[Closed] Interest only mortgages

Anyway, how stupid to people have to be to not work out how they are going to repay the capital?

Financial Darwinism in action

not necessarily. thats a very simplistic judgement.

is it though...

You have a situation where everyone "in the know" raves that house are a sure bet the price only goes one way etc. You only have to look on here the number of people who buy a second BTL home as a pension to see people still believe this.

Then you have a situation where interest only is less than the rent, you can't be evicted assuming you make the payments, unlike a tenant. 25years is a long time...

That the situation was allowed is scandalous, but people playing a game.

Just wait for the next government bailout, wouldn't want the banks to take a hit would we.

Could also mention Osbournes 20% loans, what happens if the market is flooded by repo. interest only mortgages at the end of the term???

To be fair, I assume that most people taking out such products have an alternative capital source available to them at some point in the future. They must do.

How much have house prices risen over the last 25 years? Even if these people have to sell up, they're going to be massively in profit.

a couple of my friends were buying flats in the early 2000s, all interest only, all buy to let, rent just covering the mortgage. haven't spoken to them recently, but last I heard things were not going well.

I almost got involved, pleased I didn't tbh.

ok - let me rephrase that cheeseyfeets quote...

"how stupid do people have to be not to work out that prices wont rise for ever."

The endowment folk i can understand - others who just took interest only and relied on inheritance and value increases....

your house is only worth what its worth when you sell it .... any other time its only worth what its insured for.

[i]Anyway, how stupid to people have to be to not work out how they are going to repay the capital?[/i]

I reckon its only looking at the endowment policies. And we've one that has really cheap critical-illness included, so we're still continuing it, even though we've paid off our mortgage.

So I wonder how many others are the same?

[i]Then you have a situation where interest only is less than the rent, you can't be evicted assuming you make the payments, unlike a tenant. 25years is a long time...[/i]

I know more than one family who have taken this approach. It was much, much cheaper to take out an interest repayment only mortgage than it was paying rent with the added advantage that there's a distinct possibility that at some point in the future, they could sell and possibly make some money out of it.

My niece is one of these people. She has a large family and the house they pay interest only on costs her around 300 quid a month. A repayment on the same house would be more than twice that. Sure, [s]I've [/s]we've all helped her out with the deposit but that's what you do for family.

your house is only worth what its worth when you sell it .... any other time its only worth what its insured for.

Anyway, how stupid to people have to be to not work out how they are going to repay the capital?

Financial Darwinism in action

I've always had interest only mortgages, reckoned I could use the money to get a return greater than the interest rate - so gearing. Worked for me, paid off my mortgage any my house ain't a cheap one so happy how it's worked out.

Why bother repaying the capital piedo? How about letting the debt evenutally erode itself through inflation whilst you make your capital, which in your supremely intelligent plan you are blissfully ploughing into your house, work harder elsewhere.

I'd agree the marketing associated with such schemes should be addressed but interest only may not be the stupid call its perceived to be.

ononeorange - Member

To be fair, I assume that most people taking out such products have an alternative capital source available to them at some point in the future. They must do.

Are you a purveyor of these products? If so, do you have no duty of care?

[i]Anyway, how stupid to people have to be to not work out how they are going to repay the capital?[/i]

You don't have much of a clue do you?

I bought a flat in Aberdeeen in 1996 for £25k, lived there a year and rented it out ever since and in that time I've earned over £80k in rental income. At the moment the interest only mortgage costs me £52.99 a month and I earn more than 10 times that in rent.

Its now worth at least 5 times what I paid for it.

Yep I'm an idiot.

To be clear, I'm not saying interest only mortgages are stupid, just the people to make no provision to repay the capital or assume they don't have to repay it.

If you plan correctly and it's a sound plan for you, then that's great.

Having to sell your home to repay the capital and downsize, possibly massively, strikes me as a daft position, particularly as nobody knows what they will realise until that sale is made. What if it doesn't sell for a year, what's the lender going to do? Grab the home off you, sell it at auction for way less than market value and give you the pennies left over?

