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

Renewed Warning About I O Loans

Recommended Posts

http://www.thisismoney.co.uk/mortgages/mor...p;in_page_id=58

Gambling on interest-only lotto

James Coney, Daily Mail

16 August 2006

INCREASING numbers of desperate first-time buyers are gambling with their new homes by taking out interest-only mortgages without any means of repaying the capital.
Rising house prices are forcing first time buyers to borrow record amounts to buy a place of their own. And the larger mortgage payments are putting budgets under strain.
This, in turn, is making many first-time buyers opt for interest-only mortgages, which have lower monthly payments than repayment deals.

One thing is for certain, IO mortgages will be VERY popular among lawyers when the market crashes and the IO sheeple are looking for a way out.

Share this post


Link to post
Share on other sites
Rising house prices are forcing first time buyers to borrow record amounts to buy a place of their own.

yeah yeah . . . . . no option but to shell out . . . . sob howl . . . . government. . . lending institutions. . . . terrible shame . . . aaaah . . . .

;)

Share this post


Link to post
Share on other sites

I am left asking myself why people would want to 'gamble' in this way. Why not just rent and take the safer bet that prices will drop? Of course, I am part of the informed minority and so am not scared by the threat of ever increasing prices. Nevertheless; having rented for some time, I am aware of just how insecure it is and how badly you are treated by just about everyone. I think people are motivated more by a desire for security than capital gain (I know I am).

Share this post


Link to post
Share on other sites

I am left asking myself why people would want to 'gamble' in this way. Why not just rent and take the safer bet that prices will drop? Of course, I am part of the informed minority and so am not scared by the threat of ever increasing prices. Nevertheless; having rented for some time, I am aware of just how insecure it is and how badly you are treated by just about everyone. I think people are motivated more by a desire for security than capital gain (I know I am).

Who dares wins Rodney................. :)

I have owned my own gaff since 1977 and sold my last place in 2003 and have rented eversince. I am debt-free and rent a £350k house for £750 p.m. and watch house prices tumble all arund me (West Midlands--even RICS said its bad in ther recent report). My STM funds are safely invested at a current rate of 5.04% and I am feeling somewhat happy as a clam. :D

Share this post


Link to post
Share on other sites

Situation with myself is I bought my current house a year ago, and oonly moved in 4 months ago. Do I worry about its "paper value" dipping? Not in the least. It is a long term move for me with a young, expanding family, and I plan on being here for an awfull long time. My mortgage payments are quite small due to a large deposit, and with a fixed rate mortgage, I really couldnt give a hoot what happens to local prices. Its a family home, not a bloody cash machine.

As someone else on here commentated, the real evil is MEW - greedy people treating their home as a bank vault with readily available cash, and not as a home to enjoy. Still...what goes around comes around.

Share this post


Link to post
Share on other sites

yeah yeah . . . . . no option but to shell out . . . . sob howl . . . . government. . . lending institutions. . . . terrible shame . . . aaaah . . . .

;)

Yes but dont forget:

Prices will never drop - at worst they will stagnate - so better buy quick any way you can!

If you believe the above then anyone who does not max out on a IO mortgage is the fool.

- just wait for all the compensation claims when they realise that they have been renting the expensive way and the bank get the house for keeps..... :angry:

Share this post


Link to post
Share on other sites

My guess is that a lot of the people with I\O mortgages are making no provision what so ever to pay back the capital.Some might say that over the 25 years they will ``put something away``.My guess it`s all going to be very interesting when these loans come to an end!

Share this post


Link to post
Share on other sites

Not a big fan of the Daily Mail, but I did flick through a copy on the train this morning.

I thought it was quite profound how the columnist/editing staff felt the need to use graphics to illustrate how a repayment vs an io mortgage really work using a house icon like a gauge.

I really can't believe so many people don't seem to grasp this simple concept. :blink:

Share this post


Link to post
Share on other sites

Who dares wins Rodney................. :)

I have owned my own gaff since 1977 and sold my last place in 2003 and have rented eversince. I am debt-free and rent a £350k house for £750 p.m. and watch house prices tumble all arund me (West Midlands--even RICS said its bad in ther recent report).

Quick look at YOY figures from HMLR gives 10% rise in prices between Jan 2005 and Jan 2004 and another 5% between Jan 2006 and Jan 2005. Ok, crude figures but that is a 15.5% gain in house prices and so a loss of 15.5% for the average STR.

My STM funds are safely invested at a current rate of 5.04% and I am feeling somewhat happy as a clam. :D

You pay tax I expect. At basic rate, your net rate is 3.85%. if you pay higher rate tax, that is even worse. 4% - 15% = -11% - not a good return in my book. Am I missing something or are clams particularly unhappy creatures?

