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The Masked Tulip

Dummies Question About Io Only Mortgages

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Bear with me people...

If I bought a house 3 or 4 years ago on an I0 mortgage for say 250K and I wanted to get out of the market today basically because I could no longer afford the mortgage payments... is it possible that the sum I would have to pay to the lender be such that I would need to add on tens of thousands to my original 250K?

I am just trying to get my head around the massive premiums that many sellers in my part of the world are putting on properties they bought just a few years ago.

Part of it is obviously greed, part of it is bound to be non-mortgage debt but I was just wondering whether the 'lifetime' of the mortgage cost is such that, just to get out and break even, they need to add a ridiculous amount?

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Bear with me people...

If I bought a house 3 or 4 years ago on an I0 mortgage for say 250K and I wanted to get out of the market today basically because I could no longer afford the mortgage payments... is it possible that the sum I would have to pay to the lender be such that I would need to add on tens of thousands to my original 250K?

I am just trying to get my head around the massive premiums that many sellers in my part of the world are putting on properties they bought just a few years ago.

Part of it is obviously greed, part of it is bound to be non-mortgage debt but I was just wondering whether the 'lifetime' of the mortgage cost is such that, just to get out and break even, they need to add a ridiculous amount?

In theory, it shouldn't be. If all of the payments have been made on time, the debt on an I/O Mortgage should be the same as it was when it was taken out. The only thing that might be added to the amount borrowed would be a redemption penalty, which to be fair, could be pretty steep on a £250k Mortgage (potentially anything up to 5% of the loan). Obviously, if the payments haven't all been made when due, it's a different story. Any MEWing that has gone on since the original purchase would also of course add to the cost

The other thing to factor in of course would be transaction costs. There would be agents and legal fees. The vendor would also need to pay stamp duty on their new property if they are buying another one, while there may be a CGT liability if it's a BTL sale . . . .although of course someone who's bought in the last 3 years or so may well not have any gain to tax

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No, when you borrow 250k on an interest only mortgage - regardless of whether you sell a week later or 25 years later, you have to give them back their 250k. Not a penny more, not a penny less.

Of course if you bought a place for 250k with a 250k mortgage and you wanted to sell now for 250k - you'll have to find all the selling costs (EA fees, solicitor) yourself.

Which is where many people will come unstuck now. Because, if you buy at 250k and sell at 250k the money for EA and Solicitor fees is 'real' money. You actually have to have it yourself. Normally, when you buy for 250k and sell for 300k the costs of moving just get absorbed in the bigger mortgage you take on.

Where the fun begins is if you buy for 250k with a 250k IO mortgage and sell for 230k. Then you have lost 20 real grand - because you'll have to find that money yourself to top up the 230k you get for the house.

This is why negative equity is such a bummer. Unless you can save enough to cover your losses and buy your way out, you end up stuck in the house you bought - maybe for a generation.

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In addition to all that, in order to afford the next house these days you'll need some equity (ie profit). In a dream world where you sell your house for 250k covering the 250k mortgage, where is the deposit for the next place coming from?

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Thanks both.

OK, same scenario but via a repayment mortgage - you can't keep up the payments, need to get out, is there a lifetime cost to this that could result in needing to find tens of thousands above the original purchase price just to get out of the mortgage?

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Bear with me people...

If I bought a house 3 or 4 years ago on an I0 mortgage for say 250K and I wanted to get out of the market today basically because I could no longer afford the mortgage payments... is it possible that the sum I would have to pay to the lender be such that I would need to add on tens of thousands to my original 250K?

I am just trying to get my head around the massive premiums that many sellers in my part of the world are putting on properties they bought just a few years ago.

Part of it is obviously greed, part of it is bound to be non-mortgage debt but I was just wondering whether the 'lifetime' of the mortgage cost is such that, just to get out and break even, they need to add a ridiculous amount?

My brother 'purchased' his place in 2006 on IO mortgage for approx 230K. Then he split up with his other half and re-mortgaged to pay her off and took a bit extra out for modernisation (and a plasma TV) so now he has IO mortage of 250K.

Maybe this sort of thing is common?

Let's face it, IO mortgages are stupid, you've gotto be mad to take one without any re-payment plan so I would assume that the sorts of people that do / have taken them out are only to keen to MEW them also?

Edited by MinceBalls

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Let's face it, IO mortgages are stupid, you've gotto be mad to take one without any re-payment plan so I would assume that the sorts of people that do / have taken them out are only to keen to MEW them?

IO is essentially a massive, leveraged bet on inflation.

