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munimula

Interest Only Mortgages Have Changed The Landscape

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It seems that there are events that have occured which have lead average house prices rising to a new plateau (ignoring the effect of IR's and inflation).

When women started to work and two salaries became the norm there must have been a shift in the average house price plateau. Households had increasing incomes and therefore could afford to pay more for houses, the average house price plateau must have shifted up.

The same appears to have happened again with the interest only mortgage brigade. It seems anyone buying a place today gets an IO mortgage as that's all they can afford. They don't give any thought to what this means in the longterm just so long as they own today.

I on the other hand am not prepared to buy somewhere when there is no hope of capital gains if I can only afford an IO mortgage, there is simply no point because it offers no advantage over renting, in fact it is a major disadvantage over renting.

Now it seems that this shift, if not corrected could result in prices not returning to the 3.5X earnings that we all desire as this does not reflect the IO affordability. Lending 3.5X earnings was the norm when people took out repayment mortgages and endowment policies.

As this country has turned into one big chavsville state full of people with no financial accumen and banks with very weak lending regulations I can see IO mortgages becoming the norm. Only the banks can stop this and will they want to? I don't think the majority have the intelligence to realise that there is no point in IO mortgages if there are no capital gains to be made.

Therefore possibly the average house price plateau has shifted up to 4X or even 5X average earnings.

Just a thought...

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So what you're saying is that houses in the UK will be overvalued following the next boom.

Can't say I disagree........ :D

No, they are likely to fall below 'value' as that's how these things work but I think that 3.5X earnings might not be realistic now. Hey were I live the average house price is probably about 8X - 10X the average earnings so a fall to 5X is still a massive fall (crash)!

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I can see the future claims headlines already.

'You want me to repay my capital? , and capital is?

D

:lol:

I think what I was also trying to say, is that because so many have now based their value of property on the IO repayments that they can afford, those of us that only see affordable repayment mortgages as value will always find property prices too high, the IO brigade have permanently made property poor value.

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:lol:

I think what I was also trying to say, is that because so many have now based their value of property on the IO repayments that they can afford, those of us that only see affordable repayment mortgages as value will always find property prices too high, the IO brigade have permanently made property poor value.

What happens if the economy does go into recession, and more and more people start to default on mortgage repayments, IO or not. Will the banks tighten their lending requirements? Will we see the end of IO mortgages? I don't know the answer. What happened in the last crash?

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I/O mortgage = simply renting your house from the bank on a long term assured tenancy. But one where you pay the maintenance and upkeep.

IMO if you have an I/O mortgage you are a sitting tenant with an option to buy......but you are not a homeowner.

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It seems anyone buying a place today gets an IO mortgage as that's all they can afford. They don't give any thought to what this means in the longterm just so long as they own today.

Are there reliable figures on the % of all mortgages which are interest only? I can't believe that it is more than a tiny percentage of people who take on this risk, but I can't find any stats

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IMO if you have an I/O mortgage you are a sitting tenant with an option to buy.

If only that were true, it might be a good deal. In reality, you're not only given an 'option to buy' if prices rise, but you're also liable to pay the costs if prices drop, along with maintenance and upkeep for the duration of the mortgage.

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Totally agree. You can get many IO mortgages where you can repay capital each year if you wish so what is the big deal, just is a less risky option as payments are lower each month when you first buy.

Long term fixed rate mortgages give people more confidence as well, In USA and france these are the norm and expect same to happen here, some of them are 30yr fixed!

Edited by mercsl

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To answer my own question,

Around 81 per cent of all new mortgages were standard repayment mortgages in 2002. Interest-only mortgages, which include endowment policies, ISAs (individual savings accounts) and personal pensions, account for the bulk of other mortgages

from Social Trends

Can't find any more up to date information.

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If only that were true, it might be a good deal. In reality, you're not only given an 'option to buy' if prices rise, but you're also liable to pay the costs if prices drop, along with maintenance and upkeep for the duration of the mortgage.

True. Seems like a form of sefdom really. In the same way as medieval peasantry worked land for a Lord but could never accumulate enough capital to buy any land of their own.

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Abbey report this week said IO is 25% of the market. Does this include or exclude BTL mortgages that make up 6% of the market (depending on whether people honestly request a BTL mortgage when they want to rent out a property). It could be that 30% plus of the current market is IO (or "rent" to use other's comments).

We must get banks require repayment of the loan as well as servicing the debt. Only if that happens will prices revert to the 3.5x household income norm (this allows for the 2x earner scenario or prent guarantees etc.).

As an anecdote I well remember in 1989 a friend buying a 1 bed flat which he then had to own for 7 years before escaping negative equity. It was in Aylesbury.

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Are there reliable figures on the % of all mortgages which are interest only? I can't believe that it is more than a tiny percentage of people who take on this risk, but I can't find any stats

I really don't see how it is a risk. The difference is only administrative: with an endowment, the bank invests for you to generate the capital at the end of the term, with I/O you have the choice of investing in any asset class if you choose to generate the capital, it could be a building society account or even in theory paying down the mortgage as you go. A repayment mortgage merely simplifies this latter option.

