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BillyShears

Io Now, Repayment Later

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I've noted recently that a number of people described in the press are buying houses on IO mortgages with the expectation that they will convert to a repayment mortgage at a later time. The example I read in a paper recently was a family who took out a 30 year IO mortgage fixed for 5 years, as this was all that they could afford at this time. Their plan is to convert to a 25 year repayment mortgage at the end of the fix. However, this assumes that they will be able to afford to pay back more after five years.

If interest rates rise in the interim, this could easily make it difficult for them. If interest rates go up from 4.5% to 6% in the interim (still belong long term trends), then the costs of servicing the loan will have gone up by a third, or 33.33'%. So, in order for the family to be able to afford a repayment mortgage at that time their income has to have increased by 6% per year (compounded). And that's to be able to afford the repayment mortgage. In order to pay off a 25 year repayment mortgage, they will have to pay 30% higher than that figure, or 73% more than they are doing now. This would require that their income increase 11.5% every year (compounded).

Notice the poll here, do people think it's more likely that such a family will be able to afford the repayment mortgage in 2011, is it more likely that they'll be where they are now, or do you think they won't even be able to afford the IO mortgage by then?

Billy Shears

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I don't think the country is in any position to see wage rises.

Unless one or other partner gets a better job/salary i don't see the situation changing significantly by 2011.

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Where's the choice for "they will be able to afford the IO mortgage but are likely to be in Negative Equity" ?

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This is the ulitimate, "let inflation erode my payments." However, in a low inflation environment it just doesn't work like that. People are just not going to get the amazing pay rises that they are gambling on.

If inflation kicks in interest rates will rise without bounds and hit people who maxed out on IO mortgages first. This is without even talking about negative equity....

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Where's the choice for "they will be able to afford the IO mortgage but are likely to be in Negative Equity" ?

That's quite a different question. If you post such a question as to whether people buying today on IO mortgages are likely to be in negative equity in five years I'll vote on it.

Billy Shears

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More info required really, but on the balance of probabilities, with assumed 2 earners, no real provision for kids growing up etc, maybe the ability to cut back some spending but a big risk of losing one salary - I think they will be in trouble.

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It staggers me that people think this is going to work. Even if they pay the IO for 5 years and get their capital gain (very, very unlikely) they would still have to remortgage to a repayment deal based on the value of the house at that point.

So they could withdraw the equity, but have an even larger capital amount to pay back plus interest. Or they could reinvest the capital gained in the property, but still have to pay the original amount plus interest.

Madness. Why rent off the bank for 5 years at about 3 times the rent on a private property? Emotional attachment to house ownership is just as damaging as an addiction to gambling.

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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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