EDIT: GaryM - you clearly have a way of repaying, so it works for you

I'm talking about people like the one in this article
http://www.bbc.co.uk/news/business-22366821

Nothing wrong with it as a concept as long as you know what you are doing. Possibly miss sold to a lot of people and it also appeals to those running a high risk approach to their finances so no surprise it is getting some attention.

Interest only is a sensible way to purchase a buy to let.

With respect to homes for personal use, it's not actually a problem with the mortgage is it, it's with the investment vehicle supposed to be used to repay it- returns over the last couple of decades have fallen off a cliff. Additionally there was no enforcement of the requirement to make arrangements to repay the capital. Up until the mid nineties real returns were better than the original projections, often giving a surplus.

There was a stat on the BBC news about an hour ago saying that 1 in 8 people who have taken out Interest Only mortgages, didn't even realise that it meant you were only paying back the interest, not the capital!!
😯

I know 2 people who have done it,
one bought a far more expensive house than they could afford if they went repayment with the plan being that at the back end the appreciation on the property will be worth more than having paid off a cheaper house-a gamble but one that could work I suppose
the other one said "whats the point in paying it off thats what the life insurance is for and I can spend the money saved now"-wouldn't fancy that in my retirement years myself but hey ho

depends on the market you buy in, my first house was before the boom and my mortgage{repayment} was far cheaper than renting so a no brainer, nowadays a mortgage can be a fair bit more than renting so it gets into grey areas on whats best financially especially if it will take you to 65 paying it off

Anyway, how stupid to people have to be to not work out how they are going to repay the capital?

complete rubbish, all this is simply propaganda by a government and banking system which are both seeking to raise profits for the financial service sector,

the financial crash caused interest rates to plummet, anyone with a tracker interest only mortgage is quids in on a big scale, which is hurting the banks, they want rid of these customers,

anyone with one of these mortgages who has a bit of financial nous could save away and pay of the capital as and when, either that or when the full term of the mortgage is up the value of the capital will be far less due to inflation, or are the FSA admitting there will be no house price rises in the next 15-20 years?

People in not understanding finance shocker! 🙂

I know someone who works in Finance who didn't realise that he'd 'bought' his car on a leasing deal and had to pay a significant amount of cash after three years if he wanted to keep his shiny pride and joy. He didn't... Like many he just wanted the car now and didn't really care how he got it (or at least not enough to really check whether it made sense).

Interest only was a classic boom time moment - 'lets forget all the lessons of good, prudent banking learnt over the centuries and re-invent the wheel'. On this topic, yes banks were a bit daft but hardly negligent. It would be gratuitously unfair on everyone else if the interest only borrowers got compensated such that their capital was repaid for them.

Gary_M - Member

Anyway, how stupid to people have to be to not work out how they are going to repay the capital?

You don't have much of a clue do you?

I bought a flat in Aberdeeen in 1996 for £25k, lived there a year and rented it out ever since and in that time I've earned over £80k in rental income. At the moment the interest only mortgage costs me £52.99 a month and I earn more than 10 times that in rent.

Its now worth at least 5 times what I paid for it.

Yep I'm an idiot.

Not an idiot I would say, more of a big problem for society. It's partly because of greedy landlords and leaches that house prices have bubbled, making them unaffordable for families with young children simply trying to put a secure roof over their head.

In some respects, even with no plan to pay off the capitol it's not stupid, it's almost no different to renting. Unless the value of the house goes up, then it's like renting with a bonus payout when you sell.

And also, who takes out a mortgage and expects to be on the same terms for it's life? An interest only can be an effective tool to make getting on the housing ladder affordable.

Rely on inflation.

My parents bout a house when they got married and sold it for 10 times that years later. The total house price was less than a deposit these days so if you plan to stay somewhere for a while it could work out. You house will be the same price and your wages will rise with inflation.

