Jump to content
House Price Crash Forum
Sign in to follow this  
trompe le monde

Interest-only Mortgage Take-up Doubles

Recommended Posts

http://www.myfinances.co.uk/News/mortgages...#036;400820.htm

The number of interest-only mortgages being taken out has doubled over the last four years, as more and more Britons try to get on the property ladder.

This rise in interest-only mortgages has coincided with a rise in average house prices of 41 per cent over the same period.

Figures from the Council of Mortgage Lenders reveal that in 2002 the percentage of first-time buyer mortgages that were interest-only was 11 per cent, a number which rose to 21 per cent in 2005.

Meanwhile, the average house price rose from £95,356 in 2002 to £160,319 in 2006, according to Nationwide figures.

Interest-only mortgages are often more attractive to the first-time buyer because the monthly repayments are lower than repayment mortgages. This is because the mortgage-holder only pays the interest on the loan.

However, the draw-back is that when it comes to selling the property, all the money borrowed has to be given back, and if the price of the house has fallen since the loan was taken out, this can cause big problems for the mortgagee.

The surge in the number of interest-only mortgages being taken out is a cause of concern for price comparison site moneysupermarket.com, which says it is important for consumer to consider all their options before plumping for the interest-only deal.

It advises that consumers doing so should make sure they can afford to invest in savings elsewhere, in case of a downturn in the housing market.

Louise Cuming, head of mortgages at moneysupermarket.com, said: "I would whole-heartedly urge consumers to think carefully before taking out an interest-only mortgage - even if they are attracted by the lower monthly payments.

"People should only consider this type of mortgage if they are sure they will be disciplined enough to save money elsewhere - as well as setting aside any additional lump sums of cash, like bonuses — and not touch it."

Research shows that the longer one stays on an interest-only mortgage, the larger the monthly payments will be when switching to a repayment mortgage.

For example, according to moneysupermarket.com, a £150,575 mortgage over 25 years paying interest-only for the first five years with a term tracker of 4.99 per cent will require monthly payments of £627.80.

Switching to repayment after the five years means monthly payments increase to £995.53. Had the mortgage been based on repayment from the start, monthly payments would have been £881.70 - £113.83 less.

Over the course of 25 years, this saving would add up to around £12,000.

Ms Cuming added: "If a homebuyer can afford to repay their mortgage from the off, then I would urge them to consider this option seriously."

Having trawled through three pages of new posts, couldn't find this one anywhere.

The scary thing to me is that it seems that over 20% of FTB mortgages are now interest only. In a low wage inflation environment, this debt is just not going to erode. If the average FTB is 34, they'll be 59 at the end of the term, with no capital repaid unless they wise up along the way. Even with a decent pension at the end of it all, how will this be repaid?

TLM

Share this post


Link to post
Share on other sites

http://www.myfinances.co.uk/News/mortgages...#036;400820.htm

Having trawled through three pages of new posts, couldn't find this one anywhere.

The scary thing to me is that it seems that over 20% of FTB mortgages are now interest only. In a low wage inflation environment, this debt is just not going to erode. If the average FTB is 34, they'll be 59 at the end of the term, with no capital repaid unless they wise up along the way. Even with a decent pension at the end of it all, how will this be repaid?

TLM

Of course they are fully signed up to the concept of permanent HPI. They believe that they will use the capital growth as a deposit on the next step of the ladder and maybe think about a repayment mortgage by rung 2 or 3. It has worked in the past of course but going forward ???

Share this post


Link to post
Share on other sites

Of course they are fully signed up to the concept of permanent HPI. They believe that they will use the capital growth as a deposit on the next step of the ladder and maybe think about a repayment mortgage by rung 2 or 3. It has worked in the past of course but going forward ???

They can upgrade if they can save enough money to jump the rungs as they steadily move further apart in the rising HPI scenario.

Conversely, it's like borrowing cash to buy shares before a slide. These buyers don't realise that they are highly geared in a topped out commodity. A new generation to discover what 'negative equity' really means?

TLM

Share this post


Link to post
Share on other sites

This is the real problem I foresee 20 years from now - people only a few years from their retirement age with no endowment to pay the capital - what will they do?. There are 2 things which I feel make this situation worse than pre-last crash:

1, The average earnings ratio is bigger

2, Interest rates are at their lowest

The debt will erode oh-so-slowly - then factor in some modest rate rises over the next decade and you can see that it just will not get any easier for many people with large mortgages unless their salary jumps significantly through promotion etc.

Also to note- the average FTB is over 30. By this age the main period of significant career advances is over for most people. Where is the extra money to repay the capital going to come from?

Share this post


Link to post
Share on other sites

They can upgrade if they can save enough money to jump the rungs as they steadily move further apart in the rising HPI scenario.

Conversely, it's like borrowing cash to buy shares before a slide. These buyers don't realise that they are highly geared in a topped out commodity. A new generation to discover what 'negative equity' really means?

TLM

They aren't banking on saving between rungs - how could they - they are maxed out already. No they are banking on HPI in effect doing the saving for them (as it has done for generations before them). The idea is not a bad one - but their timing is awful. Neg equity for sure around the corner for this type of buyer.