It is only a risk if you decide not to set aside money to pay the capital back but that's your decision so it's not really a 'risk'.

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So in conclusion, to support house prices we mst nullify the norm and play by new rules.

Capital repayment morgages to interest only morgages...(then we are screwed but generations to follow will also be as no inheritance)

or increased morgage terms (away from the norm of 3.5x 25 years to 4x 30years until we reach lifetime morgages and beyond)

All sounds like bankers are playing their own lending games to me.

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It is only a risk if you decide not to set aside money to pay the capital back but that's your decision so it's not really a 'risk'.

I.e. it's only a risk for probably 99% of those taking out interest-only mortgages.

All sounds like bankers are playing their own lending games to me.

Their goal is that the entire country's entire post-tax income goes to the banks. Thanks to NuLab, the game is progressing real well right now.

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I really don't see how it is a risk. The difference is only administrative: with an endowment, the bank invests for you to generate the capital at the end of the term, with I/O you have the choice of investing in any asset class if you choose to generate the capital, it could be a building society account or even in theory paying down the mortgage as you go. A repayment mortgage merely simplifies this latter option.

It is only a risk if you decide not to set aside money to pay the capital back but that's your decision so it's not really a 'risk'.

Exactly - if an individual choses an interest only mortgage and has adequate provision to repay the capital then no problem.

One thing this forum tends to overlook is the ease with which mortgage debt can be cleared in todays "low interest rate plus competitive mortgage industry" environment. Why people on this site always talk about 25 year mortgages is beyond me. They may have been the norm a decade ago but recently any savvy individual can clear a mortgage much quicker. I'd never take more than 15 years to repay a mortgage in a low inflation world.

There will be few forced sales from owners who've already cleared the majority of their debt.

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There will be few forced sales from owners who've already cleared the majority of their debt.

But plenty from those who haven't... and, even if they only make up 10% of the market, they will set the selling price.

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But plenty from those who haven't... and, even if they only make up 10% of the market, they will set the selling price.

Agreed, so long as their property is desirable to those who wish to buy.

I'm firmly of the opinion that it's only good property that is selling.

I think in the future we will see huge price differences between say a 3 bed house in a nice area and a 3 bed house in a close but grotty area. I've said many times on this forum that grotty areas will see falls of up to 70% from peak. Other areas will see falls of 10 - 20%.

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Exactly - if an individual choses an interest only mortgage and has adequate provision to repay the capital then no problem.

One thing this forum tends to overlook is the ease with which mortgage debt can be cleared in todays "low interest rate plus competitive mortgage industry" environment. Why people on this site always talk about 25 year mortgages is beyond me. They may have been the norm a decade ago but recently any savvy individual can clear a mortgage much quicker. I'd never take more than 15 years to repay a mortgage in a low inflation world.

There will be few forced sales from owners who've already cleared the majority of their debt.

I've said that with a flexible mortgage, paying down mortgage debt is far better than saving in a savings account. In real terms you are saving at your mortgage rate TAX FREE.

Almost everyone I've said this to - dozens and dozens - reacted as if overpaying the mortgage was some crazy thing: 'I would never have money to overpay', 'But the house is rising in value', 'Why would you do that?', 'But it would take years to pay it off and I want to live now'.

To my grandad mortgage debt was as evil as any other type - paying off the house was the Number One priority and he did it years and years ahead of schedule.

Maybe pre-boomer attitudes will came back, but they haven't yet.

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Exactly - if an individual choses an interest only mortgage and has adequate provision to repay the capital then no problem.

One thing this forum tends to overlook is the ease with which mortgage debt can be cleared in todays "low interest rate plus competitive mortgage industry" environment. Why people on this site always talk about 25 year mortgages is beyond me. They may have been the norm a decade ago but recently any savvy individual can clear a mortgage much quicker. I'd never take more than 15 years to repay a mortgage in a low inflation world.

There will be few forced sales from owners who've already cleared the majority of their debt.

The point is that lots of people are taking out IO mortgages and not making any provisions to pay back the capital, they are simply expecting the value of the property to go up and think that somehow this will all work out well for them in the end. It would help considerably if banks still enforced that people only had repayment mortgages or set up some other policy to repay in the end. For those that take out IO mortgages because that's all they can afford there will be no paying off the mortgage early.

The original point made is that there are undeniably a lot of people that are now prepared to take out only IO mortgages and therefore this shifts the perceived acceptable value of housing up for them. If these people that are buying/have been buying IO were forced to take out repayment mortgages then they wouldn't be buying thus removing a certain number of buyers from the market.

It is just one reason why prices have gone up higher than they should have done.

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But plenty from those who haven't... and, even if they only make up 10% of the market, they will set the selling price.

Given the amount of bad press that equities and the endowment mortgage scandal have attracted, given that less than 14% of the UK pop hold any shares, given the 'safe as houses mentality' and economic illiteracy of the UK public......

......is anybody on this site seriuosly suggesting that and siginificant number of I/O U mortgagees have any kind of capital repayment plan that they have designed....apart from hpi?

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Stupid question: Do I/O mortgages allow you to continue paying interest only indefinitely, or do they after some specified period switch on to repayment?

frugalista

Edited by frugalista

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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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