Interest Only Mortgages

[Bluelady]

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?

<{POST_SNAPBACK}>

Neither inflation or house price inflation are irrelevant. If you'd bought a house 25 years ago on an interest only mortgage - and lots of people did, remember endowments? - you'd have paid about £12-15k for it. That's a comparatively very small debt now which could even be paid off on a series of 0% credit card deals in a couple of years.

[dipstick]

Now funny you should say that Blue lady!!

I bought my first house back in 1982 for the princely sum of £13,500. And it was on an endowment.

Now I can't remember the actual house number so just looked up the street on nethouseprice. The average for a terraced there now is 80k (and I'm being a bit generous here) Whichever way I look at it, if I was still in that place the original 13.5k is still a heck of a chunk. Also if you are still in the same relative average wage, which presuming you are as you are still in a terraced, then you will be paying back the money out of something like 22k? Hardly something you would want to stick on your credit card?

Plus between 82 and now we have had two stunning booms (and busts), this one is still currently holding the house prices so I don't know what the more realistic expectation would be in a downturn.

Oh and also my 25 years ain't up yet, we are only working on 23. Wonder what it will be worth in 2 years time?

[dipstick]

Crikey!

Dr Bubb has just said something that even I can understand!!!!

I am so proud

[munro]

The other point about (high) inflation is that it redistributes wealth from lenders to borrowers. The high inflation period of the 1970s corresponds to the baby boomer generation (numerically the biggest) hitting their late 20s/early 30s; at which age they became homeowners in large numbers and started families. So they benefited from inflation - BECAUSE THEIR PAY WENT UP. Over and over again - inflation only eats away debt in real terms if its WAGE inflation.

That generation is now saving and investing like mad for their retirements and they are now benefiting from a low-inflation environment (call it a double whammy, all based on being born at the right time). Surprise surprise, now they're in power and are nett savers/investers, we have a low-inflation environment, because it protects their wealth. And, of course, it redistributes wealth from the young (nett borrowers, on the whole) to the old (nett savers, on the whole).

Of course there's a limited amount politicians can do to manage the economy but it is far from negligible. As it is with globalisation they can go with the flow because the deflation it generates suits their interests (their generational interests, that is).

Anyone who thinks that inflation is going to be allowed to let rip in the near future has missed the point - it ain't going to happen. Low inflation suits those who are in power and suits the baby boomer generation, who in a democracy can outvote any other group.

[Freelance Mycophagist]

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.

<{POST_SNAPBACK}>

I work for HSBC, and I can categoricaly state that it is NOT a low start deferred mortgage. The ONLY 'perk' that graduates get it the option of 100% lending. The 'Homestart' mortgage is available to everyone - this is interest only for the first three years, thereafter reverting to capital repayment. The affordability of this mortgage is assessed on the payments from year three (i.e. capital repayment). HSBC are, in fact, quite (a relative term in today's market, I grant you) conservative with lending decisions.

[E Powell]

If you have an IOM you are under the illusion that houses

prices will increase. Wake up!!! You have been smoking too

much of new labours legalised weed.

Most folks in the UK are financial uneducated.

[gilf]

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?

<{POST_SNAPBACK}>

The other thing to consider in today's market is that people are pushing themselves to the limit even on IOM's. So it's all well and good if you're buying a 4 bed Semi as you can trade down once the 25 years are up, but many people have gone for IO on 1 and 2 bed flats. They will have no option to trade down.

[apom]

IO only mortages only work if house prices are going to keep climbing.

that way your situation changes and you can begin to pay back capital.

IO Means that

1: you have fixed the price that you will eventually pay for the property.

If prices rise or drop you have a fixed price.

2: You must maintain interest against the loan.

3: You are not Paying of the loan or making any approach toward eventual ownership.

so essentially you are saying

"I want to buy this property. I want to buy it at this price but I cannot afford it yet. If you lend me the money I will pay you interest against the loan but I will not be able to pay back the loan."

If prices drop the gamble has not paid of. If they rise it has.

Prices have dropped (a little ) over the last 14 months.

Does not seem to be much point in this.

someone above said that the longer it takes to get on the ladder the longer it takes before you can retire.

True, but are you on a ladder if you are not actually buying a house?

Seems to me that you are not.

[dipstick]

I think that I agree with Gilf on this one.

It can only work if eventually you trade down (presuming you bought high enough to trade down in the first place).

What does it mean if you say "It only works if house prices continuing going up"?

Looking at when I first bought in 82 do you say that house prices have continually risen during that time? I would, but looking at the figures it certainly doesn't make me want to rush out and get an IO. In fact it makes endowments look pretty fair and reasonable!

We had the booms which certainly helped but we also had the busts? What is defined as "continual"? or has Dr Bubb done some figures and charts somewhere that proves during the past 80 years despite booms and busts house prices have rose at a steady annual rate?

I'm sort of looking at the period when I would think owing your own home became a status/investment thing.

Hope I'm still making sense, I start to lose the plot when it gets too deep!

Practical kind of gal not the "graphy" sort"

[Bluelady]

Now funny you should say that Blue lady!!

I bought my first house back in 1982 for the princely sum of £13,500.  And it was on an endowment.

Now I can't remember the actual house number so just looked up the street on nethouseprice.  The average for a terraced there now is 80k (and I'm being a bit generous here)  Whichever way I look at it, if I was still in that place the original 13.5k is still a heck of a chunk.  Also if you are still in the same relative average wage, which presuming you are as you are still in a terraced, then you will be paying back the money out of something like 22k?  Hardly something you would want to stick on your credit card?

Plus between 82 and now we have had two stunning booms (and busts), this one is still currently holding the house prices so I don't know what the more realistic expectation would be in a downturn. 

Oh and also my 25 years ain't up yet, we are only working on 23.  Wonder what it will be worth in 2 years time?

<{POST_SNAPBACK}>

The value of the house now or in two years' time is irrelevant. And remaining in a terraced house is nothing to do with income and everything to do with choice, if had been big enough, I'd still be living in my Edwardian terrace, I loved it.

£13.5k is a relatively small debt, thanks to inflation, both general and HPI, it's certainly an amount that I'd feel perfectly happy to move around 0% credit card deals for a couple of years to get rid of by the end of the 25 year term. After all it's the same debt whether it's with a mortgage lender or a credit card lender.

Edited September 1, 2005 by Bluelady