Wednesday, Nov 19, 2008
Homeowners with interest-only mortgages face financial ruin as their property prices plunge
mail: Homeowners with interest-only mortgages face financial ruin as their property prices plunge
Around 1.3million homeowners with an interest-only mortgage could be facing financial problems, research claims today.
The terms of their mortgage mean they pay only the interest on the loan each month, and they are failing to save money to pay off the capital, says the report from investment firm Liverpool Victoria.
Forty-one per cent were hoping to use the increase in the value of their property to pay off their loan in the future.
With prices plunging at a record rate, this is not an option for many homeowners who bought in recent years. Prices have now dropped to October 2005 levels.
It raises fears of a worrying 'mortgage gap', with an estimated £75billion of mortgages on their properties.
Posted by mark @ 11:31 AM (339 views) Add Comment
4 Comments
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1. paul said...
2. Sold My Soul To The Never Never Never said...
Correct me if I am wrong - but I could never understand the mentality of paying interest only on the premise that prices would rise and you would be able to pay back the loan with the increase of the property price. Surely if you do that then you end back at square one - WITH NO PROPERTY!
A. You would have to sell the property to liquidate the capital
B. You would pay off the loan. But you would have NO house to show for it - and probably very little equity except to pay for one of those storage containers to put all your belongings in. (storage containers - another thing I don't get but that's a different story).
C. So where would you live? In rented? You could have done that in the first place and saved all the hassle.
3. Mrb said...
"Forty-one per cent were hoping to use the increase in the value of their property to pay off their loan in the future. "
Um. I'm confused.
4. 51ck-6-51x said...
It is theoretically possible to use house price rises to pay off your home loan.
One could use some combination of leverage, timing and hedging - the most extreme examples are:
1) Over-leverage (uses some market timing)
e.g. Buy two houses on an interest only mortgages with some deposit, wait for the market to rise, sell one and use the realised profit to pay off some of the remaining loan on the first.
2) Market timing (uses some leverage, well actually a leverage of less than 1).
e.g. Buy one house on an interest only mortgage with some deposit, wait for the market to rise. Sell said house realising a profit on the deposit, wait for the market to fall. Repeat.
3) Hedge only.
e.g. Buy a house on an interest only mortgage, buy insurance against a fall in house prices (preferably in your very asset of course).