The Mortgage Clinic: 'Should I switch to an interest-only deal?'
"I'm mortgaged to the hilt, and recent rises mean I'm feeling the pinch. I am tempted to switch to an interest-only deal, though I know that if I don't get an endowment I won't be able to pay it off. But can't I just sell up at that point, when the children have left, and use the equity I've built up to buy somewhere smaller?"
SG, Crouch End, London
Lots of people are thinking about switching to an interest-only mortgage - but don't confuse the issue of endowments with the broader issue of whether to opt for an interest-only or repayment mortgage.
Endowments have come in for criticism, much of it justified. But an endowment policy is just one way of paying back a mortgage; others include mortgages linked to ISAs and other investments, or even your pension.
Equally, it is possible to have no formal way to repay the mortgage: many people now rely on bonuses, occasional overpayments from spare cash, an inheritance, or the sale of the property. All these can work, but you need to be very realistic.
At mortgage advisers Savills Private Finance, associate director Melanie Bien says the plan could succeed - depending on several factors. "The first is that the children move out in good time to enable you to sell up and downsize," she says. "The second is that you will actually want to do this. You might like the family home so much that you want to stay on there. The third is that property prices won't rise enough to cover the cost of the outstanding capital and a new home."
So it makes sense to have a back-up plan. Making occasional overpayments, using a flexible mortgage, will pay back some capital and cut your total interest bill. Alternatively, you could pay money into a high-interest savings account.
You might want to think about starting mortgage repayments again later, perhaps if a higher salary allows it. It will take rather higher payments to cover the interest-only years but at least you stand to own the property outright in the end.
Bien also suggests looking at fixed-rate mortgages. This lets you plan ahead, because you know exactly what your outgoings will be. There are long-term fixed rates on offer that can last the life of the mortgage.
It could be a mistake to look at your mortgage options in isolation. Your ability to pay back the loan is closely linked to your overall financial position. Discussing your options with both a mortgage broker and a good independent financial adviser should help.
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