing it this way. I have 4 properties in addition to my family home which I live it. All buy to let loans.

An interest only mortage isn't a new thing, it is basically what people used to take out .(they added the over rated and now dead endownment policy to back it up )

Baiscally there is no harm taking an interest only mortage to keep costs down , in a short term situation as long as you understand about the capital not being repaid. Which you clearly do..

I personally see no real harm if it is thought out properly and one positive thing you have to bare in mind is, that even though you are not paying capital during that period the property value/investment still makes capital growth.

As far as I'm aware from the experience of friends and family who have them or who have multiple properties, the only reason an interest onlyh mortgage should be used is for a couple of years e.g. to get you on your feet or if unexpected things happen like children  and you need to take a cut in payments or start off low and build them up.  They are not a long term solution as you would be as well renting property as nothing is getting paid off.  There is now some places offering interest only mortgages for life and they are quite popular in other countries.  I think the idea behind it is to pass not only the house but also the debt onto any family and children you have.  HTH

You can take out one single loan, but have some part repayment and some interest only. The reason that people tend to take interest only on rental property is because the rental rules allow you to offset the cost of the mortgage interest against the rental income. With a repayment mortgage, this amount would decrease each year, therby increasing your tax burden.
Relying on capital appreciation is one way of ensuring that the funds are available to pay off the capital sum BUT I would be very wary of this assumption in todays climate. Economic theory says the we are due a price correction in the housing market and I personally believe that prices may decrease by as much as 30% over the next 5 years. Just look at the directors of building firms who are selling off their share holdings and take heed!

However if you are looking to overcome a short term cash flow issue, or its is for your main residence , then they can be a viable alternative.

Good Luck :)

repayment mortgage is always the best option if you are planning on paying the mortgage yourself as you are paying off the loan.

Interest only are best when you are buying the property to rent to someone else as you will make on the rise in the property value.

A financial advisor is the best person to talk to as they will look at all your circumstances and should recommend the best option for you as they can take into account that your other money is tied up for a number of years,etc and make sure you get the best one.

Sometime it is best to go and talk to FI that are tied to a particular lender - whilst they will only recommend their own products you should be relatively safe in assuming that they are less likely to just recommend the one that pays them the most commission.

It is worth doing a search on line to check what you can borrow and avail yourself of the various products on the market - That way you have a chance to sound slightly more knowledgeable when you speak to the advisor.

Always look at the tie in clauses and costs of each option.  Work it out over the time of mortgage or at least the time that you are looking to stay on interest only.  That way it becomes pure maths (also if you assume your new property will go up in value make sure you choose a low % rise each year and investigate to find out what the area is doing) that way you are being realistic.

Good Luck

OOh Im glad this thread was started. Im just in the process of buying a house to rent out...it should be completed in a couple of weeks. We have got an interest only mortgage for 3 years and then we are going to re-assess the situation and see if we will be in a position to go onto the repayment mortgage.

Bit worried about house prices dropping over the next 5 years though?!?!?

Thanks for all the replies. We are literally looking at 3-5 years max. After that we will be in a position to pay off the mortgage over a short period of time. At the moment school fees/uni etc are taking a BIG chunk of our disposable income- so it's really a choice of staying put and moving in 3-5 years or biting the bullet and going for it now.

Bit worried about house prices dropping over the next 5 years though?!?!?

I wouldn't worry about it, stability in the price market is likely to happen and it is being encouraged ,but the economics of the country in my opinion do not and will not allow prices to fall.  If you buy wisely you should be OK. I personally buy properties not just for capital growth but that have both potential capital growth from natural inflation and also capital growth through possible development, Ie adding a driveway, large garden ,adding bedrooms and buying up and coming area. People go wrong by buying poor choices and not thinking about it smartly.  Not everyone has a natural eye from good investment so for some it is best to seek advice from experienced , quialified people.  I bought 2 nbeautiful victorian 1 bed cottages that had all their original features. most of the cottages in that area have all had the conversions done and added another 2 bedrooms. These types of buys if you are experienced are wise ones.

I know many a people who buy awful things that you would be seen in yourself then criticise the BTL idea. If you wouldn't live in it how can you expect someone else to want to.   Buy wisely and you will be OK.

PS flats have smaller capital grow also.

Do you have to have large deposits when you arrange BTL or second mortgages - We would like to buy a holiday home in the UK not abroad - could afford the payments but dont have a chunk for a deposit? 

My daughter has done it twice and has had to put down 20% each time.  Don't know if that is the norm?

20% generally gets you the best deal but you can have as little as 10% for some lenders.

Getting your hands on the deposit can be done in many ways.  The worst way but is sometimes done if not other option is a personal loan to get you started. Then remortage in a years time or so when the property value as went up the amount of the loan and then pay the loan off.

My first BTL one was my first home that I decided to hang on to as I was building a house and didn't want to move into temp accomodation whilst it was being built.  Once I moved into my new house I decided to hand onto the other house that was in 1995. I was just a young thing. Courages when I look back.

