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Starcrossed

Interest-only Mortgages

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I know this has been covered before but I know somebody that is thinking of transferring their existing mortgage to an Interest-Only mortgage with a possible view to use the savings made to buy somewhere else, possibly abroad. The person concerned has asked Mrs Starcrossed for her opinion and Mrs S passed it onto me with an eye on HPC.

It would be great to get a summary of the arguments so that I can pass them on...anyone want to pitch in?

Thanks.

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er... obvious I know but how will they pay off the principal on their IO mortgage at the end of the term? HP rises? Then where will they live when they have to sell the house to pay it off? They'll use the profits over and above the amount of the mortgage will they? Ok, how will that be enough to afford somewhere to live then if HP rises have occurred?. They'll live abroad in the house they buy? How will they pay off that mortgage, ad nasueam...

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My Dad has and IO mortgage, however, he owns 85% of his house, he bought 2 years ago.

It's way too complicated to explain in full, but he is waiting for money from the sale of various items he shared with his ex-wife like some antiques and a caravan, plus other stuff. When he gets this money he can pay for the remaining 20% of his house, but until then he is paying IO as it's easy for him to afford. So an IO mortgage seems to work well for him.

Where it is dangerous is when you have little or no margin for fluctuation in value, meaning you are leaving yourself open to negative equity.

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I can't quite get my head around why anyone would do this. If it is purely as an investment, it seems very risky to me, and there seems little in the way of benefits. Would they rent out the second house? Would they really save enough on an interest only mortgage to allow them to pay for a second mortgage?

Think more details are needed, like how much their present mortgage is at the moment and what % is mortgaged.

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Guest Charlie The Tramp

Two answers.

1. No don`t be stupid.

2. Definitely not or you are stupid.

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A lot of people do it because, in real terms, whats the purchase price going to be equatable to in 25 years?

Look at all those who bought homes in 1980 for 7k for example. Right now, most people have second hand cars worth more; 7k is simply not a lot of money to find. Now transpose all this 25 years in the future. Thats the first main reason for I.O. I have always came across.

The next is young professionals, who have the right degree, Medicine, Engineering etc, who in about 10 years time will be earning a significant amount more in there chosen field than they are now. They feel that in ten years, they will have seen both capital appreciation of there home, and then be in a far more realistic position to then eradicate this debt. The main detractors from this mode of thinking are those who say "ah, but anything can happen in your career between now and then" Indeed a point, it can, but actually, most people really DO go on to make more money in those sort of fields after a few years, so scaremongering aside, many find it works for them.

Classic example? I am an Engineer, and I have a friend who is a (now) Surgeon. He went the I.O. route a while back when he first qualified medically, and extended this to more than one property. He is now in the situation where he has went from 32k to more than 80k PA in the last 8 years, and is now simply using the excess to wipe out his debt.

Obviously, I expect people to post (sensible, please) detractions from this method of home ownership, but for many, it does actually work well.

Edited by billy-g

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A lot of people do it because, in real terms, whats the purchase price going to be equatable to in 25 years?

Look at all those who bought homes in 1980 for 7k for example. Right now, most people have second hand cars worth more; 7k is simply not a lot of money to find. Now transpose all this 25 years in the future. Thats the first main reason for I.O. I have always came across.

The next is young professionals, who have the right degree, Medicine, Engineering etc, who in about 10 years time will be earning a significant amount more in there chosen field than they are now. They feel that in ten years, they will have seen both capital appreciation of there home, and then be in a far more realistic position to then eradicate this debt. The main detractors from this mode of thinking are those who say "ah, but anything can happen in your career between now and then" Indeed a point, it can, but actually, most people really DO go on to make more money in those sort of fields after a few years, so scaremongering aside, many find it works for them.

Classic example? I am an Engineer, and I have a friend who is a (now) Surgeon. He went the I.O. route a while back when he first qualified medically, and extended this to more than one property. He is now in the situation where he has went from 32k to more than 80k PA in the last 8 years, and is now simply using the excess to wipe out his debt.

Obviously, I expect people to post (sensible, please) detractions from this method of home ownership, but for many, it does actually work well.

Yea, that seems reasonably sensible to me, if it looks like your going to get a big boost in the future then it makes sense.

Problem i see is factory workers with little to no education taking on 120% IO over 35 years (uh hu). Or even the factory worker taking on a standard 95% IO over 25 years with no way to ever pay off the priciple at the end of the term.

IO should be an option for a select few, who meet certain criteria.

As for it being worth more in 25 years, thats great if you want to live in your £110K 1 Bed, for the next 25 years.

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I agree with you Chuz; with regards to factory workers etc, it is heartbreaking to see them get into silly situations like the one described, because 9 times out of 10, you know where it will lead. They are the first in society to feel the pain, and have a lifetime of inflation only wage rises to look forward to. Thats not conjusive to paying off a large loan at any point in there future.

Its even more heartbreaking for some when you think that when they lose there home, they tend to end up in private rented accomodation - you know, the kind you see with the big sign saying "DSS Welcome" due to the fact there is no LA stock anymore. Straight into BTL. I have no BTL properties occupied by DSS, as I admit to being wary of that market sector. I apologise if that offends anyone; its not meant to.

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I know this has been covered before but I know somebody that is thinking of transferring their existing mortgage to an Interest-Only mortgage with a possible view to use the savings made to buy somewhere else, possibly abroad. The person concerned has asked Mrs Starcrossed for her opinion and Mrs S passed it onto me with an eye on HPC.

