How will everyone pay off their capital ?

dillydilly

one thing that has struck me recently is the number of people that have expressed surprise when I tell them I came close to losing a lot of cash in the Icelandic bank fiasco, their response being that it must be nice to have such significant savings. Thing is - these savings are just my way of paying off the capital on my mortgage - we're paying 5.0% or so on the mortgage yet can get 6%+ in ISA accounts so makes sense not to pay off the mortgage.

Which begs the question - just how are people planning to pay off their capital ? Back in the early 90s we all set up endowment mortgages to do just this, but I guess many people since have claimed compensation and got back a cash sum - have they all been saving this (hence my position) or did it come in handy in the recent consumer boom ? If they haven't been compensated, just how many have adequately made up the projected shortfall from the endowments ? We also hear many people have bought their high valued homes on interest only mortgages - again, how will this capital be repaid ?

No-one's ever asked me how I intend to pay the capital, which poses the question does anybody know ? And is there a long term time bomb ticking away where in twenty years time or so everyone will be forced to sell their homes to pay the debts, or at least reduce any inheritance as they'll need to take the debt to their graves ?

getmore4less

Most(?) people have repayment mortgages so not that big a problem

owning a home outright is part of retirement planning since it reduces the need for income to pay for housing those that mess up paying for there homes will have probably messed up the rest of their retirement plans as well.


(?)A quick search found a figure for 2006 that said 22% were interest only.

koexelek

When you are investing money at a higher rate than you are borrowing, there will usually will be some form of risk involved ( as there was with the Icelandic banks).
Most people are more cautious than that, so settle for a standard repayment mortgage.

sarkin

getmore4less wrote: »

Most(?) people have repayment mortgages so not that big a problem

owning a home outright is part of retirement planning since it reduces the need for income to pay for housing those that mess up paying for there homes will have probably messed up the rest of their retirement plans as well.


(?)A quick search found a figure for 2006 that said 22% were interest only.

Just think if house price had not rissen we would all be richer with lower mortgage payments.

This would then enable you to contribute top the pension plan of your choice.

But from what I can see people prefer higher house prices with less disposable income.

dunstonh

Most people have repayment mortgages. Those that do have endowments typically only have them for a relatively small amount of their overall equity. The average shortfall on maturity is not very high and doesnt cost very much to cover if you plan for a shortfall. On complaints the upheld rate is around 1 in 3.

No-one's ever asked me how I intend to pay the capital, which poses the question does anybody know ?

One would hope that you have the common sense to plan for this.

And is there a long term time bomb ticking away where in twenty years time or so everyone will be forced to sell their homes to pay the debts, or at least reduce any inheritance as they'll need to take the debt to their graves ?

Not really. A significant minority are on interest only with no ability to repay but over 25-40 years they should find their property value is higher than their debt so they can sell up and rent. Of course, the same people tend to have little or no retirement provision as well. So, they are effectively planning to be poor in retirement. A consequence of living beyond your means today.

Just think if house price had not rissen we would all be richer with lower mortgage payments.

That would have meant staying on the old boom/bust, high inflation economy. Which ironically would have meant endowment would have continued to pay surpluses. So, there would have been no shortfalls. We would all have been worse off still though.

Gorgeous_George

Some people will plan because they like to be in control. Sometimes the plans will fail and they may as well have not bothered planning in the first place.

Others will not plan. Sometimes, an inheritance or other windfall will come to the rescue and it wil not matter that they have not planned.

Some may plan never to be mortgage free and will settle for the fact that their interest only mortgage will be quite small due to the eroding effect of inflation.

Some will put so much effort into being mortgage free that they will miss out on life. Maybe some will be richer when they are old and unable to enjoy their riches.

When I was 22 I planned to be mortgage free by the age of 40. It could have happened too. Then I discovered the joys of holidays and got bitten by the travel bug. Two or three foreign holidays a year cost money but I'd rather enjoy them now than when I retire. I also decided that I needed a larger house so worked my way up the ladder a little and now live in a home that will be ideal to the day that I die.

We are all different and have differing needs and desires. There is no one solution that suits all.

GG

dillydilly

koexelek wrote: »

When you are investing money at a higher rate than you are borrowing, there will usually will be some form of risk involved ( as there was with the Icelandic banks).
Most people are more cautious than that, so settle for a standard repayment mortgage.

ok I'm paying 4.5% on my £50k mortgage and I'm getting 5.75% on my HSBC £50k ISA savings - where's the risk that's allowing me to make 1.25% profit ?

and where's the source that says what % of outstanding mortgages is on a repayment basis ? Or is this gut feel ?

Plasticman

koexelek wrote: »

When you are investing money at a higher rate than you are borrowing, there will usually will be some form of risk involved ( as there was with the Icelandic banks).
Most people are more cautious than that, so settle for a standard repayment mortgage.

Rubbish. I have had higher savings (not investing) rates than my mortgage rate for years. Recently some of that was with an Icelandic bank but in the past it has also been with British banks and building societies (including the one that lent me the money for my mortgage!). Maybe not a higher rate of savings after tax, but certainly before tax and with an ISA.

Addiscomber

dillydilly wrote: »

No-one's ever asked me how I intend to pay the capital, which poses the question does anybody know ? And is there a long term time bomb ticking away where in twenty years time or so everyone will be forced to sell their homes to pay the debts, or at least reduce any inheritance as they'll need to take the debt to their graves ?

I think you will be asked if you need to remortgage. We remortgaged with the Woolwich/Barclays in February 2007, so before all the current problems, and we were asked to show how we intended to repay.

Jennifer_Jane

dillydilly wrote: »

snip...
No-one's ever asked me how I intend to pay the capital, which poses the question does anybody know ? And is there a long term time bomb ticking away where in twenty years time or so everyone will be forced to sell their homes to pay the debts, or at least reduce any inheritance as they'll need to take the debt to their graves ?

As Dunstonh says, whether you've been asked for this or not, you will need to repay it at some stage, and you know this. Are you not repaying anything at all? Most interest-only mortgages allow something like 10% repayment annually (ask for this specifically to be set against the Capital).

I'm surprised this wasn't on your original mortgage application, it certainly was on mine.

And to answer the question - I had some money from endowments and pension money in South Africa which I've set against the mortgage, plus UK savings where I could. Currently, I'm putting £600 a month away into my pension AC's which I'll take as tax-free lump sum (the 25% tax-free allowance) when I retire next month to set aside for the balance of the mortgage. So that's the best 'investment' I can get at the moment. It means that I will be mortgage-free after 9 years.

Jen
x

koexelek

Plasticman wrote: »

Rubbish. I have had higher savings (not investing) rates than my mortgage rate for years. Recently some of that was with an Icelandic bank but in the past it has also been with British banks and building societies (including the one that lent me the money for my mortgage!). Maybe not a higher rate of savings after tax, but certainly before tax and with an ISA.

Not disagreeing with what you say, but the MAJORITY of people would go for the capital and interest mortgage.
You have to be pretty swithced on to invest your money safely ( net of tax) at a rate higher than that you are paying on your mortgage.
Most people are not that financially astute