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y0ssarian

How Do Interest Only Morgages Work?

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Has anyone here taken out an interest only mortgage?

I would be grateful if someone could explain to me what is involved with taking out an interest only mortgage pls,

are you required to have some form of investment scheme to make the payback on the capital sum?

surley they dont just let you pay the interest and dont worry how you will payback the capital loan at the end?!

whats the different between interest only and an endowment??

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With a endowment mortgage some of your monthly mortgage payments is used to pay off the interest on your debt, the rest goes towards a endowment policy. In theory this would generate a lump sum of cash when the policy ends which you then use to pay off your mortgage.

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An endowment is a scheme you pay into in addition to the interest payment for the term of the loan. When the capital amount is due - the endowment HOPEFULLY will have matured enough to be enough to pay it off.

I don't know whether you are allowed to take out an IO mortgage and rely on HPI alone.. I paid mine off when I sold up solely with HPI & I am still paying into the endowment as a saving scheme, but may cash it in..

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thanks for the replies, though I know already what an endowment policy is, what im looking for is an explanation on what an interest only mortgage involves

if you take out an interest only mortgage does the bank make sure you have some kind of an investment that will pay off the capital or do they just ask for the interest payments and let you work out how you will pay the capital?

I dont want one my self, im just curious to know what the situation is for all the people taking out interest only mortgages.

Edited by y0ssarian

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Interest-only means you rent from the bank for twenty-five years, sell the house, and hope it's gone up in price enough to pay off the mortgage and return more than the difference between the mortgage interest payments and rental payments.

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..if you take out an interets only mortgage does the bank make sure you have some kind of investment that will pay off th ecapital ...

Nope - they dont care. If you have no way of paying it off at end - ie no HPI, its your loss and their gain, ie they get the property back

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thanks for the replies, though I know already what an endowment policy is, what im looking for is an explenation on what an interest only mortgage involves

if you take out an interets only mortgage does the bank make sure you have some kind of investment that will pay off th ecapital or do they just ask for the interest payments and let you work out how you will pay the capital?

I dont want on my self, im just curious to know what the situation is for all the people taking out interest only mortgages.

haven't got one either - as far as I know the applicant just ticks a box declaring he is making provision to pay off the capital. I don't think there are any checks and controls. If I'm right then the whole system is potentially far more dangerous than endowment mortgages.

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If I'm right then the whole system is potentially far more dangerous than endowment mortgages.

Indeed. It's just like an endowment mortgage... except without the endowment.

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thanks for the replies, though I know already what an endowment policy is, what im looking for is an explenation on what an interest only mortgage involves

if you take out an interets only mortgage does the bank make sure you have some kind of investment that will pay off th ecapital or do they just ask for the interest payments and let you work out how you will pay the capital?

I dont want on my self, im just curious to know what the situation is for all the people taking out interest only mortgages.

They 'assume' you are saving to pay off the capital, however most of the people some of the people i know on IO have bought on IO, have removed capital through remorgaging and cant see the point of paying the morgage off.

If they dont have a pension, whats the point of paying the morgage off? The state will pay for them in there old age, provide them with accomodation etc etc...

Edited by moosetea

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There was an article in Sunday papers saying that 1/3 of mortages are now Interest Only !!!!, and of these, 1/3 don't have a recognised 'investment vehicle', just a wing-and-a-prayer that the property's value increases, or increasingly, as the article went on in further detail, that 'inheritance' will sort everything out

:blink::blink:

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I assume a the end of an IO mortgage you can just take out another mortgage?

that's right

it's called renting

except it's more expensive

and you take the risk of the prices going down

but as price can only go up you're all right. :)

Edited by Sisyphus

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If that's your combined knowledge of the housing market then you deserve to never be able to afford a house.

What a load of misinformed twaddle.

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Wow, im stunned ohmy.gif

If what you guys say is true and I beleive you then there is no argument, the housing market is insane.

