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cynic

Are Io Mortgages Such A Bad Idea?

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Can someone please destroy the following thinking for me - it's beginning to worry me.

To put my own perspective into the frame - I bought my first house in '77, traded up in '83 and sold in 2001 believing prices were precariously high. About a month after my sale we had 9/11 and of course the rest you all know. I bought a house in France and spend 50% of my time here with my partner who is an STR since 2004. I detest what’s happened to the market here and think G Brown should now be in the public stocks adjacent to a constantly replenished mound of rotting veg – for at least as long as he’s been chancellor.

I've been interested in the market since I bought my first place and though I haven't broken down the figures with anything like the rigour of many posters here, I've a fairly clear picture of the market ebbs and flows going back to the early 70s. Looking at prices now 23 years after my last purchase, it seems that you can take early 80's prices and just stick a zero on the end of those figures to get something in the order of today’s prices. Is that so far off the mark? Prices over the last 25 years have increased by a factor of 10 - maybe not quite but not far off either. This has been during a period when inflation figures have ranged from 'lowish' to 'highish' - yes, sorry I warned of the lack of rigour. But this last 25 year period might fairly have been described to have been unexceptional in terms of its inflation record - particularly when you take into account how devastating was the inflation history of the 70's when we had an enormous shock with oil prices arising from the formation of OPEC, repayment of loans from the IMF and the unformidable Dennis “with all due respect” Healey at the helm of our economy.

So, if you accept my very rough appraisal that prices have ten-tupled during an unexceptional – arguably typical – phase of economic turbulence, why shouldn’t buyers today expect things to pan out similarly over the next 25? So, they buy their average house today at 200k, in 25 years they sell at 2mill, pocket the 1.8mill difference and buy into a moderate but not punishing downsize?

Of course timing can make significant differences, e.g. prices are currently high, maybe it would be better to wait a couple of years. Possibly the optimum time to sell – when prices are highest within the 20-30 year interval will be 19, 22, 27 years hence…we’ll only have a clue about that nearer the time and obviously it will depend on the usual gamut of factors, interest rates, the economy, tensions between supply-demand etc.etc.

This doesn’t on the face of it – to me anyway – appear to be a particularly risky strategy. I would welcome any rebuttal.

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So, if you accept my very rough appraisal that prices have ten-tupled during an unexceptional – arguably typical – phase of economic turbulence, why shouldn’t buyers today expect things to pan out similarly over the next 25?

What makes the last 25 years typical? Essentially we have had a massive liberalisation of the financial system, completly unprecedented.

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Can someone please destroy the following thinking for me - it's beginning to worry me.

To put my own perspective into the frame - I bought my first house in '77, traded up in '83 and sold in 2001 believing prices were precariously high. About a month after my sale we had 9/11 and of course the rest you all know. I bought a house in France and spend 50% of my time here with my partner who is an STR since 2004. I detest what’s happened to the market here and think G Brown should now be in the public stocks adjacent to a constantly replenished mound of rotting veg – for at least as long as he’s been chancellor.

I've been interested in the market since I bought my first place and though I haven't broken down the figures with anything like the rigour of many posters here, I've a fairly clear picture of the market ebbs and flows going back to the early 70s. Looking at prices now 23 years after my last purchase, it seems that you can take early 80's prices and just stick a zero on the end of those figures to get something in the order of today’s prices. Is that so far off the mark? Prices over the last 25 years have increased by a factor of 10 - maybe not quite but not far off either. This has been during a period when inflation figures have ranged from 'lowish' to 'highish' - yes, sorry I warned of the lack of rigour. But this last 25 year period might fairly have been described to have been unexceptional in terms of its inflation record - particularly when you take into account how devastating was the inflation history of the 70's when we had an enormous shock with oil prices arising from the formation of OPEC, repayment of loans from the IMF and the unformidable Dennis “with all due respect” Healey at the helm of our economy.

So, if you accept my very rough appraisal that prices have ten-tupled during an unexceptional – arguably typical – phase of economic turbulence, why shouldn’t buyers today expect things to pan out similarly over the next 25? So, they buy their average house today at 200k, in 25 years they sell at 2mill, pocket the 1.8mill difference and buy into a moderate but not punishing downsize?

Of course timing can make significant differences, e.g. prices are currently high, maybe it would be better to wait a couple of years. Possibly the optimum time to sell – when prices are highest within the 20-30 year interval will be 19, 22, 27 years hence…we’ll only have a clue about that nearer the time and obviously it will depend on the usual gamut of factors, interest rates, the economy, tensions between supply-demand etc.etc.

This doesn’t on the face of it – to me anyway – appear to be a particularly risky strategy. I would welcome any rebuttal.

Good reasoned post BUT....

We are in a situation now where AFFORDABILITY has been stretched and is at its limits. Alondside this we are in a period where wage inflation is capped at 2% ish.

