Jump to content
House Price Crash Forum
Sign in to follow this  
Realistbear

Interest Only: The Most Dangerous Mortgage In The World

Recommended Posts

http://money.uk.msn.com/mortgages/Insight/...5597&vv=400

The most dangerous mortgage in the world?

By Karen Murray

August 14 2006

Are you sitting on a mortgage time bomb?
Just like a packet of cigarettes, mortgages now come with a health warning: your home may be repossessed if you cannot meet the repayments. However, some mortgages are more dangerous than others and the interest-only mortgage has the potential to be particularly nasty.
If you don't have an investment vehicle in place linked to the mortgage, it's even more dangerous - you could end up being repossessed and broke when you reach your 50s or 60s.
With interest-only mortgages, you pay only the interest and nothing off the debt until you reach the end of the term of the loan, when you have to repay the total sum. Normally you would take out some kind of investment such as an endowment, ISA or pension to repay the outstanding balance but some people are failing to do this, and that’s what makes these mortgages more risky.

Tick tock, tick tock, tick tock, tick tock, tick tock, ticktock, tick.......................................................................

BANG!

Share this post


Link to post
Share on other sites
Guest absolutezero

Nahhh. It's fine.

The mugs will just sue or claim compensation claiming they weren't told about the need for an investment vehicle.

It'll all be a bit "been wrongly sold an endowment? You could be entitled to compensation. Call Bodgitt & Scarper solicitors for compensation on a no win no fee basis".

Share this post


Link to post
Share on other sites

Isn't calling an "Interest only mortgage" a mortgage really a fraud, I think people might have a good chance of winning a case that it was a fraud (given all the other cases that have been won).

A mortgage is gennerally understood to be a loan to buy a house, but with an "Interest only mortgage" you never buy the house, it's just a way of holding an option to buy the house at a later date, and a payment of rent on the bank's house, although you also get any change in the value of the house, which is good in a rising market, but devastating in a flat or falling market. Lots of people are to stupid to understand the difference.

Edited by Della

Share this post


Link to post
Share on other sites

Isn't calling an "Interest only mortgage" a mortgage really a fraud, I think people might have a good chance of winning a case that it was a fraud (given all the other cases that have been won).

A mortgage is gennerally understood to be a loan to buy a house, but with an "Interest only mortgage" you never buy the house, it's just a way of holding an option to buy the house at a later date, and a payment of rent on the bank's house, lots of people are to stupid to understand the difference.

In reality it s "rent to buy" contract. But with a sting---you can be panalised if you do not exercise the "option" and it is impossible to get out of the contract without it costing a great deal of money. No wonder the sub-prime lenders are touting these kinds of creative financing as the dying breaths of HPI are becoming evident.

Share this post


Link to post
Share on other sites

Isn't calling an "Interest only mortgage" a mortgage really a fraud, I think people might have a good chance of winning a case that it was a fraud (given all the other cases that have been won).

A mortgage is gennerally understood to be a loan to buy a house, but with an "Interest only mortgage" you never buy the house, it's just a way of holding an option to buy the house at a later date, and a payment of rent on the bank's house, although you also get any change in the value of the house, which is good in a rising market, but devastating in a flat or falling market. Lots of people are to stupid to understand the difference.

A mortgage isn't a loan to buy a house though. It's a loan secured on a property, and I'm sure the terms and conditions of any mortgage agreement that people sign for an IO clearly states the nature of the mortgage and the payments that are being made.

Lets just hope more people than we give credit for are actually putting away regular money into some form of savings/investment plan to provide some means to help with repaying the capital in the future. We can assume that the BTLr's will just sell for capital profit in 25 years, so if theres no HPC before then, we can expect to see the market flooded with properties in about 2030 :lol::lol::lol:

AFP

Share this post


Link to post
Share on other sites

Isn't calling an "Interest only mortgage" a mortgage really a fraud, I think people might have a good chance of winning a case that it was a fraud (given all the other cases that have been won).

I believe this to be one of the main avenues currently being explored by those parties preparing for the fallout.

The points made by the earlier poster are less likely to apply, as the lenders have learnt their lessons from the endowments scandal. Just like HPCs, these things never happen the same way twice.

Share this post


Link to post
Share on other sites

In our live for today culture, people don't care about their 50s and 60s - all they care about is their percieved status gained from being a property 'owner'.