In recent history house prices rose much faster so you bought a house for 150k paid the interest, sold it a year later for £180k and pocketed the difference. You can see why this would be attractive to people whoc didn't think it through.

the financial crash caused interest rates to plummet, anyone with a tracker interest only mortgage is quids in on a big scale, which is hurting the banks, they want rid of these customers

Changed Nov 2008 - Lifetime tracker of 0.82% plus the base rate. So have been paying 1.32% interest over the last 4 years or so.

anyone with one of these mortgages who has a bit of financial nous could save away and pay of the capital as and when, either that or when the full term of the mortgage is up the value of the capital will be far less due to inflation

Paid £37k off the mortgage since 2009.

Plus we've also put Solar panels up which generate a 23% return on capital.

I'm an idiot because the Bank at the time suggested a 3yr fixed deal which I declined so we had to sign a waiver which acknowledged that we didn't take their financial advice.

Not an idiot I would say, more of a big problem for society

I'll get the biscuits.

Why does no-one ever talk of mis-buying?
There was a woman on the radio today with one of those mortgages saying "I don't really understand it" Well don't sign anything you don't understand! These mortgages are a risk , and can work well for those who have understood the risks and have mitigated/accepted them but if you've just bought something you know nothing about then don't expect anyone else to bail you out.

As AMT27 says, i'm not a great customer for my bank at the moment.

I went interest only 7 years ago as my monthly income can change with bonus so i liked the option to be able to pay chunks off as and when i decided to, rather than set monthly costs of repayment.

For the last few years my mortgage rate has been 0.98% so instead i've filled up my cash ISA's where i'm getting 2.75% and i'll decide to pay a bit more off in the future when the rate situation changes.

I'm sensible with my finances and know i'll pay it off one way or another. It's the people who bury their heads in the sand and then try to blame others for their stupidity/greed that annoy me.

My best mate owes £250k interest only and has not paid a penny off it in the 6 years he's had it. No savings either. I wouldn't be able to sleep at night. He knows the risks though and is happy with it.

He knows the risks though and is happy with it

I guess that the question is what alternatives does he have. If he can't save enough for a deposit, etc and the only other option is renting, is he paying more or less on interest only? It could be an (inadvertant by the sounds of it) good decision for him..

He had a sizeable deposit although a large chunk of that would have been eroded as he bought at the top of the market. He's playing the long term game, hoping that house prices will increase.

He also increased his debt my getting a BTL as well! He's not exactly the risk averse type and things tend to work out for him in the end. Although he'd have been buggered if interest rates hadn't fallen so much and halved his monthly repayments.

The thought that anybody has the nerve to try and claim 'mis-selling' by saying they didn't understand infuriates me. If you don't understand, don't sign. Simple. most of these people were just greedy and would ask enough advisers until one eventually helps them, even if others had said they couldn't afford it.

I know what you mean and funnily enough had the conversation with my Dad who had an endowment that didn't work out as hoped - he was honest enough to say that he fully understood the risks so it was his issue.

But some people clearly were mis-sold. You don't always know that you don't understand, particularly if someone is trying to ensure that you don't!.

[i]Not an idiot I would say, more of a big problem for society. It's partly because of greedy landlords and leaches that house prices have bubbled, making them unaffordable for families with young children simply trying to put a secure roof over their head.[/i]

someone doesn't understand capitalism.

He knows the risks though and is happy with it.

Yes, he can have no house now, or no house in 25 years.

Not such a hard decision when it's raining right now, is it?

someone doesn't understand capitalism.

and we don't live in a capitalistic society where supply and demand are balanced. If we were in a truely capitalistic society more houses would have been built and banks would have been allowed to fail....

Most of these people were either betting their income would go up or they could downsize when the time came.

I've done both in the past.

I'm sure there is an element of people who are just intent on paying the interest and see what happens in 25 years, but there is a fair chance that they would be in a better position than in renting if there had been any capital growth,

So I'd say most of these people had taken a sound financial decision based on their options at the time

I suspect that a fair few BTL properties on interest-only loans will be sold at fire-sale prices, & will start a drop in housing prices in a few years time.
I've avoided interest-only loans precisely because the future is uncertain.

why, surely that will only happen if they cant rent them out and the rental market seems good, surely they will just keep renting and hope?

