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Opinions Required On I.o Mortgage

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Hello peeps,

I have a dilemma; a colleague of mine has got him self in to a bit of situation. His story is as follows:

He owns a house (which he is continually MEWing to pay for holidays etc, but that is for another time), on which he is paying a repayment mortgage. All pretty standard so far, but this is where is it gets interesting; he also MEWed his parents house to pay for a commercial pilots licence. The deal was, his parents repayment would remain the same (as per their original mortgage) and he would pay the difference.

So, he pays c.£1200 pcm for his home, and a further £350 pcm towards the outstanding debt on his parents home. His parents are paying around £250 for their portion of the debt secured against their home, but are both struggling financially and are now nearing retirement (they bought very late in life, so are still going to paying their mortgage into their late 70’s).

The cunning plan appears to be this: switch to I.O on the parents house, reduce their monthly liability to £0, and then, when they shuffle off, sell the house to repay the outstanding capital. The idea is that they can enjoy their life a little more, and that the I.O will at least benefit someone.

When he first mentioned this to me, alarm bells instantly began to ring. I couldn’t quite place my concern, and have had difficulty formulating a good argument for not doing this. All I could come up with were the increased sensitivity to interest rate changes and the possibility that the asset value would not cover the capital if property took a slump.

Anyone got a more succinct argument against (or for, if it is a good idea) this plan? Is it madness or a very good use of the I.O mortgage product?

Any views are most welcome!

Cheers,

OD

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Hello peeps,

I have a dilemma; a colleague of mine has got him self in to a bit of situation. His story is as follows:

He owns a house (which he is continually MEWing to pay for holidays etc, but that is for another time), on which he is paying a repayment mortgage. All pretty standard so far, but this is where is it gets interesting; he also MEWed his parents house to pay for a commercial pilots licence. The deal was, his parents repayment would remain the same (as per their original mortgage) and he would pay the difference.

So, he pays c.£1200 pcm for his home, and a further £350 pcm towards the outstanding debt on his parents home. His parents are paying around £250 for their portion of the debt secured against their home, but are both struggling financially and are now nearing retirement (they bought very late in life, so are still going to paying their mortgage into their late 70’s).

The cunning plan appears to be this: switch to I.O on the parents house, reduce their monthly liability to £0, and then, when they shuffle off, sell the house to repay the outstanding capital. The idea is that they can enjoy their life a little more, and that the I.O will at least benefit someone.

When he first mentioned this to me, alarm bells instantly began to ring. I couldn’t quite place my concern, and have had difficulty formulating a good argument for not doing this. All I could come up with were the increased sensitivity to interest rate changes and the possibility that the asset value would not cover the capital if property took a slump.

Anyone got a more succinct argument against (or for, if it is a good idea) this plan? Is it madness or a very good use of the I.O mortgage product?

Any views are most welcome!

Cheers,

OD

Even with an IO he will still have to pay interest on the outstanding mortgage. Given the mess he seems to be in already I would say IO makes sense. I do think though that you need to have a cnadid chat with him about his spending habits. It seems he isl iving well beyond his means

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Even with an IO he will still have to pay interest on the outstanding mortgage. Given the mess he seems to be in already I would say IO makes sense. I do think though that you need to have a cnadid chat with him about his spending habits. It seems he isl iving well beyond his means

And worse still beyond the means of his parents.

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Depends how long they live for. He could be paying interest on a debt for 20 years. Clearly it would be better to clear that debt.

Sounds like he just needs to spend less money.

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You are right about his spending – equity releases ever few years to stem the tide. And about his parents house – well that compounds the problem.

The question is, can an I.O give his parents a better living standard? What are the dangers?

Depends how long they live for. He could be paying interest on a debt for 20 years. Clearly it would be better to clear that debt.

Sounds like he just needs to spend less money.

A good point. I have worked out that the difference would mean a slightly higher repayment for said wannabe pilot, no repayment for parents (but a highly burdened asset). In terms of time, what is the cut off point? 20 years is not out of the question in terms of life expectancy.

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I would think long and hard before exposing elderly parents (read it carefully :) ) to long term and non-reducing debt they can barely afford now when he already has £1,200 a month going out the door on his own home - they could all lose their homes. In effect, he's spread risk across two properties instead of one and is risking someone else's house to play Biggles.

If I were advising the parents, I would be saying get your debt down, pay it off and let him finance it on his own - if you want to help him, let him remortgage his own and give him some cash if you have it, but at the moment all they are doing is increasing their risk and lessening the odds on them having worries into their 80's.....

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Hello peeps,

I have a dilemma; a colleague of mine has got him self in to a bit of situation. His story is as follows:

He owns a house (which he is continually MEWing to pay for holidays etc, but that is for another time), on which he is paying a repayment mortgage. All pretty standard so far, but this is where is it gets interesting; he also MEWed his parents house to pay for a commercial pilots licence. The deal was, his parents repayment would remain the same (as per their original mortgage) and he would pay the difference.

