Interest Only Mortgages

[teddyboy]

This is copy of a post I have put on the CH4 forum - I just want to get a balanced view.

Just watched L*3 about a young couple who were fed up renting and wanted to buy.

They had £11,000 deposit and then got an interest only mortgage totalling £225,000. Now call me stupid here, but after the 25 years they DO NOT own that property - what happends next.

Do they get evicted - does the bank sell it?

More to the point isn't an IOM the same as renting? But paying a bank or BS instead of a Landlord?

I'm confuzzed!!!

P.S> Just noticed No of people online on Ch4 forum was 8 on HPC site 124!!

[Elizabeth]

The idea is that inflation will erode the value of the original borrowing to about 1/3 of the actual cost and in the mean time you will have been so canny with your investments that you will have enough to pay it off. These kind of morgages usually require an associated savings vehicle. That is were the endowment morgage misselling scandal takes over the story

[BuyingBear]

This is copy of a post I have put on the CH4 forum - I just want to get a balanced view.

Just watched L*3 about a young couple who were fed up renting and wanted to buy.

They had £11,000 deposit and then got an interest only mortgage totalling £225,000. Now call me stupid here, but after the 25 years they DO NOT own that property - what happends next.

Do they get evicted - does the bank sell it?

More to the point isn't an IOM the same as renting? But paying a bank or BS instead of a Landlord?

I'm confuzzed!!!

P.S> Just noticed No of people online on Ch4 forum was 8 on HPC site 124!!

<{POST_SNAPBACK}>

Duh, prices always go up, it's a one way bet! In 5 years time when prices have doubled and doubled again they could sell the house and walk away with £775k, everyone is doing this, the money grows on trees and everyone will have more than enough money that they won't ever have to work again!

Interest only mortgages are OK because something will come along and bail them out, the govt and BoE wont allow prices to fall.

Of course their next rung up the ladder will cost £1.5m (lovely former crack den mid terrace in need of modernisation) but who cares... live for today, better yet, get a 110% mortgage and get a new 4x4 too!

[Jason]

http://community.channel4.com/groupee/foru...41/m/3530010403

Here's the link to watch the dumb ass replies!

[Elizabeth]

Duh, prices always go up, it's a one way bet! In 5 years time when prices have doubled and doubled again they could sell the house and walk away with £775k, everyone is doing this, the money grows on trees and everyone will have more than enough money that they won't ever have to work again!

Interest only mortgages are OK because something will come along and bail them out, the govt and BoE wont allow prices to fall.

Of course their next rung up the ladder will cost £1.5m (lovely former crack den mid terrace in need of modernisation) but who cares... live for today, better yet, get a 110% mortgage and get a new 4x4 too!

<{POST_SNAPBACK}>

My god, all of a sudden I have realised the mental hollow that links house price thinking to pyramid selling scams...

[the end is a bit nigher]

http://community.channel4.com/groupee/foru...41/m/3530010403

Here's the link to watch the dumb ass replies!

<{POST_SNAPBACK}>

most seem to involve free money, just, sort of.....appearing, from somewhere

[Guest Bart of Darkness]

most seem to involve free money, just, sort of.....appearing, from somewhere

My theory is that it leaks in from a parallel dimension.

[Time to raise the rents.]

This is copy of a post I have put on the CH4 forum - I just want to get a balanced view.

Just watched L*3 about a young couple who were fed up renting and wanted to buy.

They had £11,000 deposit and then got an interest only mortgage totalling £225,000. Now call me stupid here, but after the 25 years they DO NOT own that property - what happends next.

Do they get evicted - does the bank sell it?

More to the point isn't an IOM the same as renting? But paying a bank or BS instead of a Landlord?

I'm confuzzed!!!

P.S> Just noticed No of people online on Ch4 forum was 8 on HPC site 124!!

<{POST_SNAPBACK}>

Think of it as renting from the bank with an option to buy later. It seems to me to make sense that way, especially when someone is young and can expect to earn more in the future.

[JST]

Think of it as renting from the bank with an option to buy later. It seems to me to make sense that way, especially when someone is young and can expect to earn more in the future.

<{POST_SNAPBACK}>

If you want to be legalistic about it, there are much better and safer ways to buy an option to buy later and hedge against price falls at the same time.