My business partner had one - I say had because she paid it off in full last year.

She liked the flexibility to pay as much off the principal sum without penalty whenever she liked.

Not suitable for everyone though, perhaps.

I suspect that a fair few BTL properties on interest-only loans will be sold at fire-sale prices, & will start a drop in housing prices in a few years time.

I bet it won't.

As, you are assuming that the rental market won't change. Which as more and more people are priced out is unlikely. Politicians care about voters, when renters become a sizeable electorate then their interests will be considered. That rental property might become a albatross round the owners neck.

I have two mortgages on my house, one is endowment (the original mortgage, first time buyer on low wage and it was the cheapest option). It should be paying out £45k but is actually going to pay out more like £25k, bit of a kick in the nads but I didn't try and claim compensation as I knew there was a risk when I took it out (although I didn't realise the shortfall had any realistic chance of being quite that big!). Fortunately though I bought right at the bottom of the late 90's market so still have equity in the house and I'll probably also just re-mortgage to a single repayment mortgage and keep the endowment going as a bonus. It does irk me a little that fund managers on six figure salaries could have got a better return on my money just sticking it in a bank.

I'd take their survey with a huge shovelful of salt. Twenty three years ago we sat in Bradford and Bingley trying to borrow thirty grand to buy our first house. Choice of repayment or endowment. Were promised all the capital plus twenty grand minimum bonus on top with a fancy Legal and General with profits endowment. Of course we took it. Now it looks like it'll struggle to make 22K rather than the 30k needed or the 50k promised.

Now every year they (Aviva, successor company to the successor company to the successor company of Legal and General) send me a survey saying we desperately need to know what you're going to do when our shit product fails to come even within sight of a reasonable performance. Do we fill it in or stick it straight in the shredder having long since made our own arrangements? What do you think? I'd guess lots of other people are just telling these guys any old guff, or what they think they'd like to hear, or what seems funniest at the time.

have an endowment part and an interest only part. The endowment matures in 2014 after 25 yrs and will have a shortfall of over 50K. Still will have 8 yrs to go on the interest only bit, so a bit of investment and some future iheritances will more than cover.

Very sceptical of most non hard cash savings poilicies, pensions included.

Joined a company in 1983 selling 'financial products' to innocent people. Left after 2 weeks because they were tools to a man. They sold endowment mortgages to everybody, saying that property would always go up and interest rates wouldn't drop below 10%. Conveniently walked away with all the commission. Only interested in their BMW M5s. Yes, people nee dto know what they're getting into, but most people didn't understand the details back then, especially older folk.

Not an idiot I would say, more of a big problem for society. It's partly because of greedy landlords and leaches that house prices have bubbled, making them unaffordable for families with young children simply trying to put a secure roof over their head.

someone doesn't understand capitalism.

Someone who does understand (what you seem to be calling...) "capitalism". And someone who also understands more than "capitalism"... BTW, what you described is really a form of socialised-financial parasitism.

We have friends who are paying Interest Only as they get more house for their money compared to renting. Sure, they own nothing but for them, even several years down the line, it's the option they've taken with eyes firmly open.

I'm just glad I took out an endowment.

From experience although the paperwork warned of the risks of endowment policies mortgage advisers were doing the hard sell on them right up to the middle of 2008 (nothing in writing of course). Didn't go for it myself (mostly because Radio 4 was doing an equally good job of warning of the dangers back then) but can see how plenty of people did

I have an interest only but have a very low LTV figure so it works for me.

I'm able to pay of lumps as I get them without any penalty, interest rate on my lifetime tracker is very nice indeed and I am not at all worried about the future capital repayment. I think there are, like all things, shades of grey that the OP didn't consider.

Why bother repaying the capital piedo? How about letting the debt evenutally erode itself through inflation whilst you make your capital, which in your supremely intelligent plan you are blissfully ploughing into your house, work harder elsewhere.

This.

Plus its quite tax inefficient to be paying down capital out of after tax income.