House prices/the asset behind thes loans only has to drop a small percent and banks will be calling in these loans or putting premiums up to cover the difference.

no doubt when it all goes tits up these people will be crying that they were miss sold.

everyone will be crying that it was the EAs, the government, the banks etc

Its a shame that we cannot "bottle" in some way the current sentiment so that in a few years when people are opening very unpleasant letters from the bank and crying into their neg equity, they can be reminded of the insanity that prevaled. Memories are short and people will conveniently forget the stupidity of the sheeple.

the same banks that are now pushing loans like drug pushes with smiles on thier faces will turn absolutley ruthless, I hope those affected rise up and burn down their local high street branch when tshtf.

If that's your combined knowledge of the housing market then you deserve to never be able to afford a house.

What a load of misinformed twaddle.

Please explain what you mean?

You have a different understanding of interest only mortgages?

There was an article in Sunday papers saying that 1/3 of mortages are now Interest Only !!!!, and of these, 1/3 don't have a recognised 'investment vehicle', just a wing-and-a-prayer that the property's value increases, or increasingly, as the article went on in further detail, that 'inheritance' will sort everything out

:blink::blink:

Which paper was that so I can go have a look?

Edited by y0ssarian

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You have a different understanding of interest only mortgages?

Let me guess: interest-only mortgages are a great way for FTBs to get on the ladder before they miss the boat, because house prices only ever go up. Our parents had it just as hard when they first bought a house, so we shouldn't complain about paying 300,000 pounds for a two-bed flat.

Edited by MarkG

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There was an article in Sunday papers saying that 1/3 of mortages are now Interest Only !!!!, and of these, 1/3 don't have a recognised 'investment vehicle', just a wing-and-a-prayer that the property's value increases, or increasingly, as the article went on in further detail, that 'inheritance' will sort everything out

:blink::blink:

Hmmmm - My brother in law and his wife are banking on their 'inheritance' to pay of their lie-to-buy / interest only / no endowment / reliant on 'inheritance' / leasehold / buy at the top of the market mortgage.

They have really p'd my husband and me off over the past few years. They have been trying to get us to buy for a long time - they think we're childish and foolish for renting. They don't have a proper job between them - one is a jobbing actor, the other a stay at home mum (fair enough). They made a small profit on a flat they had in london - paid of their credit card debt, then bought again last May

The reason they p'ss me off so much is the fact that they think they're some kind of investment gurus - they even offered to come round to see us to help us buy somewhere - what they meant was tell us how to lie to the bank to pretend we're on incomeX ,apply for an interest only mortgage & buy at the top.

I don't know whether they:

A Do, GENUINELY believe they are property developers who are going to make a massive profit on their hideous house and want us to have the same (i don't think so)

or

B Are more Machiavelian than that, and just want us to be in the same boat as them (safety in numbers etc - Crash Gordon won't let house prices go down - it would affect too many people, kind of mentality)?

Anyway - my husband has been compliling his superb "HOUSE PRICE CRASH COMPENDIUM PARTY PACK" for the past 4 years - it's going to be so pleasurable to invite the gloating b'strd's round when the crash is well and truly underway and show them that we haven't been quite as ignorant as they thought we were...

Edited by wifeling-smi

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What a load of misinformed twaddle.

The clue is in the user name. Maybe you could tell us all about responsible lending.

http://www.fsa.gov.uk/consumer/07_MORTGAGE...erest_only.html

"Mortgages - Interest only mortgages

An interest only mortgage is one way to repay your mortgage, the information below will help you to decide whether an interest-only mortgage is right for you.

What is an interest-only mortgage?

An interest-only mortgage means your monthly payments cover only the interest on the loan. They do not pay off the amount you owe. So, at the end of the mortgage term, assuming you have made all the interest payments, you will owe the same amount that you borrowed at the beginning. You need to have a lump sum available to pay the mortgage back in one go at this time.

Make sure you make arrangements to pay off the loan when the mortgage ends. If you don't, you could lose your home.

How to pay off an interest-only mortgage

If you choose an interest-only mortgage, make sure you know from the outset how you intend eventually to pay off the loan. You don't have to arrange this through your lender. Your main options are to:

Save regularly

You make payments into a savings or investment scheme each month to build up a lump sum to pay off the loan when the mortgage term ends (or sooner if you can afford it). There is a risk if the savings plan does not build up a big enough lump sum by the end of the mortgage term.

