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Realistbear

6 Reasons Why Interest Only Loans Should Be Avoided

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http://www.50connect.co.uk/50c/articlepage...c=propertylinks

Research last year by Abbey found that about one in five housebuyers who took out interest only mortgages said they had done so because they would not have been able to afford a house otherwise. :o

But here are six reasons why interest only loans should be avoided by all but the most sophisticated borrower:

1. You won't have an equity safety net - If anything happens to you, such as ill health or redundancy, and you cant meet your repayments, you wont have built up any equity in your home to give you a buffer for rescheduling the loan with your lender.

2.Alternative saving plans are risky - In the present low-interest environment, using a means of repayment outside a mortgage scheme leaves you with an above-average chance of failing to hit the target for repaying your loan when the time comes. Returns on savings accounts with banks and building societies are usually too low, and you have to pay tax on many of them. You therefore need to take some degree of risk with your alternative savings scheme, such as investing in stocks and shares, which means that if the market turns against you, you could be left with a shortfall. This has been the problem with endowment schemes.

3.Don't put off till tomorrow what you can pay today - Putting off repaying capital for a couple of years, and changing to a repayment mortgage later on, might be a sensible option if you could be sure you would have a higher income in a few years' time. The difficulty here is that your circumstances might change. Dual income couples find themselves with just one earner in the family and another mouth to feed if a baby comes along.

4.A lottery win will probably never happen - If you are relying on an inheritance or a business deal to pay off the loan, you need to be sure that the money will materialise. For example, what if the tax laws changed and you did not get as much cash as you thought you would, or Uncle Albert changed his will at the last minute? If you were thinking of relying on a lottery win, don't!

5.You will pay more interest - If you don't start paying down the capital from the start you will pay more interest in the long run.

6.You might not be able to sell when you want to - Selling the property to pay off the loan is the strategy used by many buy to let investors, but it is not really suitable if you need to live in the house.

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http://www.50connect.co.uk/50c/articlepage...c=propertylinks

6.You might not be able to sell when you want to - Selling the property to pay off the loan is the strategy used by many buy to let investors, but it is not really suitable if you need to live in the house.

I know I'm a Bear of very little brain but this has always intrigued me. A large number of BTL-ers are on I/O. They claim the place will "be their pension". Aside from the fact that recent entrants are not even covering the interest with the rent - two acquaintances I know have admitted that - when the 25 years is up surely the bank will want their 200k that afternoon? So, since Johnny BTL presumably won't have any cash anywhere (they've not even afforded to pay the capital back remember), they'll have to sell the gaff to pay the loan off. Assuming anyone wants that nasty single bed studio opposite the council incinerator that is! No more rental income just when they'll need it for their pension and in the unlikely event they've got a bit of capital appreciation it's hardly going to be enough to draw a liveable income from after inflation. I'm sure you BTL-ers can put me right though.

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Interest only mortgages are the scourge of today's housing market. Many people who have one don't even understand that they won't own the property at the end of the term. They will be the subject of miss-selling investigations in the same way as the endowment mortgages of the 80's.

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I know I'm a Bear of very little brain but this has always intrigued me. A large number of BTL-ers are on I/O. They claim the place will "be their pension". Aside from the fact that recent entrants are not even covering the interest with the rent - two acquaintances I know have admitted that - when the 25 years is up surely the bank will want their 200k that afternoon? So, since Johnny BTL presumably won't have any cash anywhere (they've not even afforded to pay the capital back remember), they'll have to sell the gaff to pay the loan off. Assuming anyone wants that nasty single bed studio opposite the council incinerator that is! No more rental income just when they'll need it for their pension and in the unlikely event they've got a bit of capital appreciation it's hardly going to be enough to draw a liveable income from after inflation. I'm sure you BTL-ers can put me right though.

I completely agree with you I don't always agree with what is written on this forum but IO mortgages are lunacy. I wonder are these people smoking crack!! I don't think the 1 out of 5 are all BTL's however if you look at some of the stories on MSE you will see a lot of people up to their eyes in debt on IO mortgages but "we don't want to lose the house" like they owned it or something

Edited by *sparkle*

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I completely agree with you I don't always agree with what is written on this forum but IO mortgages are lunacy. I wonder are these people smoking crack!!

Agreed, to be fair I don’t know a single person, friend, colleague, or neighbour who lives in East Yorkshire that has an IO mortgage. Who are the people getting these IO mortgages? I suppose prices in the East Riding generally don’t warrant IO mortgages. When I was looking for my mortgage every IO mortgage made it perfectly clear you needed some fund/investments/whatever planned to pay it off.

You would have to be a complete moron to buy a house to live in on the basis of IO in my opinion. I agree 100%; people who stretch themselves to buy and have to rely on an IO mortgage are indeed smoking crack!

It makes my 75k capital mortgage look like a complete breeze. :)

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i was recently on a financial services seminar

lecturer at the front said interest only mortgages had become more popular because they were cheaper and only way ftb could afford to get on the property ladder.

lets not worry about the repayment then :unsure:

and this from someone who regulates mortgage brokers/financial advisers

unbelievable

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And since the BTL explosion over the past couple of years seems to have been concentrated in blocks of "developments ideal for investors", they'll all be being forced to sell by the banks at exactly the same time in the same place. Glut.