Plus its quite tax inefficient to be paying down capital out of after tax income.

How so, assuming owner occupation.

I was lucky enough to take out an interest only tracker mortgage in 95 for .16 above base, so now it makes more sense to pay all my spare money into a savings account offering a paltry 2-3% than it does to pay off any capital which is only costing me 0.66 interest rate. Therefore I have the capital there to pay it, but its in my account not theirs!

Sometimes if you were prepared to take the risk an interest only mortgage could work,depending as ever on location.

I had an interest only mortgage on a 4 bedroomed home in Harpenden that that I was never likely to own outright.That house gained £50k in two years despite the onset of the recession.If I still had it I`d currently be £100k up in 4 years.

No Id never have been able to pay it off but Id been able to simply move somewhere cheaper and buy a house outright in a more modest area with the equity I`d have made, when I retired.( That was the plan before divorce came along!)

In fact the equity in that house would have bought the house I currently live in which is just 5 miles up the road.

And it was still cheaper than renting.

But.......... I`m bloody relieved not to have the financial risk associated with such a strategy anymore!

So how is interest only mortgage anymore foolhardy than renting for your entire life. It's not like you'd need to rent a house at current rates whilst on your meagre pension anyway is it?

I suspect that a fair few BTL properties on interest-only loans will be sold at fire-sale prices, & will start a drop in housing prices in a few years time.

I bet it won't.

Totally agree, it won't happen.

Any government is afraid of negative equity on a big scale, it would be political suicide for any party, partly killed off the Tories in the early 90s

neg-equity SHOULD have happened however, to allow the next generation onto the housing LADDER with their lower salaries and uncertain career prospects, but the government are actively propping house prices by loaning first time buying a percentage of their property value,

I blame the baby boomers

Per the A couple of the posts above we're on .49% over base rate for life - so with isas returning 2% over base rate and other investments returning 6-8% over base rate there's no ever point paying the capital element.

So how is interest only mortgage anymore foolhardy than renting for your entire life. It's not like you'd need to rent a house at current rates whilst on your meagre pension anyway is it?

Renting = paying another mans mortgage.

Any government is afraid of negative equity on a big scale, it would be political suicide for any party, partly killed off the Tories in the early 90s

never say never,

when renters become a voting block then watch the politicians playing for their votes. At the moment the baby boomers are in charge, they are the votes that are targeted.

Our housing market is unbelievably messed up!

Youngsters have no chance.

What will happen when those who own all the property begin to pop off?

By some rough calculations, property in real terms is around double what it should be according to what normal people earn. That'd be a really serious bit of negative equity if the market readjusts..

Nevermind, keep the immigration rates up and all those people renting will perpetuate the status quo.

And so buy to let will soak up the fall out from people dying off, plus the hairbrained government scheme to enable people to borrow too much, all indemnified by you and me. It could become like a whole new subprime crisis all over again! 😉

We are nowhere as free as we once were. I blame reckless lending and governments clamouring for all the tax revenue to fund their ideals (electoral bribes).

By some rough calculations, property in real terms is around double what it should be according to what normal people earn. That'd be a really serious bit of negative equity if the market readjusts..

Is that including dingy one bed flats?
First time buyers do seem to want to go as near to the top of the ladder as possible, rather than climb it from the bottom.
Some do seem to want the whole lot without making any sacrifices, nice home, good car and all the trimmings.
I guess folk aren't prepared to sit on a deck chair until they can 'afford' better these days 😀 I was an oldgit even when I was young.

I think that's a very valid point oldgit.

There are (quite a lot of) houses in our town that are on the market for £30k-£40k. They need a bit of work but I reckon you could move in now. They are of course small and not in great areas but they're the first rung on the housing ladder. It appears people are far less likely nowadays to make that step, they want a 4 bed detached with a 50 inch TV and a beemer on the drive. Living in a little grotty terrace for five years isn't on their radar.

I blame Cowell

phil.w - Member
In some respects, even with no plan to pay off the capitol it's not stupid, it's almost no different to renting. Unless the value of the house goes up, then it's like renting with a bonus payout when you sell.