Convert to a repayment mortgage later

This might be a suitable option if, say, your earnings are low now but are expected to be much higher in future, for example, when you've finished training or gained professional qualifications. Using an interest-only mortgage keeps your monthly payments down until you can afford the higher monthly payments of a repayment mortgage.

Because you're putting off repaying the capital you will end up paying more interest and more in total for your mortgage over the term.

Use a lump sum from somewhere else

For example an inheritance, or selling something such as another property or a business. This is usually a risky strategy - how sure are you that the inheritance will materialise, what happens if your business fails?

Sell the mortgaged property to pay off the loan

This is suitable only if you won't need to live in the property - for example, if it is a buy-to-let property or a second home, or you are buying something smaller or cheaper.

What you could use to pay off an interest-only mortgage?

Endowment mortgage

ISA (Individual Savings Account)

Pension Mortgage

The return offered by a bank or building society account is usually too low to pay off the amount borrowed.

Instead, it's usual to accept some risk in the hope of a higher return by choosing schemes whose return is linked to the stock market. With these stock-market-linked schemes, there is no guarantee that your money will grow enough to pay off the mortgage in full by the end of the mortgage term."

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Interestingly, repayment morgages are more popular today than ever before.... only a small proportion are IO.... See percentage of repayment morgages against time graph...

CMLRepayment.JPG

post-552-1142862787.jpg

Edited by moosetea

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Slightly off-topic, but I was speaking to someone about IO mortgages the other day.

He was saying that 'overpaying' an IO mortgage upto the repayment level would not give the same result as a repayment mortgage i.e. if you borrow £100k, and the IO monthly payment is £400 and the repayment would be £650, you would not pay it off as quickly by taking the IO option and still paying £650 per month.

Is this true, and if so could someone explain how it works? :)

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You never 'pay off' an interest-only mortgage. That's the whole point: you only pay the interest, and at the end of the mortgage you still owe exactly as much as you did at the start.

An interest-only mortgage is a bet that house prices will inflate enough to cover the cost difference between mortgage and rent.

Edited by MarkG

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You never 'pay off' an interest-only mortgage. That's the whole point: you only pay the interest, and at the end of the mortgage you still owe exactly as much as you did at the start.

An interest-only mortgage is a bet that house prices will inflate enough to cover the cost difference between mortgage and rent.

You lunatic, of course you can pay off the principle with an Interest Only mortgage. You don't have to but that's the individuals choice. Why anyone would bet in the way you describe beggars belief.

Essentially the responsibility for having another method of paying off the principle rests with the borrower. The post above showed the myriad ways this can be done. Try applying for a IO mortgage and see how far you get without proof that you will pay off the full amount.

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Slightly off-topic, but I was speaking to someone about IO mortgages the other day.

He was saying that 'overpaying' an IO mortgage upto the repayment level would not give the same result as a repayment mortgage i.e. if you borrow £100k, and the IO monthly payment is £400 and the repayment would be £650, you would not pay it off as quickly by taking the IO option and still paying £650 per month.

Is this true, and if so could someone explain how it works? :)

You can't pay off the priciple with IO. So if you overpay, assuming no penalties, you will just pay off the interest earlier. There is nothing to stop you investing the additional £150 elsewhere though, and if you manage to get a better return than the amount of the principle over the term, you will have beaten the repayment mortgage.

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You lunatic, of course you can pay off the principle with an Interest Only mortgage. You don't have to but that's the individuals choice. Why anyone would bet in the way you describe beggars belief.

Essentially the responsibility for having another method of paying off the principle rests with the borrower. The post above showed the myriad ways this can be done. Try applying for a IO mortgage and see how far you get without proof that you will pay off the full amount.

You nutter.... why does the CML produce stats for IO morgages with no specifed repayment vehicle? 20% of people applying for morgages appear to be able to get IO morgages without telling there provider they are saving... Many/Most of these people wont have a repayment vehicle.

The people on this graph have ticked a box, and the provider trusts them....

IO_No_repayment_vehicle.JPG

post-552-1142865080.jpg

Edited by moosetea

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Try applying for a IO mortgage and see how far you get without proof that you will pay off the full amount.

Does the lender follow this up after the initial mortgage application? Do they check your investment vehicle after say 1 year, 5 years, 10 years to make sure you are doing what you promised in your mortgage application?

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  • 302 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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