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This is why negative equity is such a bummer. Unless you can save enough to cover your losses and buy your way out, you end up stuck in the house you bought - maybe for a generation.

People should never have bought houses they would only want to stay in for a couple of years anyway. It was a symptom of bubble mania.

When I finally buy I intend to be 'stuck' there for a generation.

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So one possibility, apart from greed, is that some are waking up to the fact that their IO mortgage has been no better than renting, that they ar unable to ever find the money to pay off the house unless there is massive HPI.... so, perhaps, they are not just looking to get out but are also being greedy feckers by wanting the price of another home on top.... hence the ludicrous asking price.

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So one possibility, apart from greed, is that some are waking up to the fact that their IO mortgage has been no better than renting, that they ar unable to ever find the money to pay off the house unless there is massive HPI.... so, perhaps, they are not just looking to get out but are also being greedy feckers by wanting the price of another home on top.... hence the ludicrous asking price.

how-to-win-at-bingo.gif

and factor in the Mortgage fees, Transaction fees, Stamp duty, Removal fees (you accumulate more junk as an owner)..

Personally, I never understood the benefits of 'borrowing to own' a home over renting a home from a 'professional landlord' over the last 15 years. The only upside is that you do eventually become an 'owner' but at a cost, which in my opinion probably doesn't work out much different to renting in the long run, but if renting you have the difference in costs to invest as you wish in the meantime.

The rise and fall in property value is meaningless until you downsize or go to live in a yurt, and then, like any market, your jackpot depends upon whether your personal circumstances dictate that you exit at a favourable or unfavourable time.

At any point it is a simple cost-benefit analysis

Borrowing to become a professional (rather than BTL) landlord is different however, since you will understand your investment and its timing, hopefully.

But this has all been chewed over before.

Edited by LiveinHope

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A dummy answer to a dummy question.

You'd presumably agree it is a bet on inflation, though. I think that IO would work as a spectulative strategy in terms of property investment, but to my mind it is somewhat risky given the illiquid nature of the asset class. It would have worked 2000 - 2007 but seems dependent on cashing out at the top or at least getting in very early if you wish to ride corrections out. You'd also have the problem of dealing with remortgaging. I cannot see why you would necessarily want to bet your own home on inflation, that would be a risk too far. Also I think it is also fair to acknowledge that many people taking an IO would not necessarily understand or have the risks explained to them. I would strongly suspect Mr and Mrs Mug saw the IO mortgage as a discount compared to a repayment and took it on that basis.

Edit: typo

Edited by FaFa!

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Thanks both.

OK, same scenario but via a repayment mortgage - you can't keep up the payments, need to get out, is there a lifetime cost to this that could result in needing to find tens of thousands above the original purchase price just to get out of the mortgage?

I would have thought exactky the same as I/O, with the obvious (and better) exception that you have whatever portion of the capital you have paid off. As you know, in the classic repayment-over-25-years the ^"£$ing banks load the first years of the mortgage with the interest, and you only pay more of the capital as the years progress. (that was my first mortgage, then I changed to the OneAccount system, which encourages capital repayment and daily calculates interest)

EDIT: clarity

Edited by dryrot

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So one possibility, apart from greed, is that some are waking up to the fact that their IO mortgage has been no better than renting, that they ar unable to ever find the money to pay off the house unless there is massive HPI.... so, perhaps, they are not just looking to get out but are also being greedy feckers by wanting the price of another home on top.... hence the ludicrous asking price.

It is worse.

When renting you don't take on the risk of negative equity, your landlord does.

As a tenant of a repossessed landlord you just walk away and rent another place, you don't get hit with a bill for £50k of NE.

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There is a house near me bought 10/2007 which has just come on the market with a £50K increase on what the buyer paid. I can only assume that an IO mortgage is behind this price (which clearly flies in the face of reason),and that it's a desperate attempt to raise a deposit on the their next purchase.

I think this thread may have uncovered a more important factor in insane pricing than we've previously allowed for.

Edited by juvenal

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I would strongly suspect Mr and Mrs Mug saw the IO mortgage as a discount compared to a repayment and took it on that basis.

Of course,

(I don't want to post the 'bingo' image again)

People are stupid, or ill-educated about money to be polite.

Had a friend who applied for a job for a well-known building society. At interview he was asked to pretend the interviewer was a customer and introduce himself: So as you would, he said:

"Hello, how are you, what can we do for you"

'WRONG' he was told, instead you had to say

"Hello, hasn't the weather been bad recently, have you thought about taking out a loan for a holiday to get away from it all"

It must have worked. I fear this is how very many people see money. Partly because they have never had to earn it.