The second one I bought I drew the deposit from my own house, then from there I drew from the collateral in the Buy to let homes I had by remortgaging  then a year or so after I had bought them.

Hope that makes some sense.

We've put 12% down I think. It's all still quite scary at the minute especially as Im only 22 and buying to let but I have encouragement from my family (and my OH's) so hopefully we are doing the right thing and in a few years we're hoping to do it again! The estate agents have told us that on the same street we are buying this house they were fighting over the property which was to let! Lets hope people still feel the same now!

Just remember it is a long term investment and you will be fine -  as long as you have a tenant in paying enough to cover your mortgage and costs then you shouldn't need to worry.  I wish I had started this years ago, but I know now that I will not be selling any of the houses I own again

We've looked at our finances in great detail and we can actually afford to pay for both the house we live in and the house we are buying so we should be ok. It would just mean no fancy holidays to Florida (22 days to go!!) :D

Well done Tracy123 for being so brave at such a young age. 

Intrest only is a good option when money is tied up. Its better than having a paying mortgage and not being able to pay it. When your money is right change it to a paying mortgage. Property is always a good investment. Intrest only mortgage is some times cheaper than rent. I think is is a great idea for people to own there property. and get on the property ladder. 

"property is always a good investment"

Oh no it's not.

This is a dangerous phrase. Have we all already forgotten the drop in house prices in the early 90's when double taxation relief was abolished and interest rates rising. From Q2 1989 to Q3 1995 real house prices fell from average just over £100,000 to c£65000.  The timing of property investment has always beed crucial, and current economic indicators are not favourable - increasing interest rates, increase in number of mortgage defaults, salary multiples and affordability, and the current freefall in the American property market , eg down 20% in Florida so far this year. If take the time to study the house price tre

If you can't afford a repayment mortgage, then I personally would not advise anyone to take interest only on their first house.

I would question that notion too.  Our first house was bought at the height of the oil boom in NE Scotland.  We sold it 3 years later for the same amount therefore loosing out in real terms as inflation was higher then too, together with all the fees connected with both the buying and selling. 
Like many others I have an uncomfortable feeling about the market at the moment.  Certainly prices around us are falling, my neighbour has recently dropped £30,000 to get a sale on his.

House prices are still rising in Somerset.  Comparable properties are now higher than the area that I left - Berkshire.

I have a serious interest in property ;) and valued my parent's small retirement bungalow for legal reason last week.  When I spoke to my local agent, I was £10,000 under the last sold price.  He told me that prices were still rising here.

My daughter has bought 2 new flats in Berkshire this year.  Both are now changing hands at £25,000 more than she paid.  Maybe areas are different at the moment? :)

Definately, they always are :) but the point is there is no guarantees that the value of a property will always move in an upwards direction.  They were continually galloping in the Lakes from when we bought in 2001 and I think many people could no longer imagine that it would not continue forever in an upwards direction.

Val, yes you are absolutely right that although trends are given, they do mask underlying property price movements regionally. That is where money can possiblly still be made in assessing local market conditions  and buying in to an undervalued area,  but I don't know many people are that sophisticated when looking at buying property, or if they just purchase locally, because it is familiar to them.The serious buy to let investor will have a portfolio of properties in varying locations, not necessarily just in his own backyard.

Until we reach the pinnacle of prices, they will keep showing a rise as you suggest, the trick is guessing when the top has been reached, then will it be a gentle steady path or a skid down the other side.  I don't know the answer, but I do study other trends like director share dealings and at the moment firms with an interest in the property market have more directors cashing in their share than buying, so they must believe that their building companies are fully valued.

Time will tell, even the experts can't agree, so its not surprising if champdogs members don't either :)

I would never consider an interest only mortgage, but that's just me. :D  I do think that property should always be viewed as a long term investment not a quick way to make a few grand, unless you are going to get involved in property development.  That's a diffrent game. :S

Whether you are buying a house to live in and feel that the general area in restricted, or are looking to buy to let, the same rules apply. 
Location is everything.  You can improve the property but you can't change what you don't own. :)
If you're buying to let then make sure that there is a good letting market in the area before you buy.
Buy under the market value if you can.  There are always people who need a quick sale for a variety of reasons.
Buying from auction can be great if you have a tame surveyor to have a look for you before you commit.
New are usually a good buy because the builders have to price to sell and you can get incredible deals from builders (even big ones!) if they need to get some money in to complete the phase!  In the next phase the price always increases, which improves the vale of your property too. :D
And always do your homework before you jump in. :)

Here! Here! Val, My daughter has just done the same. But! I do admit she guts the property,
New beautiful bathroom and kitchen, it even pays her to put fitted new cooker ect; in them.
re-plastered through out, all cream and white paint work, They are fit for people to move striaght in to.
It is, to help her get further up the property ladder. It my slow down now as her first baby is due Christmas Day. In the midlands the properties are still going well. But! do not take one valuation as being a correct
amount to what the property is worth. Some are valued under there price, as in many occupations, they have people they know, waiting for certain properties in certain area's to be pasted on to them to rent.
I expect for a l i t t l e  commision of course

Ok I'm a mortgage advisor so here goes with what I would suggest...