Share this post


Link to post
Share on other sites

Also to note- the average FTB is over 30. By this age the main period of significant career advances is over for most people. Where is the extra money to repay the capital going to come from?

point made in my first post ;)

Well worth repeating though, it's going to be a biggie.

TLM

Share this post


Link to post
Share on other sites

They aren't banking on saving between rungs - how could they - they are maxed out already. No they are banking on HPI in effect doing the saving for them (as it has done for generations before them). The idea is not a bad one - but their timing is awful. Neg equity for sure around the corner for this type of buyer.

agreed, if they are just trying to make a cash profit. If they plan to 'move up the ladder', though, the cost of their more expensive dream home just pulls further away like a Porsche overtaking a Reliant Robin. They're both hard on the gas but the gap is going to widen and they'll be stuck in that ex council 1 bed flat for a long time.

TLM

Share this post


Link to post
Share on other sites

Depends how you use an IO mortgage. I don't think they are the root cause of all evil. For example, an IO mortgage is probably the equivalent of renting anyway. So if you are renting and saving and prices are not dropping, you could get an IO, save and then make a capital payment every now and then.

This would, of course, fall apart if prices started to drop.

<_<

The real trick is being disciplined to take this approach. I personally like this because you could use the money to invest as you see fit, in order to pay for it. But having read the "A Nations Of Spendaholics" thread I doubt many could take this approach.

Share this post


Link to post
Share on other sites

The next mortgage to come out is a default only pay interest on the interest you haven't paid kinda repossession / insolvency mortgage.

Apparently the repossession type are on the way up as well.

Share this post


Link to post
Share on other sites

Do they understand them? Hrm, does it mean I can borrow more, more, more and buy that house now, now now? Will I be donald ducked with endless mortgages that are rolled over and over for many decades? Yes, yes yes!

Where do I sign?

Share this post


Link to post
Share on other sites

Depends how you use an IO mortgage. I don't think they are the root cause of all evil. For example, an IO mortgage is probably the equivalent of renting anyway. So if you are renting and saving and prices are not dropping, you could get an IO, save and then make a capital payment every now and then.

This would, of course, fall apart if prices started to drop.

<_<

The real trick is being disciplined to take this approach. I personally like this because you could use the money to invest as you see fit, in order to pay for it. But having read the "A Nations Of Spendaholics" thread I doubt many could take this approach.

You're right IO is like renting but from the bank not a landlord. However, currently you are able to save more renting than paying IO. So why not be tenant and be disciplined and save rather than making a capital repayment?

Share this post


Link to post
Share on other sites

If people are stupid enough not to understand how to use an IO mortgage properly then they deserve all they get in the future. There will be no mis-selling scandal either, todays motgage application forms are legally watertight.

IO mortgages are great if used properly. Terrible if abused.

Share this post


Link to post
Share on other sites

IO mortgages are great if used properly. Terrible if abused.

What percentage of FTBs going for Interest Only mortgages would you say will use them properly, and what percentage will not?

I'd go for >50% in the latter category.

Billy Shears

Share this post


Link to post
Share on other sites

IO mortgages are great if used properly. Terrible if abused.

How is it possible to use an IO 'properly' in the current market? Capital gains from a recent purchase are unlikely, and massive losses increasingly possible.

So where is the sense? People are using them because it makes their mortgage 'cheaper', and they get to 'own' that house.

Edited by tahoma

Share this post


Link to post
Share on other sites

How is it possible to use an IO 'properly' in the current market? Capital gains from a recent purchase are unlikely, and massive losses increasingly possible.

So where is the sense? People are using them because it makes their mortgage 'cheaper', and they get to 'own' that house.

IO mortgage application forms insist that you confirm you have alternative arrangements in place to pay off the principle.

How many lie is a debate we've seen on here plenty of times.

How many FTBs use IO mortgages properly? Under 50% definitely.

Every individual tends to think that they'll have salary increases in the future well above average and therefore can swap to repayment later in life of mortgage or over-repay. Complete nonsense of course.

The financial vehicle to repay the principle should be in place at the outset (or preferably earlier).

Share this post


Link to post
Share on other sites

How is it possible to use an IO 'properly' in the current market? Capital gains from a recent purchase are unlikely, and massive losses increasingly possible.

So where is the sense?

Assuming that someone is going to pay off a 150K mortgage in 15 years, and if this someone is clever enough to invest the money to pay off the capital in an investment that performs better, after tax than the interest rate on the mortgage, they are better off. I just wrote a few line program to calculate how much would be earnt if the difference between repayment and interest only mortgage (assuming 5% fixed) were saved every month and interest paid at different interest rates. Unfortunately, my program suggests that getting the same 5% return as a mortgage means that over the 15 years the amount saved will be 154K compared to a 150K, and taking the repayment versus IO costs as calculated by the BBC mortgage calculator. So they must calculate their figures different from how I calculated mine. But the difference is small.

Is tax paid on interest paid for investments intended to pay off a house? If this is the case, then an interest only mortgage becomes much less of an attractive proposition.

