Jump to content
House Price Crash Forum
Sign in to follow this  
Guest Baffled_by_it_all

What Are They Thinking?

Recommended Posts

Guest Baffled_by_it_all

Having a flatmate who's just taken on an I/O mortgage - which seems bizarre at the moment. I wonder what people maxed out on their mortgage are thinking will happen long term. Particularly those 'renting from the bank'

Wage inflation wiping out their debt?

Promotions increasing their earning power?

50% increases over the next 10 years - was quoted to me yesterday by a banker friend! So even HE believes it.

Share this post


Link to post
Share on other sites

Having a flatmate who's just taken on an I/O mortgage - which seems bizarre at the moment. I wonder what people maxed out on their mortgage are thinking will happen long term. Particularly those 'renting from the bank'

Wage inflation wiping out their debt?

Promotions increasing their earning power?

50% increases over the next 10 years - was quoted to me yesterday by a banker friend! So even HE believes it.

Has your flatmate arranged an alternative investment which will allow him to pay off the principal at the end of the loan?

Billy Shears

Share this post


Link to post
Share on other sites
Guest Baffled_by_it_all

Unless that includes playing the lottery - no.

When I discussed the speculative mortgage I'd looked at he said he 'couldn't afford a repayment one'

I'm guessing he's hoping his salary is going to go up.

Share this post


Link to post
Share on other sites

Most people hope that their salary will go up. I/O is popular with a certain age group becuase they hope to be making a lot more at 40 than they do at 25/30. Most switched on folks will.

Also, most people getting on the ladder these days have debt external to the mortgage. They plan to pay off these debts, and then use this money saved to start on the capital of the morgage. The extremely good I/O fixed rate deals for 5 years or so around at the minute promote this. Accord, if I remember rightly, do a blinder.

Couple these facts with the honest, if somewhat grim, realisation, that many shall inherit wealth when a parent dies, means that I/O maybe isnt the stigma its made out to be if you are at a certain age and want to get on with the whole property buying thing.

Share this post


Link to post
Share on other sites

Having a flatmate who's just taken on an I/O mortgage - which seems bizarre at the moment. I wonder what people maxed out on their mortgage are thinking will happen long term.

I am absolutely convinced that many people think that repayment mortgage is just a name for one type of mortgage and interest only is just another name for a mortgage and that both of these pay off the capital. Otherwise they wouldn't be allowed to call it a mortgage, right?

Alternatively, I think some people may be under the impression that you only pay the interest on the mortgage for the first few years and then start paying off the capital sum plus interest at a later date when hopefully you are earning more money.

People have tried to convince me to take an interest only mortgage and have only recently turned around and said "I didn't realise that an interest only mortgage means that you literally only pay off the interest and don't pay off the capital sum at all"

I would ask any friends taking out an interest only some discreet questions to try to work out whether they really know what sort of mortgage they have taken on.

If it turns out that they are well aware of the fact that they are renting off the bank - well, that beats the hell out of me, what are they thinking of? :blink:

Share this post


Link to post
Share on other sites

I can honestly say I have NEVER met anyone who thought that an interest only mortgage did anything else but pay the interest only :blink:

After all, the big clue is kinda in the name.. :)

Share this post


Link to post
Share on other sites

I can honestly say I have NEVER met anyone who thought that an interest only mortgage did anything else but pay the interest only :blink:

After all, the big clue is kinda in the name.. :)

You obviously move in the wrong circles. :P

NDL

Share this post


Link to post
Share on other sites

You obviously move in the wrong circles. :P

NDL

Your right, the more I read on here I'm starting to think I'm bloody lucky with my circle of friends! :blink:

Share this post


Link to post
Share on other sites

Wage inflation wiping out their debt?

Please will people stop saying that wage inflation wipes out debt, it doesn't. Wage inflation makes a debt easier to pay but that is different, it is only real inflation (ie. a permanent reduction in the value of money) that eliminates debt.

Consider the following:

Wage inflation 3% p/a; debt (interest free) £100,000, repayment due in 10 years, inflation rate 0%. In 10 years time your income is 35% higher but you still have £100,000 debt.

Wage inflation 8% p/a nominal (3% real), inflation rate 5%, debt as above. In 10 years time your (real terms) income is still 35% higher but your real debt is almost £40,000 lower.

It is the change in the value of money that eliminates debt, not the change in income. This is also why we need to focus on the real rate of interest, not the nominal one.

Share this post


Link to post
Share on other sites

Promotions increasing their earning power?

50% increases over the next 10 years - was quoted to me yesterday by a banker friend! So even HE believes it.

inflation alone at 2.25% would add a nominal 25% over ten years so 25% rise in real terms aint huge if wages rise by more than this

Share this post


Link to post
Share on other sites

It is the change in the value of money that eliminates debt, not the change in income.

Technically neither price nor wage inflation "eliminate" debt - they just reduce it relative to a particular benchmark. The confusion over which is important occurs because both types of inflation tend to happen together.

I would say that wage inflation is in fact the more important of the two so far as debt is concerned - your debt repayments as a proportion of income are likely to be more important than your repayments compared to the price of bananas.

If neither wages nor prices rise, your debt burden remains the same.

If prices go up without your wages rising correspondingly fast, if anything your debt burden becomes heavier since repayments represent a greater proportion of disposable income.

If your wages go up but prices don't, then you have oodles of money relative both to your debt and to the things you want to buy - bonus!

If both prices and wages rise, your debt will be appear lighter, but this is due to the higher wages rather than prices.

Share this post


Link to post
Share on other sites

Having a flatmate who's just taken on an I/O mortgage - which seems bizarre at the moment. I wonder what people maxed out on their mortgage are thinking will happen long term. Particularly those 'renting from the bank'

Wage inflation wiping out their debt?

Promotions increasing their earning power?

50% increases over the next 10 years - was quoted to me yesterday by a banker friend! So even HE believes it.

Personally, as someone "maxed out on interest only" my thinking is that I can do one of the following, or a combination of them with the money freed up -

(1) Not need to work for 5 years.

(2) Invest in property short term to make a higher return than the interest on the mortgage (you could call this a SIE - self invested endowment.) Not easy, but I'm fairly young, have no dependents and want to give it a go (my personality and job history mean I know I'll always be fairly poor if I work for other people).

(3) Pay off a chunk of the mortgage should that appear to be a wise move.

(4) Invest in something other than property short term to make a higher return than the interest on the mortgage (this is not going to be as easy as (2) as I have spent the last 4 years learning about property not anything else.)

The other main reason for interest only (which doesn't really apply to me) is that some people want to "lock in" to a property and a price now while they are 100% certain they can (and in the knowledge that this might not always be possible in the future - whether due to prices rising, credit tightening, lost job etc etc). Once on the property ladder they can worry about everything else later. (I'm not saying this is wise, but I can se how it suits some people)

Share this post


Link to post
Share on other sites

I can honestly say I have NEVER met anyone who thought that an interest only mortgage did anything else but pay the interest only :blink:

After all, the big clue is kinda in the name.. :)

:huh:

I thought IO stood for idiots option :blink:

It does <_<

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.