[thunderbird900]

About a month ago there was a report in the Mail on Sunday about a scheme by HSBC aimed at first time buyers who had qualifications or were graduates. In other words, borrowers who were a safe bet to lend money to and would have increased earnings in the future.

The headline was something like "How I now own my first property".

Down to the nitty gritty.

First of all it was a 100% mortgage. He therefore paid no deposit but borrowed the full amount from the lender.

Secondly, it was an interest only mortgage.

Thirdly, it was low start deferred mortgage. The full interest was not charged in the first years, but rolled up to be added on at a later date.

Words fail me! I was going to contact the newspaper to ask for them to comment on this disgraceful reporting. Then I thought was is the bloody point? Let these idiots stew in their own misfortune.

[BuyingBear]

Thirdly, it was low start deferred mortgage. The full interest was not charged in the first years, but rolled up to be added on at a later date.

<{POST_SNAPBACK}>

It's something we've caught from the yanks, we've always had IOM but they've got one step better in the form of negative amortization ARM.

[munro]

More to the point isn't an IOM the same as renting? But paying a bank or BS instead of a Landlord?

<{POST_SNAPBACK}>

Surely if you "buy" on an IOM you pay all the maintenance, repairs, etc etc, as its "your" house, unlike renting?

Yeah, all speculation on the back of ramping that it will all go on and on...until the oil runs out.

[Pink Flamingo]

Interest only mortgages are not a bad thing if 1) you are likely to earn a good deal more in the not to distant future & can therefore change to a repayment then or 2) if you intend to live in the property a long time which means that inflation will make your original debt tiny. For instance, if I'd have bought my parents house when they did 25 years ago for £75,000 and got an interest only mortgage, I could now sell it for £750,000 and repay my initial sum, leaving me with a nice bag of cash. Alternatively I could have rented all that time and my landlord could now pocket the big bag of cash & put me out on the street.

I've only ever had interest only mortgages and they've worked for me

Edited August 30, 2005 by Pink Flamingo

[eurows]

Interest only mortgages are not a bad thing if 1) you are likely to earn a good deal more in the not to distant future & can therefore change to a repayment then or 2) if you intend to live in the property a long time which means that inflation will make your original debt tiny. For instance, if I'd have bought my parents house when they did 25 years ago for £75,000 and got an interest only mortgage, I could now sell it for £750,000 and repay my initial sum, leaving me with a nice bag of cash. Alternatively I could have rented all that time and my landlord could now pocket the big bag of cash & put me out on the street.

I've only ever had interest only mortgages and they've worked for me

That assumes that house prices only ever go up. Pretend they went down 10% when you bought. Then what.

[John Smith]

Hmmm ... not only tied to an IOM mortgage, but also tied to either 1) your chosen career for life of mortgage (assuming your salary does increase) or another suitable job paying the same rate of salary.

So hedging your bets against a large IOM mortgage, you are also comitted to a future you do not yet know - what if you fancy a job change, but can't?

[Pink Flamingo]

That assumes that house prices only ever go up. Pretend they went down 10% when you bought. Then what.

<{POST_SNAPBACK}>

Then nothing. I simply wouldn't have sold & therefore wouldn't have been affected by the price drop.

[Pink Flamingo]

Hmmm ... not only tied to an IOM mortgage, but also tied to either 1) your chosen career for life of mortgage (assuming your salary does increase) or another suitable job paying the same rate of salary.

So hedging your bets against a large IOM mortgage, you are also comitted to a future you do not yet know - what if you fancy a job change, but can't?

<{POST_SNAPBACK}>

Life is full of "what ifs" - if you worried about all of them you wouldn't get out of bed in the morning! I gambled against the risk of both house prices dropping and my business failing and me not being able to get a job on enough money to cover the interest payments. To me, doing the sums, the benefits far outweighed the risks involved.

[John Smith]

Life is full of "what ifs" - if you worried about all of them you wouldn't get out of bed in the morning!  I gambled against the risk of both house prices dropping and my business failing and me not being able to get a job on enough money to cover the interest payments.  To me, doing the sums, the benefits far outweighed the risks involved. 

<{POST_SNAPBACK}>

Agreed. Life is full of what ifs and doing the sums is key. However, the way I see it here, is that banks are offering 'ways out' ... surely this is like dangling a carrot in front of a donkey i.e. is the donkey weighing it all up and taking a gamble, or just reacting to the nice crunchy carrot?