I think your point about capital losses really addresses the buy or not buy decision. Once the decision to buy a property is made, and if the only choice is repayment versus IO, and the property is going to be held long term, then there is the possibility of an IO mortgage being better provided that the purchaser knows what they are doing in terms of investment.

Billy Shears

Share this post


Link to post
Share on other sites

Assuming that someone is going to pay off a 150K mortgage in 15 years, and if this someone is clever enough to invest the money to pay off the capital in an investment that performs better, after tax than the interest rate on the mortgage, they are better off. I just wrote a few line program to calculate how much would be earnt if the difference between repayment and interest only mortgage (assuming 5% fixed) were saved every month and interest paid at different interest rates. Unfortunately, my program suggests that getting the same 5% return as a mortgage means that over the 15 years the amount saved will be 154K compared to a 150K, and taking the repayment versus IO costs as calculated by the BBC mortgage calculator. So they must calculate their figures different from how I calculated mine. But the difference is small.

Is tax paid on interest paid for investments intended to pay off a house? If this is the case, then an interest only mortgage becomes much less of an attractive proposition.

Good point - well illustrated. I posted much the same about a month ago in another thread discussing IO mortgages. Most people would use their ISA allowance to build a tax free pot.

I can't understand why people think IO mortgages are the cheap option. You have to include the cost of the financial vehicle into the monthly budget as well as the mortgage payment.

Share this post


Link to post
Share on other sites

Good point - well illustrated. I posted much the same about a month ago in another thread discussing IO mortgages. Most people would use their ISA allowance to build a tax free pot.

I can't understand why people think IO mortgages are the cheap option. You have to include the cost of the financial vehicle into the monthly budget as well as the mortgage payment.

In my calculation, about £7K per year would have to be put into the pot. I think that's possible if all types of ISA are used. Are there restrictions on how stocks and shares are included in an ISA?

Edit: And concerning people thinking that IO mortgages are the cheap option; over and above other points made in other threads such as comparing mortgage buyers to dogs in Gary Larsen cartoons, perhaps people who see HPI increasing at 10-20% a year forever think that the initial purchase price will be an irrelevance in the future.

Billy Shears

Edited by BillyShears

Share this post


Link to post
Share on other sites

Assuming that someone is going to pay off a 150K mortgage in 15 years, and if this someone is clever enough to invest the money to pay off the capital in an investment that performs better, after tax than the interest rate on the mortgage, they are better off. I just wrote a few line program to calculate how much would be earnt if the difference between repayment and interest only mortgage (assuming 5% fixed) were saved every month and interest paid at different interest rates. Unfortunately, my program suggests that getting the same 5% return as a mortgage means that over the 15 years the amount saved will be 154K compared to a 150K

Many people spend freely using money that isn't theirs, how many will be disciplined enough to sit on a £150k pot of gold?

Of course they are fully signed up to the concept of permanent HPI. They believe that they will use the capital growth as a deposit on the next step of the ladder and maybe think about a repayment mortgage by rung 2 or 3. It has worked in the past of course but going forward ???

How can they simultaneously subscribe to the notion of hyperinflation of incomes bailing people out, even with high interest rates to match, and forming the housing ladder as we (or our parents) know it... whilst also believing that we're in a low inflationary environment of low interest rates and modest wage growth.

I do not doubt the inflationary zeal of the central banks, but it certainly isn't showing up in wages and they're keen to prevent 'leakage', how is cheap tat from china like a DVD player expected to maintain peoples standard of living?

Edited by BuyingBear

Share this post


Link to post
Share on other sites
The next mortgage to come out is a default only pay interest on the interest you haven't paid kinda repossession / insolvency mortgage.

Nah, next will be the 'buy now, pay in twenty-five years' mortgage. You get the house now and pay off the principle and accumulated interest at the end of the mortgage when you sell... since houses are going to keep going up at 20% a year and interest rates stay at 4.5% or below it's a no-brainer for the banks.

Edited by MarkG

Share this post


Link to post
Share on other sites

Nah, next will be the 'buy now, pay in twenty-five years' mortgage. You get the house now and pay off the principle and accumulated interest at the end of the mortgage when you sell...

And live where? And what happens when millions of IO minions try to sell up and do the same? ;)

Share this post


Link to post
Share on other sites
And live where?

A gold-plated executive caravan.

Well, maybe they won't be able to afford the gold plate the rate it's going up.

Share this post


Link to post
Share on other sites

Until last night I too was awfully suspicious of interest only mortgages, then I met a contractor friend of mine in Soho. He was telling me that he and others working in jobs where they get big bonuses are doing IO. This guy day-trades so occasionally reaps big pots of cash.

They buy somewhere with 10% deposit. (He is going to rent his out, whilst he rents a flatshare)

In a a year or so, depending on the bonuses they change to repayment and dump down another 10% of the equity.

He gave me the impression that a lot of monied consultants and contractors working in the city are doing this.

IO is so cheap compared to repayment. These guys make small fortunes with investments outside of their main jobs too.

Share this post


Link to post
Share on other sites

And live where? And what happens when millions of IO minions try to sell up and do the same? ;)

Will it be the IO millions who try to sell up, or will it be the banks repossessing and selling?

Billy Shears

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.