Edited by LiveinHope

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...certain people think in different ways;There comes a point when you owe so much and the thought of being able to repay the debt in full without selling is unachievable and out of the question....so what's a few more extra quids debt when so much is already owing....live for now, if it all goes pear shaped, hand the keys back to the lenders become debt free then get on with living. ;)

This is where we are leading....the only ones that will ultimately lose are the lenders, the government and the tax payers.

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"Hello, hasn't the weather been bad recently, have you thought about taking out a loan for a holiday to get away"

It must have worked.

Sounds familiar. Back in 2007 I moved towns and took up a 1 year contract to do a project. I walked into the bank in order to shift some money out of my savings account to prevent going into my overdraft. Lady behind the counter promptly offered me 6 months gross salary in a loan to "help me settle in". I say it was six months gross so you get an idea of the money in terms of my income. She didn't actually ask what I was earning before offering it, just knew that I was starting a 1 year temp contract and had just moved.

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Yes I would wholeheartedly agree with the inflation aspect.

I wouldn't try to understand it on a short term timescale though, the best way to get it is look at it on a 40 year timescale.

How do you deal with remortgaging? What about the possibility of margin calls? So you are saying you view it as a 40 year buy and hold strategy? Would you recommend it to someone in the UK, FTB now?

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How do you deal with remortgaging? What about the possibility of margin calls? So you are saying you view it as a 40 year buy and hold strategy? Would you recommend it to someone in the UK, FTB now?

There is no possibility of margin calls for residential mortgages. Some BTL mortgages have them. Not many though.

All IO mortgages do is keep the market up. Anyone who takes one out, without a suitable repayment vehicle is nuts.

If you are skilled in investment matters, it could make sense to have an IO mortgage and a self-managed investment strategy. This MIGHT make much greater returns than a repayment mortgage which will simply repay the capital.

If my kids ask me for advice - I'll tell them to get a repayment mortgage.

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In forty years time you could pay of the principal relatively easily, it would be the equivalent to a motorbike loan in fort years time.

No not buy and hold borrow and hold.

Yes I would recommend it to a FT in the UK.

Check what the median house price was in 1970 compared to what is is now. I have said this before on here and I will sound like a bore but here it is once again. It could be shown that if you bought a house forty years ago and paid no interest but instead increased the principal by that amount, you would have created equity by now.

One thing I would not assume (myself) is that the interval between 1970 and 2010 will bear any resemblance to the interval between 2010 and 2050.

I think it is just as likely that, by then, we'll be a relatively third world country and that house prices here might be half (quarter, eighth - pick a number) of what they are now. They might not, of course, they might be 10 times.

The world changes and the rate of change seems to increase exponentially. Which is why I think the future is more likely to not repeat the past. I really can't see 20% wage inflation occurring here in the foreseeable (however long that is) future.

I would definitely recommend a repayment mortgage to any youngster today. At least you know where you stand.

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This is where we are leading....the only ones that will ultimately lose are the lenders, the government and the tax payers.

and the proportion of tax payers who were savers, specifically

(and we were told prudent was the 'in thing')

Edited by LiveinHope

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Check what the median house price was in 1970 compared to what is is now. I have said this before on here and I will sound like a bore but here it is once again. It could be shown that if you bought a house forty years ago and paid no interest but instead increased the principal by that amount, you would have created equity by now.

Thanks for that. I think there are substantial risks here however. I think you might need to be financially savvy in a way that Mr and Mrs Mug aren't to ensure it would work out.

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Yes I would wholeheartedly agree with the inflation aspect.

I wouldn't try to understand it on a short term timescale though, the best way to get it is look at it on a 40 year timescale.

The 40 year aspect is probably true but it still doesn't make sense to buy at a time when prices are slipping.

p-o-p

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A dummy answer to a dummy question.

I guess your mummy has let you use the internet today because it is raining and you can't go outside?

I think you’ll find it has already been ascertained that you are the dummy.

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There is no possibility of margin calls for residential mortgages. Some BTL mortgages have them. Not many though.

There is no such thing as BTL mortgages. They are BTL *LOANS*.

It's a common misunderstanding encouraged by the "mortgage" brokers.

These are business loans, all of which include wording that would allow margin calls.

People often REFER to them as BTL "mortgages" but if you read the loan contract they aren't.

Mortgages are a special type of loan offered to people who intend to live in the property they are buying. It's complex, but simply, mortgages can't be called in as long as you keep up the repayments, even if the asset/house value falls to zero, but at the same time mortgages aren't written off by bankrupcy.

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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