And also, who takes out a mortgage and expects to be on the same terms for it's life? An interest only can be an effective tool to make getting on the housing ladder affordable.

This. We bought our first property, a one bedroom flat, in 2005 on an interest only mortgage. Renting a similar flat was costing us £1250 a month, yet the interest only mortgage was £610. We were able to renovate the property ourselves, sell it once we started a family, and with the increased equity, buy a small house instead on a sensible repayment mortgage.

The plan was only ever to be on interest-only in the very short term to get on the ladder and put the money saved each month into the property. Clearly we knew that we would need to go onto a repayment mortgage soon, but as Phil-W says, you could just treat it as cheap rent with the option to do what you want to the property and maybe make a little on it at the same time. After 25 years, you have no property, as with renting, but you may have a nice chunk of cash.

Politicians care about voters, when renters become a sizeable electorate then their interests will be considered.

oldgit - Member
By some rough calculations, property in real terms is around double what it should be according to what normal people earn. That'd be a really serious bit of negative equity if the market readjusts..
Is that including dingy one bed flats?
First time buyers do seem to want to go as near to the top of the ladder as possible, rather than climb it from the bottom.
Some do seem to want the whole lot without making any sacrifices, nice home, good car and all the trimmings.
I guess folk aren't prepared to sit on a deck chair until they can 'afford' better these days I was an oldgit even when I was young.

I think the cheaper prices regionally mean this generally a Northern trait. In London, we were very happy to buy a one bed ex-council flat overlooking the railway line, which hadn't been decorated since 1961.

The 3 Bed terrace house we have now is the stuff of dreams!

"First time buyers do seem to want to go as near to the top of the ladder as possible, rather than climb it from the bottom.
Some do seem to want the whole lot without making any sacrifices, nice home, good car and all the trimmings."

equally on that front - sometimes it makes sense not to buy a flat.

a flat in town here costs >130k

A nice flat in town costs > 160k

to many of my friends have ended up being unwilling land lords due to the fact that flats in abundance in town.

But then i have crap cars while they have nice new lotus and nissan sports cars. - one thing is for certain , a car on the road being used will always lose money. Theres a small chance a house might appreciate or at least lose minimal ammounts over time.

[i]Renting = paying another mans mortgage.[/i]

Correct, and buying me lots of nice things every month. Thank you renters of the world 🙂

Correct, and buying me lots of nice things every month. Thank you renters of the world

Man, you're so ****ing awesome!

But then i have crap cars while they have nice new lotus and nissan sports cars. - one thing is for certain , a car on the road being used will always lose money. Theres a small chance a house might appreciate or at least lose minimal ammounts over time

This is how I work.

[i]Man, you're so ****ing awesome![/i]

Awww thanks, one tries ones best.

Then you have a situation where interest only is less than the rent, you can't be evicted assuming you make the payments, unlike a tenant. 25years is a long time...

This is what my missus does (only her names on the mortgage). Works for us as we intend to have moved out well before 25 years is up.

The advantage of renting over either mortgage option is flexibility, a friend just moved from one 2 bed house to another and they reckoned it cost them £10k by the time they'd paid the banks, solicitors, agents, taxes etc, and they'd only lived there for 3 years!

TBH I don't get the whole "must buy a house" philosophy this country has, why? So you can spend 25 years paying for it, followed by 20 years of being smug to people still paying for them, followed by having to sell it to fund 10 years of paying someone else to wipe your arse for you?

Having said that our next house will probably have to be a repayment mortgage.

Renting = paying another mans mortgage.

Paying a mortgage = paying the bankers coke and Porsche habit.

Very interesting thread reminds me of www.housepricecrash.co.uk

Some people who bought interest only morgages realise that if enough people say that they didn't understand the product when they bought it it may involve a payout or adjustment in their favour somewhere further down the line.

I get the feeling that some people are trying to get the denials in early to bag the compo payment!!

Of course interest rates did reach almost 15% in my time.....that would never happen again 🙄