Friday, Jul 07, 2006

July 6, 2006

The Motley Fool: The Deadliest Home Loan!

I see that the Council of Mortgage Lenders (CML, a trade association which represents almost all UK mortgage lenders) has arranged a seminar on interest-only mortgages in November. suspect that some CML members are becoming increasingly nervous about the rising number of homebuyers who are taking out interest-only mortgages. These are home loans where your monthly payments consist purely of interest, unlike repayment mortgages, where each month that goes by sees a little more chipped off your debt.

Posted by WaitingInTheWings @ 01:35 PM (6250 views)
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16 Comments

1. Retiredbanker said...

This type of mortgage has been very popular in the US for the last few years, enabling many people to buy properties
that they could not otherwise afford.

Now that interest rates in America are on the rise, so are house repossessions.

Those that doubt the possibility of a HPC should take the time to read some of the American sites, one of the best
being- http://patrick.net/housing/crash.html - which discusses the property bubble in the San Francisco Bay area.

Friday, July 7, 2006 02:20PM Report Comment
 

2. sebastian said...

Rent from yourself!

Friday, July 7, 2006 02:29PM Report Comment
 

3. Surfgatinho said...

Aren't interest only loans practically unsecured. I mean if there is a neglibile deposit at the end of the day what are they going to take back? Negative equity?

Friday, July 7, 2006 03:20PM Report Comment
 

4. denzil said...

Isn't an IO mortgage one where you rent the house from the building society pay significantly more than renting from a private landlord and have to pay for all the maintainance yourself?!?

Seems like good financial to me.

Friday, July 7, 2006 03:37PM Report Comment
 

5. Gregzki said...

Yep denzil - dont also forget the survey fees, stamp duty etc

Friday, July 7, 2006 04:00PM Report Comment
 

6. bingo said...

IO loans are popular with people trying to buy more house than they can afford with a regular repayment loan. Generally the lender will ask for minimum 20% deposit, this pretty much secures their stake, in other words if the borrower defaults at least the lender will have the 20% to claw back in a repo' situation. The premise is that whilst you are only paying the interest on the loan, the property is shooting up in value, you can sell after a few years and pay off the premium on the loan and voila, you make a fortune. I wish I was as smart as some these people.

Bingo out...

Friday, July 7, 2006 04:15PM Report Comment
 

7. bidin'matime said...

Oh I am so looking forward to the bloodbath - it will make Chainsaw Massacre look like a childrens' tea party. Just hope I dont get too splashed...

Friday, July 7, 2006 04:48PM Report Comment
 

8. sebastian said...

Denzil, yup it is exactly like that from my experience. I rented a house for 625 where the interest only on the house would have cost me 750+ (over 1k for a repayment) a month if I had bought it for 160k, it eventually went for 178k. Obviously you would expect landlords to have perhaps owed the property for some time and probably have put a good deposit down thus meaning they can charge less.

There was an article a while back also stating how people who rent in certain parts of the country are now actually ending up better off after 25 years.

Friday, July 7, 2006 04:56PM Report Comment
 

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10. Dunduk said...

this type of mortgage is really good when inflation is above say 10% pa. In that case present value of 250 000 repayment in 25 years time is only 23 074. The problem is inflation does not that high these days and 250 000 in 25 years time is still going to be hel a lot of money.

Looks like ppl do not understand this.

Friday, July 7, 2006 05:01PM Report Comment
 

11. Kpjcomp said...

We've been renting for the past 3 months for 575 pm, the landlord paid 115,000 for the house. I estimate if he had got a mortgage for 25 years @ 5.65% that would = 778.85 pm. And if it was Interest only it would be 588.54 pm.. , How mad is that? BTL'ers your nuts, unless you start selling fast, of course if my landlord is reading this, forget what I just said.. :)

Friday, July 7, 2006 06:04PM Report Comment
 

12. Time To Raise Petrol Prices said...

Erm.... I'm a bit worried that some people here don't understand how repossession works at all!

The lender takes possession of the house and then sells it, getting their money back, but not a penny more. Any surplus (in the UK at least) must legally be returned to the (ex)homeowner. If there is insufficient equity to pay back the lender...well, they sell the house anyway, but the mortgage is not discharged - the borrower still owes the lender money, and the lender has a legal right to ask for it. This is why negaive equity is so dangerous - you can lose your house and still owe thousands!

Friday, July 7, 2006 07:36PM Report Comment
 

13. tyrellcorporation said...

Check this...

2 bed flat down on the Quay in Exeter for sale at 220k...to rent the same property costs 750 a month!!!!

How much would the mortgage be?

Saturday, July 8, 2006 12:55AM Report Comment
 

14. denzil said...

tyrellcorp said:
>>2 bed flat down on the Quay in Exeter for sale at 220k...to rent the same property costs 750 a month!!!!
>>How much would the mortgage be?

for those that are interested the best I could find on a 5 year fix with and interest only mortgage putting down a deposit of 11% gave a monthly payment of 820.
So as well as stumping up a large deposit the landlord is still subsidising his tenent and that is not even taking in consideration empty periods, letting agent fees and maintainance.

Saturday, July 8, 2006 09:29AM Report Comment
 

15. Londonernow said...

I used to have an interest only loan when I first bought my house. The problem was that try as I might I couldn't save anything above and beyond this, even though I was making a reasonable amount of money and should have been able to. To save myself, I switched to a repayment mortgage after one year. My point is, these interest only things make even those with good intentions turn bad.

Saturday, July 8, 2006 11:03AM Report Comment
 

16. tyrellcorporation said...

Mmmm... I read recently (don't know if it's true), that at any given time about 50% of rental property is empty. If this is the case the landlords are doing a sterling job of subsidising us folks in rented accommodation... Cool! :)

Saturday, July 8, 2006 06:15PM Report Comment
 

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