I have not got into an inflation debate because it cancles itself out in this case.

Edited by iangilb

Share this post


Link to post
Share on other sites

IO isn't as bad as you guys make out. In another similar thread it became relatively clear that used properly, IO mortgages can be of great benefit. It's well known that repayment mortgages repay hardly any of the original capital until the 7th, 8th or 9th year owing to the majority of the interest being front loaded and frankly most people tend to move after 5. I mean, who wants to buy somewhere, stay in it for, say, 8 years and then move up the ladder and take out another repayment for ANOTHER 25 years thereby having a mortgage burden for 33 years ??

IO mortgages were originally mean to run alongside the endowment and later, the PEP. The general idea today for those who take them out without investment vehicles is that inflation will erode the true value of their debt leaving them with something they can repay with what may well be the average annual salary in 25 years' time considering the ineptitude of all but a few governments in controlling it not to mention the propensity for events and economies elsewhere to push it along regardless of how hard the BoE blow.

Share this post


Link to post
Share on other sites

IO isn't as bad as you guys make out. In another similar thread it became relatively clear that used properly, IO mortgages can be of great benefit. It's well known that repayment mortgages repay hardly any of the original capital until the 7th, 8th or 9th year owing to the majority of the interest being front loaded and frankly most people tend to move after 5. I mean, who wants to buy somewhere, stay in it for, say, 8 years and then move up the ladder and take out another repayment for ANOTHER 25 years thereby having a mortgage burden for 33 years ??

IO mortgages were originally mean to run alongside the endowment and later, the PEP. The general idea today for those who take them out without investment vehicles is that inflation will erode the true value of their debt leaving them with something they can repay with what may well be the average annual salary in 25 years' time considering the ineptitude of all but a few governments in controlling it not to mention the propensity for events and economies elsewhere to push it along regardless of how hard the BoE blow.

You seem to have a lot of faith in the financial knowledge of joe public.

Personally I think it's simply a case of people going for IO on the basis that a repayment is £X and IO £Y where Y is cheaper than X.

The last thing on their mind is inflation eroding the debt. I have earwigged enough conversations on the Train/Tube/Bus to know people go for IO simply because the monthly figure is cheaper, I have never once heard the words, I went for IO because in 25 years inflation will have erodded the debt.

Share this post


Link to post
Share on other sites

The general idea today for those who take them out without investment vehicles is that inflation will erode the true value of their debt leaving them with something they can repay

This is where the theory falls down somewhat.

If inflation is going to increase at a rate fast enough to erode the debt, then governments will raise interest rates to reign this inflation in.

This will make it very hard for IO holders to keep up their monthly payments (as IO's are all interest this will mean the repayments required increase proportionally much more than repayment mortgages).

This is a self liquidating theory - in order for it to succed in the long term it will wipe out IO users in the short term. People who are basing their decisions on this logic are very deluded indeed.

Share this post


Link to post
Share on other sites

You seem to have a lot of faith in the financial knowledge of joe public.

Personally I think it's simply a case of people going for IO on the basis that a repayment is £X and IO £Y where Y is cheaper than X.

The last thing on their mind is inflation eroding the debt. I have earwigged enough conversations on the Train/Tube/Bus to know people go for IO simply because the monthly figure is cheaper, I have never once heard the words, I went for IO because in 25 years inflation will have erodded the debt.

In the same way one doesn't need to know how a car works in order to drive it, you don't really need to know how an IO mortgage works in order to benefit from it do you. All these people need to know is that IO is cheaper than repayment in times of relatively low rates and that's pretty much it.

Share this post


Link to post
Share on other sites

In the same way one doesn't need to know how a car works in order to drive it, you don't really need to know how an IO mortgage works in order to benefit from it do you. All these

A car is a vehicle that gets you from A to B in nearly all circumstances. An IO is a vehicle that gets you from a specific 'A' to a specific 'B' and will only work if a whole host of other factors (or potential hazards) are in play. In order to arrive successfully at point 'B' you will need to have had these series of other factors work in your favour - otherwise you'll go off the road, or be unable to pay the bill at the finally destination.

To build on your very wonky metaphor - as most users of IO mortgages appear not to understand what these external hazards are we may have a lot of accidents in the road ahead..

Share this post


Link to post
Share on other sites

This is where the theory falls down somewhat.

If inflation is going to increase at a rate fast enough to erode the debt, then governments will raise interest rates to reign this inflation in.

This will make it very hard for IO holders to keep up their monthly payments (as IO's are all interest this will mean the repayments required increase proportionally much more than repayment mortgages).