Houses are getting more and more UNAFFORDABLE every year! Even if they stagnate - it would take something like 8 years to get back to a level that will make it affordable and we get back to the LADDER! Without this ladder, the market is SPECULATIVE.

You also have to factor that IF prices crash NOW it will take a good 8-10 years to get back to todays level from PEAK to TROUGH to PEAK. That leaves 17 years for houses to go from £200K to £2million.

You do the math!

These arguements are always SLIGHTLY plausable when you see massive growth. You also have to factor that IR's have been low since 2001 and fuelled HPI in a way that is UNIQUE to the situation. I can only say that IF you buy a house now and expect £2million in 25 years Im afraid you will have to form your own terrorist group and cause mayhem!

Based on history the MAXIMUM a house will be worth (£200K) in 25 years is £800K. Even that is optimistic imho.

TB

Edited by teddyboy

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What makes the last 25 years typical? Essentially we have had a massive liberalisation of the financial system, completly unprecedented.

Note, I say 'arguably' typical - I'm not sure even what might be constituted in a 'typical' 25 year period. For the sake of this argument, by typical, I mean a varied mix of factors relating to boom/bust, high/low inflation, high/low interest rates, high/low unemployment etc.etc.etc.

Glancing back, that is more or less what I've seen. Other than relatively recent and local significant loosening of credit policy what do you mean by liberalisation?

Good reasoned post BUT....

We are in a situation now where AFFORDABILITY has been stretched and is at its limits. Alondside this we are in a period where wage inflation is capped at 2% ish.

Houses are getting more and more UNAFFORDABLE every year! Even if they stagnate - it would take something like 8 years to get back to a level that will make it affordable and we get back to the LADDER! Without this ladder, the market is SPECULATIVE.

You also have to factor that IF prices crash NOW it will take a good 8-10 years to get back to todays level from PEAK to TROUGH to PEAK. That leaves 17 years for houses to go from £200K to £2million.

You do the math!

These arguements are always SLIGHTLY plausable when you see massive growth. You also have to factor that IR's have been low since 2001 and fuelled HPI in a way that is UNIQUE to the situation. I can only say that IF you buy a house now and expect £2million in 25 years Im afraid you will have to form your own terrorist group and cause mayhem!

Based on history the MAXIMUM a house will worth (£200K) in 25 years is £800K. Even that is opptimistic imho.

TB

Ok, but based on your 25 year projection, I can go for an IO mortgage and still have a windfall of £600k at the end of it - that's doesn't seem so hard to take. And if that represents 75% of the average house price, I'm still going to be able to buy for cash a fairly decent flat at those rates. I realise all these figures are hopelessly vague for a 25 year projection, but I still see it as a fair bet for those wondering about the wisdom of IO.

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Other than relatively recent and local significant loosening of credit policy

Are you kidding? It's a massive fundamental change in getting credit, getting a mortgage now is incredibly easy, there are hundreds of different types of mortgage products to suit all sorts of people. This simply wastn't the case 25 years ago. The financial industry is massivly different and this financial service sector liberaisation has had massive affects, particularly in the ability to take out large mortgages.

Now, there is scope for further liberisation, particularly increase mortgage terms (40 years etc) but nothing like the changes we have seen over the last 25 years.

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Are you kidding? It's a massive fundamental change in getting credit, getting a mortgage now is incredibly easy

I'm not sure what you're aguing about.

I said the changes were relatively recent - within the 25-year time frame I'm talking about that's true isn't it? And I also conceded the loosening of credit policy was significant. If it helps you to describe this as 'massive' I've no problem with that.

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Note, I say 'arguably' typical - I'm not sure even what might be constituted in a 'typical' 25 year period. For the sake of this argument, by typical, I mean a varied mix of factors relating to boom/bust, high/low inflation, high/low interest rates, high/low unemployment etc.etc.etc.

Glancing back, that is more or less what I've seen. Other than relatively recent and local significant loosening of credit policy what do you mean by liberalisation?

Ok, but based on your 25 year projection, I can go for an IO mortgage and still have a windfall of £600k at the end of it - that's doesn't seem so hard to take. And if that represents 75% of the average house price, I'm still going to be able to buy for cash a fairly decent flat at those rates. I realise all these figures are hopelessly vague for a 25 year projection, but I still see it as a fair bet for those wondering about the wisdom of IO.

I hear what you are saying but this is what is so stupid about it all.

I go the garage. I buy a BMW 5 series and it costs me £500pcm in payments for 5 years and a lump sum of £8,000 to pay at the end.

In 5 years time I come to pay the 8K but I dont have it. So I sell it and buy a Citreon C2!

Ive paid £30K in payments but ended up with a worse car at the end. It would have been cheaper to lease one?

OK NOT AN EXACT SIMILE - but I hope you get my gist.

