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Interest Only Mortgages - My Friend

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I have a friend who bought a flat in summer 2004 (oh dear! I hear you cry)

Him = young professional earning decently.

Flat = 1 bedroom flat 28 miles north of where he works (not very nice and not in a great area either). They were too expensive where he works - Buckinghamshire.

He couldn't afford the flat on his own so his Dad combined powers to raise the mortgage multiple available (Dad saw it as an investment!)

So he gets an interest only mortgage for virtually the full amount (no problem at the bank cos he's a graduate)

I warned him that the whole situation seemed a bit absurd and that it was ringing alarm bells in my head.

Generally he didn't want to listen to my advice becuase I hadn't bought and was therefore not an investment guru.

I asked him what happens if he wants to move somewhere better (or closer to his work/friends/family) in a couple of years, having not paid off any capital or saved anything (he spends most of the rest of his money on servicing debt e.g hire purchase flash cars he couldn't otherwise afford etc).

He gave me all the usual rubbish about how the capital value would keep going up (similar flats in the area had gone up 10K in the time it had taken him to complete the purchase). This was somehow irrefutable proof that he was an investment genius.

With all of my persuasive skills I just about managed to make him consider what would happen if the flat went down in value or he was unable to sell it for 'a period of time' at the price he wanted

He said that it would be ok because he could rent the flat out for a while until he could sell at the right price.

Yeah, right. The flat isn't that great and in the middle of nowhere where the local salaries are way below his.

Why would anyone rent his flat if noone would consider buying it (location poor etc)?

I raised that point and he said it would be ok because the guy who sold him the flat had several others in the estate and said he had just rented out one to somebody. This somehow proved in his head that his flat was rentable (at what ever price he may need at the time) in all market conditions.

I didn't quite have the heart to point out that he shouldn't really take what the vendor said as proof of anything (I suspect the vendor is now very rich and very out of the property market at this time). Also if the vendor still does have any flats to rent there - he bought them 10 years earlier and could probably therefore afford to let them at a fraction of the price that my friend could if the crunch came.

My friend is earning ok and has family to support him if times get really hard so I'm sure he can at least hang on to the flat in the event of higher interest rates, but I'm getting increasingly worried that he may be stuck in the wilderness 28 miles away from his work/ friends etc for a very long time.

If he escapes it's going to cost him a lot.

I tried my best.

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I have a friend who bought a flat in summer 2004 (oh dear! I hear you cry)

Him = young professional earning decently.

Flat = 1 bedroom flat 28 miles north of where he works (not very nice and not in a great area either). They were too expensive where he works - Buckinghamshire.

He couldn't afford the flat on his own so his Dad combined powers to raise the mortgage multiple available (Dad saw it as an investment!)

So he gets an interest only mortgage for virtually the full amount (no problem at the bank cos he's a graduate)

I warned him that the whole situation seemed a bit absurd and that it was ringing alarm bells in my head.

Generally he didn't want to listen to my advice becuase I hadn't bought and was therefore not an investment guru.

I asked him what happens if he wants to move somewhere better (or closer to his work/friends/family) in a couple of years, having not paid off any capital or saved anything (he spends most of the rest of his money on servicing debt e.g hire purchase flash cars he couldn't otherwise afford etc).

He gave me all the usual rubbish about how the capital value would keep going up (similar flats in the area had gone up 10K in the time it had taken him to complete the purchase). This was somehow irrefutable proof that he was an investment genius.

With all of my persuasive skills I just about managed to make him consider what would happen if the flat went down in value or he was unable to sell it for 'a period of time' at the price he wanted

He said that it would be ok because he could rent the flat out for a while until he could sell at the right price.

Yeah, right. The flat isn't that great and in the middle of nowhere where the local salaries are way below his.

Why would anyone rent his flat if noone would consider buying it (location poor etc)?

I raised that point and he said it would be ok because the guy who sold him the flat had several others in the estate and said he had just rented out one to somebody. This somehow proved in his head that his flat was rentable (at what ever price he may need at the time) in all market conditions.

I didn't quite have the heart to point out that he shouldn't really take what the vendor said as proof of anything (I suspect the vendor is now very rich and very out of the property market at this time). Also if the vendor still does have any flats to rent there - he bought them 10 years earlier and could probably therefore afford to let them at a fraction of the price that my friend could if the crunch came.

My friend is earning ok and has family to support him if times get really hard so I'm sure he can at least hang on to the flat in the event of higher interest rates, but I'm getting increasingly worried that he may be stuck in the wilderness 28 miles away from his work/ friends etc for a very long time.