This is a self liquidating theory - in order for it to succed in the long term it will wipe out IO users in the short term. People who are basing their decisions on this logic are very deluded indeed.

Assuming you don't fix your rate then yeah that's a possibility but either way it worked out far cheaper for me to do IO than repayment. I'm selling after 9 years of ownership and it's gratifying to know I didn't pay more than I had to to keep the roof over my head because I wouldn't have paid off anything near a significant amount of the original capital.

Share this post


Link to post
Share on other sites

I'm selling after 9 years of ownership and it's gratifying to know I didn't pay more than I had to to keep the roof over my head because I wouldn't have paid off anything near a significant amount of the original capital.

Surely that's better than paying off no capital at all.

How much money do you still owe the bank by the way?

Share this post


Link to post
Share on other sites

A car is a vehicle that gets you from A to B in nearly all circumstances. An IO is a vehicle that gets you from a specific 'A' to a specific 'B' and will only work if a whole host of other factors (or potential hazards) are in play. In order to arrive successfully at point 'B' you will need to have had these series of other factors work in your favour - otherwise you'll go off the road, or be unable to pay the bill at the finally destination.

To build on your very wonky metaphor - as most users of IO mortgages appear not to understand what these external hazards are we may have a lot of accidents in the road ahead..

I guess cars don't go wrong then or get punctures or. . . . :rolleyes:

Almost everyone I know who bought at the same time as I did, got an IO mortgage. I ain't hearin' any wails of despair from ANY of 'em. I've had one for nigh on 10 years and I've got to my point 'B' very comfortably indeed without having more than average financial awareness.

Surely that's better than paying off no capital at all.

How much money do you still owe the bank by the way?

Er. . . . . No . . . it isn't ! The amount of capital I'd have repaid would be less than the difference between my payments on IO versus repayment.

I owe less than half of what the gaff's worth even after a few returns to the trough for more dosh.

Share this post


Link to post
Share on other sites

I guess cars don't go wrong then or get punctures or. . . . :rolleyes:

Almost everyone I know who bought at the same time as I did, got an IO mortgage. I ain't hearin' any wails of despair from ANY of 'em. I've had one for nigh on 10 years and I've got to my point 'B' very comfortably indeed without having more than average financial awareness.

Er. . . . . No . . . it isn't ! The amount of capital I'd have repaid would be less than the difference between my payments on IO versus repayment.

I owe less than half of what the gaff's worth even after a few returns to the trough for more dosh.

Quite agree, Tenroom - there are advantages to the interest only route.

Personally, I find it useful to be able to pay the interest and save towards the capital repayment in concurrently. Also, I can "overpay" during the quiet months and pay less when heavy bills come in. Can also chip in annual bonus, additional professional fees, etc.

Having said that, most couples I know who have taken the IO route have done so with the expectation of either switching to a repayment mortgage in a few years when their salaries have increased, or relying on the inheritance when the old folks peg it. :)

Share this post


Link to post
Share on other sites

A mate is buying places on IO mortgages, doing them up and selling them on. He is gradually building up his equity this way. Trouble is, it only takes one place to go tits up and become a money pit to loose that equity, or a market downturn. He who dares Rodders, he who dares..

Share this post


Link to post
Share on other sites

Er. . . . . No . . . it isn't ! The amount of capital I'd have repaid would be less than the difference between my payments on IO versus repayment.

honestly - how does that work. The additional component you pay on a repayment mortgage goes to pay off the capital, in total , unless you have some additional insurance , which should be similar to that for IO anyway? And anyway the reduced capital should mean that you pay less interest so you end up paying more off than the sum total of the repayment component. So , arithmetically, how can what you say be true?

seriously, I am genuinely interested in knowing this as I don't understand what you are saying.

Share this post


Link to post
Share on other sites

honestly - how does that work. The additional component you pay on a repayment mortgage goes to pay off the capital, in total , unless you have some additional insurance , which should be similar to that for IO anyway? And anyway the reduced capital should mean that you pay less interest so you end up paying more off than the sum total of the repayment component. So , arithmetically, how can what you say be true?

seriously, I am genuinely interested in knowing this as I don't understand what you are saying.

Repayment mortgages are worked out in a way which I'd have been able to explain to you in the nineties but I've forgotten now. Essentially, the lender asks you to pay a monthly amount which - in the early years - is effectively 100% composed of interest. It's not until some time after the intial years that you actually start making inroads into the capital.

If your lender calculates interest daily then you may have your payments calculated to result in your paying less but I'm not sure. Suffice it to say that when I arranged my mortgage back in '97, most lenders calculated interest monthly and as I'd been a mortage broker for nearly 10 years back then, IO made FAR more sense to me.

If you really wanna know then I guess you could run a search on the net.

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.