It would be great to get a summary of the arguments so that I can pass them on...anyone want to pitch in?

Thanks.

Interest only mortages.

Look at it this way.

Its not what you pay today ie your so called low monthly repayment.

Look at the whole picture, what interest do you pay overall, over the whole period the loan is outstanding?

I would say a hell of alot more than a repayment mortgage.

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The next is young professionals, who have the right degree, Medicine, Engineering etc, who in about 10 years time will be earning a significant amount more in there chosen field than they are now.

A medic friend of mine is going to get a £10K pay cut next year. This I believe will affect a lot of hospital doctors, part of a deal they did with the government whereby they all got decent pay rises but these were only for a few years. Sure in 10 years time he might be earning more but his pay is going down, not up.

Classic example? I am an Engineer, and I have a friend who is a (now) Surgeon. He went the I.O. route a while back when he first qualified medically, and extended this to more than one property. He is now in the situation where he has went from 32k to more than 80k PA in the last 8 years, and is now simply using the excess to wipe out his debt.

Your surgeon friend is in a minority position. A lot of people might earn more but most people won't earn considerably more than what they attain in their mid 30's and worth pointing out is that the average age of a FTB is now about 34. Also most people will have to compete with younger people on less pay which keeps salaries down and as you get older and earn more, costs generally go up considerably due to kids etc so assumption that there will be more money for housing is probably incorrect.

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I will be going for an interest only mortgage when I trade up. My reasons are

1) It keeps the monthly payments low while my wife isn't working (at home with children)

2) The lower payments mean I can have the bigger house now than with a repayment mortgage.

3) I shall be taking out a current account / offset mortgage (had one since 1999). Thus all my savings are in effect reducing the capital outstanding (and reducing the interest) but if I need the money back for whatever reason I can retrieve it immediately. The mortgage may be interest only but in effect it is a repayment mortgage.

I recommend everyone to get a CAM (current account mortgage). They have so many advantages such as not having to faff around looking for a good rate on your current / savings account. Also a great wheeze is to get a egg card and fund your CAM with it (the anniversary offer they do is jolly good). Add a few more 0% purchase credit cards which you max out with your normal spending and then transfer the balance to a 0% balance transfer card when the 0% purchase deal runs out. This way your money sits in your mortgage account reducing the interest very nicely thank you. It really is a nice feeling to have the credit card firms pay off your mortgage for you. :P:D:lol:

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I will be going for an interest only mortgage when I trade up. My reasons are

1) It keeps the monthly payments low while my wife isn't working (at home with children)

2) The lower payments mean I can have the bigger house now than with a repayment mortgage.

3) I shall be taking out a current account / offset mortgage (had one since 1999). Thus all my savings are in effect reducing the capital outstanding (and reducing the interest) but if I need the money back for whatever reason I can retrieve it immediately. The mortgage may be interest only but in effect it is a repayment mortgage.

I recommend everyone to get a CAM (current account mortgage). They have so many advantages such as not having to faff around looking for a good rate on your current / savings account. Also a great wheeze is to get a egg card and fund your CAM with it (the anniversary offer they do is jolly good). Add a few more 0% purchase credit cards which you max out with your normal spending and then transfer the balance to a 0% balance transfer card when the 0% purchase deal runs out. This way your money sits in your mortgage account reducing the interest very nicely thank you. It really is a nice feeling to have the credit card firms pay off your mortgage for you. :P:D:lol:

The art of stoozing, works great until ya f*ck up :D

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Those who buy on an IO mortgage with the argument that in 20 years it will be worth more doesn't stack up. The real question is will the value go up over that time more than the interest you have paid on the mortgage?

I.e. you can get a IO mortgage of 5% currently, that means houses will have to up by 165% over 20years to break even!

Edited by Jason

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This is all just another effect of the recent boom.

Consumers have become used to easy money,and the concept of ever having to actually pay for something through hard work has gone.

Work is now becoming harder to find, unemployment is rising fast, and soon you will find people desperate to work for less money than they would 2 years ago.

The economy is now going into savings mode, consumption falls, and jobs disappear.

People will go back to the idea that they actually need to pay for the property at some stage.

The great circle of life.

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The one thing I found strange when I was offered a mortgage last year was that banks would lend the same amount for IO as for repayment - I realise now that with the IO they make more money.

Now my idea was to take out an IO that I could overpay on (or set up some other kind of repayment vehicle for the end lump - I guess like an endowment).

The reason? INTEREST RATE RISES.

With an IO your compulsory monthly payment is less than for a repayment.

If IRs were to double, IO would allow me the flexibility to stop overpayment to keep afloat - Not an option with repayment, which could see me possibly default sooner.

So IO offers you a lifeline if/when IRs rocket.

Gladly, I did not buy in the end :)

When I do, I will go for IO (if they are still offered) - but you need discipline to overpay

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Classic example? I am an Engineer, and I have a friend who is a (now) Surgeon. He went the I.O. route a while back when he first qualified medically, and extended this to more than one property. He is now in the situation where he has went from 32k to more than 80k PA in the last 8 years, and is now simply using the excess to wipe out his debt.

Perhaps I'm not normal but if was earning 32k with the prospect of earning 80k in 8 years, I'd live in a shed or some pokey rented flat for a few years and pay down a huge chuck of a repayment mortgage and overpay big for a few years unil I owned it.

Why are rich people in such a hurry to dispose of their wealth?

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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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