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VeryMeanReversion

Rent Vs I/o Contrast

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I had a look on rightmove today and noticed something rather odd.

1. Most expensive house in the village = £1.1 million. 4000+sqft with lots of land.

With an interest only mortgage at 1%, get it for £1Million and pay £833pcm, basically renting from the bank. A 1% mortgage may sound silly but I have a high-earning relative on that rate and they had no problem moving it onto a much larger property and taking out a bigger mortgage at that same rate.

2. Cheapest rental. A very small (~450sqft) 1 bed, £750pcm.

I know its not really a fair comparison but I still found it rather shocking.

The temptation for people to take huge risks is still there. A similar high-end property has just sold for around £900K and I see two brand new white Audis outside, presumably on finance.

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Guest BillyNI

The temptation for people to take huge risks is still there. A similar high-end property has just sold for around £900K and I see two brand new white Audis outside, presumably on finance.

The risk on that is massive. But it's shocking to think those numbers reflect an form of reality.

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An OO cannot take out an IO mortgage.

A BTL LL can. That should be stopped, dead.

Absolutely... A landlord afterall is highly dependent on a renters income or the states ability or willingness to pay....highly unfair IMO.......suppose it all comes down to the deposit offered borrowed or not....those with the most pay the least, same as it's ever been.;)

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An OO cannot take out an IO mortgage.

A BTL LL can. That should be stopped, dead.

An OO can take out an IO mortgage. They have to have "a clearly understood and credible repayment strategy in place for the interest only part of the mortgage". That could easily be selling the property in question and/or taking a pension lump sum, depending on whether they have a persuasive plan for where they'll live once they sell.

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An OO can take out an IO mortgage. They have to have "a clearly understood and credible repayment strategy in place for the interest only part of the mortgage". That could easily be selling the property in question and/or taking a pension lump sum, depending on whether they have a persuasive plan for where they'll live once they sell.

I think the MMR allow an IO mortgage, technically.

Here are the HSBC IO rules:

  • sole applicants must have a minimum income of £100,000 per annum excluding bonus, commission, overtime and rental income.
  • For joint applications, at least one applicant must have an individual income of £100,000 per annum excluding bonus, commission, overtime and rental income.
  • For a Buy-to-Let Interest only mortgage, you must meet our Buy-to-Let criteria

I think thats an effective 'No' to 95% of the UK population.

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An OO can take out an IO mortgage. They have to have "a clearly understood and credible repayment strategy in place for the interest only part of the mortgage". That could easily be selling the property in question and/or taking a pension lump sum, depending on whether they have a persuasive plan for where they'll live once they sell.

Who checks the repayment vehicle?...... lenders do not, as long as there is hpi and their interests are covered they welcome a regular payment of as many years as possible IO...very often a much higher rate than a repayment mortgage.....repayment means killing debt, lenders make money from low risk debt and growing debt....no debt no income.;)

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An OO can take out an IO mortgage. They have to have "a clearly understood and credible repayment strategy in place for the interest only part of the mortgage". That could easily be selling the property in question and/or taking a pension lump sum, depending on whether they have a persuasive plan for where they'll live once they sell.

I thought that selling the house was explicitly excluded as a possible repayment strategy?

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I thought that selling the house was explicitly excluded as a possible repayment strategy?

From PS12/16 Mortgage Market Review Feedback on CP11/31 and final rules (October 2012)

As we stated in CP11/31, there is a consensus view that interest-only should be a ‘niche’ product. We expect most mainstream lending to take place on a capital and interest basis. We recognise that interest-only mortgages can be appropriate in a wide variety of circumstances, so we do not think it would be useful, or practical, to set out any form of minimum standards.

[...]

In relation to what might constitute a ‘speculative’ repayment strategy, we mean a strategy where the borrower is reliant on uncertain external events, such as property price increases or an inheritance.

Also in response to concerns about the fact that some "disabled borrowers may not be able to demonstrate a repayment strategy for their interest-only mortgage that is acceptable to lenders, if they are relying on the eventual sale of the property (e.g. on death).

We have already acknowledged that customers may have a wide variety of repayment strategies. We do not prevent lenders from accepting the eventual sale of the property as the repayment strategy, providing the customer is not relying on a speculative strategy, such as property price increases.

Essentially, the regulator is allowing that there may be some people for whom an interest only mortgage with a separate repayment strategy is appropriate, but it will be a "niche" product, not 40% of the market in London and the South East as it was in the go-go years. Further, within that niche there may be borrowers for whom sale is a reasonable repayment strategy.

For example if you were making excellent money and already owned outright a home in the Cotswolds to which you intended to retire, you could probably be 60% LTV interest-only on a London home and have the affordability assessed on just the interest with the repayment strategy being a sale, (particularly if you had separate liquid assets or a decent retirement income).

It would be a credible repayment strategy because the circumstances where you'd come a cropper (e.g. big enough house price falls that it would wipe out all your equity, and eat through your liquid assets and still leave you forced to sell your other home too and not leave you enough left over to buy something somewhere) were pretty extreme.

Hence interest-only is itself a niche product, and interest-only with sale as a repayment strategy is a sub-niche within that niche, but strictly speaking interest-only lending with sale as the repayment strategy is possible, but not for some pug punter using the mortgage to 'buy' their one and only house.

Edited by Idlewild

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Niche financial product also means expensive.

A regulated bank should not be entering the IO market. IO mortgages should require a much higher IR and capital charge.

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