Share this post


Link to post
Share on other sites

Hang on a sec . . . Did any of you financial know-alls actually have a mortgage back when endowments were the repayment vehicle du jour ? No, they weren't worth the paper they were printed on but that's with the benefit of hindsight. Surely you've heard the nightmare stories from people who've been told by their endowment provider that their premiums need to be topped up or they face being unable to pay off the capital at the end of the term ?

I bought my flat when endowments were being sold by every building society, bank and estate agency financial gimp. Never truly bought into the endowment mullarky so I didn't get one. I still got an interest only loan because I figured that the value would go up (it has) and that in the unlikely event that I'd even keep the place for 25 years, I certainly wouldn't be retiring and living out the rest of my days so I'd sell it to pay off the mortgage the buying power of which would have been eroded by inflation.

Yes . . . I know that the current government has made inflation it's sworn enemy but, frankly, it'll be around a lot longer than NuLab and world events seem to have a far greater effect on our economy than BoE or the govt would like. A militant picks up an RPG in Jerusalem and I have to pay another penny on a litre of petrol.

Share this post


Link to post
Share on other sites

Lets just hope more people than we give credit for are actually putting away regular money into some form of savings/investment plan to provide some means to help with repaying the capital in the future. We can assume that the BTLr's will just sell for capital profit in 25 years, so if theres no HPC before then, we can expect to see the market flooded with properties in about 2030 :lol:

You can find out about the BTL brigade from their trade association at: http://www.arla.co.uk/btl/. For instance, this June 2006 survey of BTL muppets (51k PDF) shows:

- 6.1% expect to sell in 2-5 years

- 27% expect to sell in 5-10 years

- 45% expect to sell in 10-20 years

- 21.8% expect to sell in over 20 years

Note the use of the word 'expect'. IMO, falling yields and the end of vain hopes of inflation beating HPI will cause many/most to sell much earlier.

- 45.4% of BTLs got into the market too late, from 2003 onwards. This means that almost 50% of BTL will be in negative equity with only a small drop in prices. :huh:

Share this post


Link to post
Share on other sites

Isn't calling an "Interest only mortgage" a mortgage really a fraud, I think people might have a good chance of winning a case that it was a fraud (given all the other cases that have been won).

Actually, I can see it from the point of view of a financially naive individual. It is perhaps not all that unreasonable to assume that the bank don't want the capital repaid also, given that they are charging you so much interest over a 25 year period.

And it is called an "interest only" mortgage. Shouldn't it be "interest only during the term of the loan, and full capital repayment at the end of the term?" :rolleyes:

Share this post


Link to post
Share on other sites

Hang on a sec . . . Did any of you financial know-alls actually have a mortgage back when endowments were the repayment vehicle du jour ? No, they weren't worth the paper they were printed on but that's with the benefit of hindsight. Surely you've heard the nightmare stories from people who've been told by their endowment provider that their premiums need to be topped up or they face being unable to pay off the capital at the end of the term ?

I bought my flat when endowments were being sold by every building society, bank and estate agency financial gimp. Never truly bought into the endowment mullarky so I didn't get one. I still got an interest only loan because I figured that the value would go up (it has) and that in the unlikely event that I'd even keep the place for 25 years, I certainly wouldn't be retiring and living out the rest of my days so I'd sell it to pay off the mortgage the buying power of which would have been eroded by inflation.

Yes . . . I know that the current government has made inflation it's sworn enemy but, frankly, it'll be around a lot longer than NuLab and world events seem to have a far greater effect on our economy than BoE or the govt would like. A militant picks up an RPG in Jerusalem and I have to pay another penny on a litre of petrol.

Do you have a repayment vehicle on your IO mortgage, or are you relying solely on HPI to pay off your massive bank loan?

Share this post


Link to post
Share on other sites

Do you have a repayment vehicle on your IO mortgage, or are you relying solely on HPI to pay off your massive bank loan?

No I don't have a repayment vehicle to pay it off. I don't need one.

Share this post


Link to post
Share on other sites

isn't that somewhat oxymoronic? :blink:

No it isn't . . . the value has quadrupled, the debt hasn't and I'm selling up !

Edited by tenroom

Share this post


Link to post
Share on other sites

Are you buying somewhere else?