Getting 600K so called 'equity' to allow you to buy a small 2 bed flat does not compare to buying on REPAYMENT and keeping a lovely 3 bed semi or detached property????

Your paying for 'CAMERON DIAZ' but getting VENESSA FELTZ'! :blink:

TB

TB

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I think you are also missing the obvious. If you buying property on an I.O. mortgage was such a guranteed success, why wouldn't the banks being doing it themselves? Under your assumptions you have a guranteed profit just by borrowing the banks money. So why don't the banks do it themselves?

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I think you are also missing the obvious. If you buying property on an I.O. mortgage was such a guranteed success, why wouldn't the banks being doing it themselves? Under your assumptions you have a guranteed profit just by borrowing the banks money. So why don't the banks do it themselves?

Eh? Guarantees? What on earth are you talking about? Try reading the original post.

I’ve put forward a suggestion as to why many, looking at HP figures over the longer term, might opt for IO mortgages, what might possibly underlie their thinking and why for many it could turn out to be a satisfactory idea.

If anything, and I mean anything, under the sun relating to loan and risk were underpinned by guarantees then we would all know EXACTLY what our strategy should be, we could all stop speculating on the future of house prices and HPC.co.uk could close down its website.

There are no guarantees.

Getting 600K so called 'equity' to allow you to buy a small 2 bed flat does not compare to buying on REPAYMENT and keeping a lovely 3 bed semi or detached property????

Your paying for 'CAMERON DIAZ' but getting VENESSA FELTZ'! :blink:

TB

TB

At my age, Vanessa Feltz might be more than I deserve - but I take your point.

Isn't there another way of looking at this? Let's imagine that you're stretching yourself to the limit. What if an IO mortgage enables one to live immediately in a 3-bed with down-sizing to a 2 bed after 25 years versus (on a repymnt) a 2-bed now with no downsizing. Sure, with the IO you've eventually got to face the downsize but at least you've lived in relative style for 25 years.

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Lets assume house prices will be way higher in 25 years time (which they will be providing that we are all not ash by then).

The house that you buy on a repayment mortgage now would cost you a lot less on IO. Because of that you have three choices:

1) Take a repayment mortgage on the house of your choice now and stretch yourself knowing that it will be yours in 25 years time.

2) Take an IO mortgage on the house of your choice now and spend the money save on wine, women & song but in the knowledge that you will never own the property.

3) Buy a better property where the IO payments equal the repayment mortgage payments on the smaller property knowing that you will never own the property.

There are positive and negative points to all of the options:

1) You might not have an awful lot of spare money for 1\3 of your life but you will own a house at the end of it which will be payment free which means for most people, they will have money to spend on bingo, plants for the garden, new slippers, cardigans, electric blankets, hot chocolate and hot water bottles.. The fact that you have owned it for 1\4 of a century and cannot stand the site of the place hasn't been accounted for here.

2) You have the same nice house as scenario 1 but you also have money left over to have a laugh with and live your life. Holidays, beer, handgliding, beer, boating, beer, following the football, beer and lambrusco for the better half. You do not own the property at the end of the term but, in the scenario we are talking about, on top of having a right laugh over the past 25 years, you are sticking 600 big ones in you account at the end of it. Agreed, everything else has gone up as well so you can either take a new mortgage on the same property for the same amount (£200k as you have a £600k deposit) and keep having the same fun for the rest of your life (dependant of course on IR's) and although you will not have a property to leave to the kids, they will inherit a bit of cash.

Alternatively, at the end of the initial 25 year term, you sell and buy a smaller property for cash. You will probably have had enough of the first property anyway and will be so partied out that all you yearn for is a nice small property with a nice little manageble garden, bingo, plants for the garden, new slippers, cardigans, electric blankets, hot chocolate and hot water bottles. Then sit there with a glas of wine reminiscing about the crack that you have had over the past 25 years.

3) You have a better property than you originally planned so you are chuffed. The mortgage payments are the same as they would be on the smaller property so although you have no free cash, you have a much nicer pad so don't mind staying in anyway.

At the end of the 25 years, you sell the big house and buy the house that you originally wanted for cash.

Difficult one really but if pushed I think the wine, women and song bit of option 2 seal it for me ;-)

Edited by binkybonka

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Ok, an actual mathematical example:

Consider a £200k mortgage over 25 years at 6% interest rate

Over that 25 years you pay:

£1300 * 12 * 25 = £390,000 on a repayment mortgage

£1000 * 12 * 25 = £300,000 on an interest only mortgage

As you can see, the difference in total payments is £90k. This is a lot less than the £200k you borrowed and now own in equity on the repayment mortgage.

Why does it work like this? The answer is simple, when you are doing a repayment mortgage you are paying a lot less interest in the latter years.

This example istn't 100% accurate because you have to consider the opportunity cost of the £300/month over the 25 years.

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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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