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I completely agree with you I don't always agree with what is written on this forum but IO mortgages are lunacy. I wonder are these people smoking crack!! I don't think the 1 out of 5 are all BTL's however if you look at some of the stories on MSE you will see a lot of people up to their eyes in debt on IO mortgages but "we don't want to lose the house" like they owned it or something

Is there anywhere we can find stats on what kind of mortgages people are taking out? Or would the banks protect this kind of info?

To my mind if I/O is the way everyone is going, this is the potential ‘trigger’ that would kick off a downward spiral.

I’m a reasonably bull(ish) not-so-bright amateur BTLr. But so not bullish that I would take out 100% I/O mortgages. I don’t see much point. My investments are 25% deposits and 20 yr repayment mortgages. I’m not interested in the monthly profit (They do, but I get taxed heavily on it anyway) Just the mortgage being paid off by the tenant will do. Ultimately, I want to own the houses outright. That’s my pension and would regard any HPI over that 20 yr period as nothing more than a bonus.

I know a couple of other amateur BTLr’s in the same boat, similar setups etc. (Self-Employed IT Contractors). So I read this post with interest. Who would take out a 100% I/O mortgage? I didn’t even think you could do a BTL mortgage that way anyway? Aside from anything else, the really good mortgage deals are only available with large deposits.

Bottom line is if you haven’t got that deposit. Don’t bother. If you have, then you can safely say you’re in it for the long.

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"Alternative saving plans are risky"

and

"Don't put off till tomorrow what you can pay today"

Errr....don't these two statements contradict what most people on this board seem to be suggesting right now. That currently you're better off saving and investing than buying into an overpriced property market?

The above advice seems to be - invest in property - and do it now!

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It will come as no surprise I'm sure that I have an IO mortgage.

But then I'm not financially naive. Discipline is all that's required, discipline.

Do they teach that in schools these days?

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I know I'm a Bear of very little brain but this has always intrigued me. A large number of BTL-ers are on I/O. They claim the place will "be their pension". Aside from the fact that recent entrants are not even covering the interest with the rent - two acquaintances I know have admitted that - when the 25 years is up surely the bank will want their 200k that afternoon? So, since Johnny BTL presumably won't have any cash anywhere (they've not even afforded to pay the capital back remember), they'll have to sell the gaff to pay the loan off. Assuming anyone wants that nasty single bed studio opposite the council incinerator that is! No more rental income just when they'll need it for their pension and in the unlikely event they've got a bit of capital appreciation it's hardly going to be enough to draw a liveable income from after inflation. I'm sure you BTL-ers can put me right though.

The strategy is sound as long as the investment is made with the problem of loan repayment in mind. A single BTL on IO will result, as you point out, in the LL selling up, losing the income & I will add that they won't have enough cash to buy a comparable place, so will end up at an older age having to invest the cash somewhere else. They will also have paid CGT which will give them problems.

The sound strategy however, is to buy several places in quick sucession - minimum of three, but 4 or 5 is better. All mortgages are IO, the properties should grow over the life of the 25 year mortgage to be worth 3 to 5 times what they cost to buy. The strategy then is to sell 1 out of 3 or 4, or 2 out of 4 or 5 to raise the cash to pay out the remaining loans. CGT is payable on the sold properties, but can be lowered after so many years of ownership and we can assume that the investor would sell in a way that minimises the potential CGT. Anyway, the investor is left with somtheing between 2 and 4 properties, fully paid for, earning enough money to both pay for the maintenance of the property, taxes and supplement the persons retirement income. I'm sure a person with 4 or more properties would be able to manage all of these commitments and have an income to live off as well.

I forgot to add. In life, they'll be more than comfortable, at death, they'd have an inheritance to pass onto their family in the form of real estate. That kick-ar$e investment strategy beats hands-down the idea that money should be saved into a pension scheme that forces the retiree to buy an annuity with their savings.

Edited by Time to raise the rents.

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There is nothing fundamentally unsound about interest only mortgages whether you're BTL or OO....All the investment returns are the same as for s/o paying a repayment mortgage.............and the cash you save can be invested elsewhere

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"The sound strategy however, is to buy several places in quick sucession". A fair response. (I always enjoy your responses, which won't do my street cred much good). But how many of the recent wave of amateurs have done that? And how many are able to FROM NOW ON? Those I know have one or at most two - they're only doing it because they're scared sh1tless and VIs have told them they're GUARANTEED to get a good pension off it. Pity those VIs aren't regulated. I'll pop back here in 25 years and we can compare notes, one of us'll say "I told you so".....

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the properties should grow over the life of the 25 year mortgage to be worth 3 to 5 times what they cost to buy

Why.. is that simply an assumption based on history repeating itself?

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The point is, I believe, that there are good times to buy and there are bad times. Right now is a bad time as we are in the down cycle after many years of extraordinary property inflation. For investors, now is a particularly bad time as the prospects for capital appreciation are poor in the short and medium term. The downcycle may last many years and it would be unwise to tie up cash in real estate with the prospect of 3-5% return p.a. when there are downside risks of up to 50% (if history can be relied upon).

The economic cycle cannot be beaten. We have had the boom now its time for the bust.

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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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