If he escapes it's going to cost him a lot.

I tried my best.

I know someone else who has just bought in Brighton with a 200k interest only mortgage- on the basis that "houses never lose value in brighton" - funnily enough, houses lost value to the tune of 2% last month, biggest falls for any town in the Uk. Nothing is selling here as its so overpriced. Amazing. I am keeping my mouth shut now though and waiting for the apocalypse!

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Similar story with my girlfriend's brother. Just put down a deposit on a place costing 13.5x his salary. His mum and Dad and also little brother have also gone in with him even though they won't be living there (they are buying it as an investment!!!). Anyway, the reason they proceeded was because the property (a brand new development in Worcester Park in Surrey) had just decreased in price by 30k and so they saw it as a bargain. Tried to talk about it and talk them out of it but to know avail. Suppose some people just get carried away with the dream when quite clearly they can't afford it. Hey look on the bright side, it has got underfloor heating ;)

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Same story here. Friend just purchased a place for 197K, down from 225K to 209K after the 2nd deal fell through. The EA said they are worth 250K in good condition. So he thought he had a bargain.

If he had checked www.ourproperty.co.uk he would have realised the EA was full of it. There has never been a house sold in that street above 216K !

And he's gone interest only !

Mental.

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oh - I forgot to mention...

I asked my friend how he ever planned to pay off the capital part of the loan and thus own his prized asset.

He'd thought of everything, being a financial genius - he is putting aside some money every month into a company share savings scheme at his work. I calculated it - and won't be enough over 25 years unless the whole scheme grows at a rate of around 50% a year. Sounds totally fool-proof.

Also he can't actually get any money out of these savings for 5 years if the sh!t does hit the fan because its tied in to share maturity dates etc to stop the company being shafted by all the employees selling their shares at once.

Maybe I just have an attitude problem. Maybe I'm too risk averse.

Probably the dreaded "mortgage phobia"

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Maybe I just have an attitude problem. Maybe I'm too risk averse.

Probably the dreaded "mortgage phobia"

I have a mortgage, but am still very much averse to risk. Just reading that story is enough to make me anxious. Will this guy's parents still be around in 25 years to help him out? Hope so for everyone's sake.

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One of my friends has dug the biggest whole I have heard of. He used to drive a taxis for about £30k a year, but has now got a 9-5 job as a junior account for about £13k.

He did have about £30k of credit card debt, so he borrowed £30k of his dad to pay that of. Got a self-cert interest only mortgage (apparently earning £45k a year) a got the desposit from a new low interest credit card, for a £110k flat, but don't worry he will be able to remortgage and pay of the credit card after a year.

Aleast all my friends now know property is a bad purchase ias he has just done it. (He has a reputationg in buying the cars you shouldn't buy).

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I have a mortgage, but am still very much averse to risk. Just reading that story is enough to make me anxious. Will this guy's parents still be around in 25 years to help him out? Hope so for everyone's sake.

Scarily enough...

This guys parents split up several years ago- hence only his Dad helping him (Mum not too well-off).

His Dad has retired so I can't see where any great sums of money are going to be magicked from. His Dad used a some of the lump sum he got at retirement to fund a deposit (small though it was.)

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The banks for not fully checking who they lead to.

Why should they? They may well sell the mortgages on to your pension fund... then it's no longer their problem.

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The banks for not fully checking who they lead to.

Exactly - they need to be tightened on their lending policies. When the brown stuff does hit the

fan, I would expect the borrowers to have to face their stupidity and cough up at least some

money rather than taking bankruptcy.

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I would be more inclined to blame banks and mortgage advisors, than people who have no concept of risk. Only 20 years ago, it was difficult to get loans/mortgages - now it is difficult to avoid them.

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There is also a huge moral hazard issue because if any lenders collapse they and their depositors will be bailed out by the state. Increasing the likelihood of slack lending and hence the collapse in the first place.

Edited by BoredTrainBuilder

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So, who is to blame? The banks for lending, or the individuals for having no concept of risk?

More than enough blame for everybody. Seriously though, the self-certified mortgages are a scandal, as I understand it the salesmen are encouraging the applicants to lie to complete the process so that they can get their commission knowing that when the S*** hits the fan they will be long gone.

I think that anything up to £50,000 can be self certified without any sort of evidence.

Lieing on the application form is a criminal offence however the banks are effectively committing the same offence by encoraging it.

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  • 301 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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