If people simply 'react' to these offers from banks without any real thought processes, then are we adapting to a point whereby this is seen as the norm - where could this then lead to?

[enworb]

Agreed. Life is full of what ifs and doing the sums is key. However, the way I see it here, is that banks are offering 'ways out' ... surely this is like dangling a carrot in front of a donkey i.e. is the donkey weighing it all up and taking a gamble, or just reacting to the nice crunchy carrot?

If people simply 'react' to these offers from banks without any real thought processes, then are we adapting to a point whereby this is seen as the norm - where could this then lead to?

<{POST_SNAPBACK}>

As long as you don't buy a property for say £20k more than its value, an IOM is a good way to get onto the property ladder.In 10 years, regardless of what the doom and gloom brigade believe, it will make a tidy profit. In the mean time, assuming you get an annual payrise, depending on the mortgage deal, you could change to a repayment mortgage......or simply put the extra money into an ISA or high interest bank account and make money that way.

The longer you take to get on the property ladder, the less chance you have of early retirement. I don't fancy working until 65 and then droppingdead the day after. Take some risks and if people prefer to rent until prices crash, leave them to it.

[OnlyMe]

enworb,

As long as you don't buy a property for say £20k more than its value, an IOM is a good way to get onto the property ladder.In 10 years, regardless of what the doom and gloom brigade believe, it will make a tidy profit

Twadlle I'm afraid, there is no guarantee whatsover if making a positive return. The Janese markt went down for a straight deacde and a half, other markets ahve suffereed such swinging falls that their investors never saw their money back, look up the Florida land bubble and how prices of land dropped to 3% of their peak within a matter of years.

[Guest struthitsruth]

The longer you take to get on the property ladder, the less chance you have of early retirement. I don't fancy working until 65 and then droppingdead the day after. Take some risks and if people prefer to rent until prices crash, leave them to it.

In principle, this is on the nail !

put the extra money into an ISA or high interest bank account and make money that way.

but in the detail, well . . . . my ISA provider has been very prompt informing me that the interest rate has dropped following last month's IR decision, so beyond saving a limited tax allowance, it couldn't realistically be regarded as an investment vehicle, could it ?

[Jason]

I find it very scary that people 'recomend' these IO mortgages, with no real method to pay the capital back. They seem to have the assumption they will earn more later in life, so it will be ok...

[munro]

As long as you don't buy a property for say £20k more than its value, an IOM is a good way to get onto the property ladder.In 10 years, regardless of what the doom and gloom brigade believe, it will make a tidy profit. In the mean time, assuming you get an annual payrise, depending on the mortgage deal, you could change to a repayment mortgage......or simply put the extra money into an ISA or high interest bank account and make money that way.

The longer you take to get on the property ladder, the less chance you have of early retirement. I don't fancy working until 65 and then droppingdead the day after. Take some risks and if people prefer to rent until prices crash, leave them to it.

<{POST_SNAPBACK}>

1. In a globalised economy, what makes you think you're going to get an annual payrise?

2. What does a "tidy profit" mean if you have to put a roof over your head, and all other houses have risen in line with yours? Are you suggesting getting an IOM on a bigger house, in order to downsize in ten years and cash out some of this profit? You might get lucky, or it might prove to be a hell of a gamble and you get badly burnt. Not chance I'd want to take, and I'd like to see somebody approach a bank for a whacking great IOM on a substantial house and say "well, I'm gambling on HPI and cashing out my profit and downsizing". Can't see that going down well (existing customers only, perhaps )

[DTMark]

The basis of arguing for an IO mortgage is that history is a good guide to the future, ergo, at the end of the 25 year term the real value of the home will have inflated such that paying off the original capital will be small change.

However I find it interesting that the same people who would argue this conveniently ignore that same history when arguing that prices won't crash.

Either the past is a good guide to the future, or it isn't.

[dipstick]

Am I missing something here?

Surely whether inflation eats away at the initial sum or house prices rise is irrelevant.

Even if you stay in the place for 25 years you've still a) either got to have enough money in the bank to cover the initial cost, or sell it to release the equity.

Presuming you actually like the place and don't want to sell it then you have to run some kind of savings scheme along side during the course of the 25 year stint to ensure you have the money to pay for the initial loan, the amount of which would depend on inflation?