So, he pays c.£1200 pcm for his home, and a further £350 pcm towards the outstanding debt on his parents home. His parents are paying around £250 for their portion of the debt secured against their home, but are both struggling financially and are now nearing retirement (they bought very late in life, so are still going to paying their mortgage into their late 70’s).

The cunning plan appears to be this: switch to I.O on the parents house, reduce their monthly liability to £0, and then, when they shuffle off, sell the house to repay the outstanding capital. The idea is that they can enjoy their life a little more, and that the I.O will at least benefit someone.

When he first mentioned this to me, alarm bells instantly began to ring. I couldn’t quite place my concern, and have had difficulty formulating a good argument for not doing this. All I could come up with were the increased sensitivity to interest rate changes and the possibility that the asset value would not cover the capital if property took a slump.

Anyone got a more succinct argument against (or for, if it is a good idea) this plan? Is it madness or a very good use of the I.O mortgage product?

Any views are most welcome!

Cheers,

OD

You Your friend should go to the citizens advice bureau.

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switch to I.O on the parents house, reduce their monthly liability to £0,

I don't understand this bit. Why would switching to IO reduce their monthly liability to £0? They still have to pay interest, every month for the rest of their lives, on the the remaining debt. They will in essence be renting a portion of their house from the bank.

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I don't understand this bit. Why would switching to IO reduce their monthly liability to £0? They still have to pay interest, every month for the rest of their lives, on the the remaining debt. They will in essence be renting a portion of their house from the bank.

My colleague (honestly, it’s not me!!) thinks that by going to IO on his parents house, the total monthly payment would be lowered to the point where they could stop paying towards it, and he would continue to pay about the same amout.

Does that make any sense? I’m rubbish at getting this across I know!

Cheers,

OD

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My colleague (honestly, it's not me!!) thinks that by going to IO on his parents house, the total monthly payment would be lowered to the point where they could stop paying towards it, and he would continue to pay about the same amout.

Does that make any sense? I'm rubbish at getting this across I know!

Cheers,

OD

I see what you mean, but the interest is probably going to be the vast proportion of the debt repayment. If you post the debt amounts, we can work it out for you (it's probably easier to describe in figures).

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I see what you mean, but the interest is probably going to be the vast proportion of the debt repayment. If you post the debt amounts, we can work it out for you (it's probably easier to describe in figures).

Ok, the figures are as follows:

Mortgage outstanding:

c.£89k

Parents owe £37k, colleague owes £52k

Total monthly payment: £600. split

£250 parents

£350 Colleague

IO on £89K is £377

The idea is that the little extra paid by Mr X (as we shall now call him, or maybe Mr D for dunce?) will allow the parents to live in their home without paying a bean.

My question is whether or not this is a good idea in the long run. Seems to essentially throwing the asset away at the end (although I do appreciate that not everyone views property as an investment).

Comments if you please!

OD

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That makes it a little clearer, but how is the actual debt going to be repaid?

I suppose an IO mortgage may be fine for the son, but not for the parents. Your mate could repay the debt £52k when he gets his pilots license. But would your mate be happy to pay his parents debt (and the interest on it) of £37k?

It may be best for the parents to continue to pay the repayment as normal, and the son to pay interest on his part. It is possible to have a part repayment and part IO mortgage. But if he were to do this, he needs to make sure he can afford to repay the debt.

The debt needs to be repaid by someone, either that is by the parents or the son!

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My question is whether or not this is a good idea in the long run. Seems to essentially throwing the asset away at the end (although I do appreciate that not everyone views property as an investment).

Your colleague realises he is going to be paying that monthly fee until his parents die, however long that is going to be?

The idea in principle is fine, especially if his parents die soon. However, every year they are alive he is going to be paying interest on £89k.

As for what happens when they do die (both of them of course), depends how much equity is left.

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One thing you have not mentioned. Is the parent's mortgage in their name or the son's. Most normal lenders will not lend where the end date runs past their 70th birthday. Some run up to age 85. Unless the mortgage lender is running it ad infinitum, not possible, there must be an end date stated.

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And you won't be able to just move it into the son's name, then you have inheritance tax avoidance issues coming into play - the parents would have to pay the son rent.

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And you won't be able to just move it into the son's name, then you have inheritance tax avoidance issues coming into play - the parents would have to pay the son rent.

A good point, and one I hadn't thought of. The plan is that once they are gone the house is sold to pay off the outstanding capital. This seems risky to me as they may not be much in the way of equity in the house if the market does indeed slump (although this could be 20 years from now and I should imagine that it will be at least able to cover the £80k).

More ammo is needed as to why he should just pay back the money like he's supposed to, but at the moment IO still seems a reasonalbe suggestion. By the way, and this what made my ears pick up in the first place, the IO idea was suggested to him by a BTL mate of his down the pub. BTL on IO? Must be worried about the MPC news.

Keep it coming, this is starting to shape up nicely.

OD

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What happens if say there is one parent left and the house has to be sold to pay for a care home when the time comes?

Good point there, and a morbid one to boot.

All that interest and one dribbler left. Sorry, but he has spent his parents home on learing to fly (and he hasn't become a Commercial Pilot, not enough money in it apparently).

Cheers for all the help on this!

OD

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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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