You can have a part interest only/part repayment mortgage, this tends to be a good option for people whose endowments are mis-performing so they do the shortfall amount on repayment & keep the endowment running.

You can have an interest only mortgage purely on its own for as long as you want, there are very few lenders nowadays who insist on a repayment vehicle, as stated you never pay anything off the capital but the payments are very low obviously.  This is a good option for first time buyers (recommended by HSBC) as it keeps the costs down to a minimum whilst they find there feet.  We did this & when our fixed rate expired in May this year we changed to Repayment & managed to keep the payments the same as they were before because of the increase in house value.  Obviously it is a risk if it is done on a long term basis but how many houses do you know have lost value over a 25 year term??

Contrary to what is often reported in the press house prices are not going down in most areas, if anything we are still in a booming economy where house prices are concerned, the main change is the reduction in the formally known North/South Divide.  Property is & in my opinion will always be the best investment you can make.

Buy2Let's as a general rule require between 13-15% deposit, although this is a very fast moving industry & new products are coming out every week!  The main reason buy2let's don't work out is because the rental income taken from the property must be at least 15-25% higher than your mortgage payment at SVR on an interest only basis.  However there are a few who will do it based on income, however what's the point in buying a property to rent out & you as the owner having to make up the shortfall on the mortgage payment if the rent doesn't cover it, the whole point of it is to be self financing!!

The mortgage industry as a whole nowadays can be a minefield if you don't seek the correct advice right from the outset, most Mortgage Brokers will charge a fee for their service however they will have access to the whole market & could secure you an exclusive deal.  Most banks/building society's on the high street do reasonably good rates, if you have a deposit Abbey & Halifax tend to be the market leaders, although HSBC will offer their existing customers preferential rates.

Hope that helps! :)

We did this & when our fixed rate expired in May this year we changed to Repayment & managed to keep the payments the same as they were before because of the increase in house value.

I don't understand - how did the increase in the value of your house affect your mortgage repayment? The repayment is dependent on the amount borrowed and the rate of interest - if my house increases in value, it doesn't affect what I owe the bank. Are you talking about having had a higher rate penalty because of the percentage borrowed against the house, which is not the same thing.

As for recommending first time buyers to take interest only mortgages, well if anything illustrates a growing time bomb, this does. Effectively 1st time buyers can no longer afford repayment mortgages, so the banks, in an effort to keep their business growing are offering interest only mortgages. And when house price growth continues to outstrip wages, what then?

Bedruthen, Our mortgage was interest only for 2 years & when our fixed rate came to an end, we switched from interest only to repayment but even though we hadn't repaid any of the capital our house had increased in value by 10% so we had more equity as a deposit.  Simply by switching mortgage lenders & obtaining a better interest rate our mortgage payments are the same now on Repayment as they were on Interest Only.

Lenders are offering Interest Only mortgages to FTB to help them onto the property ladder without overcommitting themselves right from the start.  Obviously if you can afford Repayment then this is the best option but don't dismiss other options.  Many of you would have bought a house when house prices were in proportion to wages, this is no longer the case & hasn't been for some time & in a country when everyone strives to own their house I applaud any mortgage lender who will help FTB's out!!!

Everyone will have a different take on this issue that's why I suggested approaching a specialist advisor who can give you whole of market advice without being biased towards any particluar product or lender.

At the end of the day I am only offering advice, which I'm guessing is why the OP came on here.....

This only happened in certain areas , I was going to say not in Scotland but Isabel's example showed in Aberdeen that due to the oil there was an impact.

It is all about being smart and understanding the house market and business in general. Some people want to get into it but in my honest opinion just don't have the skill, knowledge or common sense to be let loose ;-)

I think you also have to understand how capital gains tax works and how to avoid the pit falls. I hae done a few transfers etc to gain my annual tax free amount.

You don't just buy a house and hope for the best.

Current economics ARE favourable just now, depending on what  you are buying and why... the interest rate went up a small amount and you get people panicking ( inexperienced people in my opinion) for me this is often a perfect time to buy a house in fact I just did yesterday :-)  I have haggled and haggled with someone this week and got it at the price I want to pay :-). Buying for a perfect couple " panickers" :-D shouldn't say that.

An interest only mortgage as a first house buy isn't always a negative thing, again you have to look at the whole picture people could be 1st graduates in a new role and in 2 -3 years time be making a fortune , if they hadn't bought the house they would miss out of 3 years capital growth ..that would be a smart move. Again each circumstance has to be looked at individually.

I keep saying this over and over again to people it is all about being smart. Generalising isn't in my book. :-)

The cheaper end of the house market is the best buy for BTL without any doubt whatsoever they can only go UP in value. There is nothing below them.