Nah ! Not for a fair old while. Gonna do flatshare for a year or two then drag my sorry ass back to market when the prices are a little cheaper.

Share this post


Link to post
Share on other sites

There is nothing wrong in principle with i/o mortgages.....

because in most places even a 100% i/o mortgage would only cost about 15% more than rent on a similar property.

If you got a long term fix at 6% your payments would remain the same but the renter's rent would go up with inflation and soon overtake what the buyer was paying.....

After 15 or 20 years the renter would be paying at least double and and the buyer still the same and the buyer would have realised capital gain too......although still of course owing the original amount borrowed....

but all of this begs the question posted by Dogbox last week that if residential property is a one-way bet in the mid to long term unlike everything else why dont institutional investors with serious wedges of cash like pension funds buy up all the houses in the uk and rent them out..........

Share this post


Link to post
Share on other sites

No there isn't anything wrong with interest only mortgages, it's just that they're suitable for far fewer borrowers than was originally thought. I didn't want an endowment, PEP or whatever the banks/building socities were pushing at the time and repayment mortgages weren't appropriate as the interest on the loan was front-loaded ie you pay mostly interest for the first 5 - 8 years then your monthly payments actually start to eat into the capital you originally borrowed. Well . . . at least that was the deal when I got my mortgage back in '97.

I've had DAMN cheap repayments and RIDICULOUS capital appreciation and without getting burned by a more expensive repayment mortgage that wouldn't have reduced the capital initially borrowed.

Share this post


Link to post
Share on other sites

There is nothing wrong in principle with i/o mortgages.....

because in most places even a 100% i/o mortgage would only cost about 15% more than rent on a similar property.

If you got a long term fix at 6% your payments would remain the same but the renter's rent would go up with inflation and soon overtake what the buyer was paying.....

After 15 or 20 years the renter would be paying at least double and and the buyer still the same and the buyer would have realised capital gain too......although still of course owing the original amount borrowed....

but all of this begs the question posted by Dogbox last week that if residential property is a one-way bet in the mid to long term unlike everything else why dont institutional investors with serious wedges of cash like pension funds buy up all the houses in the uk and rent them out..........

Can you actually get a fixed rate IO mortgage?

Share this post


Link to post
Share on other sites
Hang on a sec . . . Did any of you financial know-alls actually have a mortgage back when endowments were the repayment vehicle du jour ?

Well, after the "Endowment Scandle" the IO mortgage phenomina is doubly surprising! It will be "Endowment II: The Shortfalls Continue". It's a very bad idea. It will no doubt be a big scandle although not as big as BTL which I believe will be the greatest investment scandle of our age.

I was offered an Endowment Mortgage in 1987. I say offered - more like a hard sell. The idea of paying interest on a loan for 25 years without ever reducing it and relying on an investment to clear the debt sounded like one of the stupidest things I'd ever heard. I ignored the hype and took out a repayment mortgage. Since I had to move following the crash (fortunately I bought way below the peak) the repayment method was the only thing that kept me out of NE!

I've had DAMN cheap repayments and RIDICULOUS capital appreciation and without getting burned by a more expensive repayment mortgage that wouldn't have reduced the capital initially borrowed

Of course it would reduce the capital - just not by very much. Indeed the repayment part is very small in the early years and it's mostly interest - but at least you begin to erode the debt. Actually, borrowing over 25 years would make little sense if it were not for the fact in normal circumstances it works out the same or cheaper than renting. So there is a financial benefit. At the moment this is not the case - there is not a financial benefit to a 25 year house loan - big ooops!!

Edited by George Mainwaring

Share this post


Link to post
Share on other sites

The idea of paying interest on a loan for 25 years without ever reducing it and relying on an investment to clear the debt sounded like one of the stupidest things I'd ever heard.

I hope you've got this wrong, or it's bad news for... EVERY CHILD IN BRITAIN.

That's how the wizzo new scheme for kids works, they borrow money, give it to the kids parents who entrust it to friendly fund managers in the hope that when they grow up it will be enough to pay back the massive debt that has been compounding for eighteen years.

Share this post


Link to post
Share on other sites

Remember the endowment scandle?

As for the child trust fund, in about 15 years it will be a good idea to buy shares in companies that make plastic crap to stick on old bangers to make them look "wikkid". I'm guessing that's how most of it will be spent.

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.

  • 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%



×
×
  • 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.