Quarter of Brits on interest only mortgages

shakerbaby

nicko33 wrote: »

Why does working hard come into it?
Isn't the point of IO that the money you are not reducing the balance by is working harder for you (by getting a return, after tax, greater than your mortgage rate) ?

Shhh :shhh: it not called renting from the bank for no reason. :j

julieq

Entertainer wrote: »

Not only are you leasing your home from the bank you are also taking a highly geared play on the property market. Effectively these people are selling a £300,000 put option on the property market, without even realising it; individuals who would recoil at the idea of putting £20 on a roulette table.

This debate about 25 years is a complete red herring; of course prices are going to be higher in 25 years time - that's not the issue. Given the enormous scale of the boom, if you bought at the peak of the market you could be facing 25% negative equity immediately- 7 years of all the associated problems- not being able to remortgage, move house (people's relationships break up, you can't guarantee you will stay in the same house forever). Why inflict that on yourself with no backup of owning equity in your house? A person is effectively insolvent for all that time, a zombie borrower.

These interest only mortgages lead to inflation in the housing market and the prevalence of them could explain why prices are still overvalued. Of course there are responsible borrowers like Dan but how many do you think are like him? The whole nation's future is being mortgaged to permanently low interest rates. When that ends, it means insolvency of the banks and individuals as well.

Nice rhetoric, but doesn't really stand scrutiny.

Anyone buying on any type of mortgage at a peak before a crash is in negative equity, and has precisely the same problems. It really makes only a marginal difference if you're on a repayment mortgage in versus an interest only mortgage, and in both cases you have precisely the same option to fix the problem, which is to build up some sort of offsetting savings or investment.

Buying just before a fall is really the risk you run when you buy a house.

The roulette analogy is interesting. I understand risk, and I understand that roulette is a losing proposition on average so I wouldn't take the £20 bet. Buying a house isn't. Most people who bought on interest only mortgages (or any sort of mortgage) will come out ahead, because overwhelmingly most of them won't be forced to crystallise a loss. And to participate in the game they pay an amount which is comparable to that which anyone renting will be paying, and unless that renter eventually joins the game they will be paying that amount every month for their entire life, which implies vastly increased pension provision to achieve a like for like outcome.

So there is a massive potential downside for a long term renter and no upside, a relatively small downside for an interest only purchaser (the difference between sale price and buying price at the point a sale is forced if that happens) and a potentially very large upside over time. It's a bet worth taking. To turn it round, why would you inflict a lifetime of struggling to pay the rent?

So it's really demagoguery to claim that a house purchase is a bet similar to roulette, the maths doesn't support that statement. And then to use words like "zombie", which is like the "toxic" of "toxic assets", a word designed to create an impression rather than to convey truth accurately.

House price falls will create problems for some people, and the problems will be of various degrees of severity, from mild inconvenience through to financial ruin. Anyone taking out an interest only mortgage has their own set of problems, but most people doing that will overcome them.

MrCarrot

wageslave wrote: »

Anyone who has no other way of repaying the capital sum borrowed other than a vague hope that they will be earning more or that their house will be worth enough to pay the mortgage and buy another house outright is a lunatic.

At the end of this year I am going to attempt to switch to an interest only mortgage from a repayment mortgage. I will then overpay each month to make it the equivelant of repayment. The advantage is, if times become hard I can stop overpaying, and will have a very small amount to pay in interest each month (much less than if I rented from a private landlord).

My mortgage is going to be around £40k at the end of this year if my plans come together. Whether I overpay each month or not, I would hope I could save up £40k over the next 21 years.

I can't see interest only mortgages are that bad, unless you borrow say £200k and never have any plans of saving up and repaying the capital.

geoffky

PasturesOld wrote: »

Ok how can someone payoff a mortgage interest only? You don't pay it off you just pay interest. Anyone taking out an interest only mortgage usually needs supporting evidence of a repayment vehicle ie isa. Geoff can i ask you, are you one of these skint bears who are hoping that property drops to an affordable level for you probably 70% from peak?

you obviously have not been reading if you think i am a skint bear....far from it..

HAMISH_MCTAVISH

geoffky wrote: »

you obviously have not been reading if you think i am a skint bear....far from it..

No, just an imaginative one.;)

geoffky

HAMISH_MCTAVISH wrote: »

No, just an imaginative one.;)

POOR YOU..:rotfl::rotfl::rotfl:

HAMISH_MCTAVISH

julieq wrote: »

Nice rhetoric, but doesn't really stand scrutiny.

Anyone buying on any type of mortgage at a peak before a crash is in negative equity, and has precisely the same problems. It really makes only a marginal difference if you're on a repayment mortgage in versus an interest only mortgage, and in both cases you have precisely the same option to fix the problem, which is to build up some sort of offsetting savings or investment.

Buying just before a fall is really the risk you run when you buy a house.

The roulette analogy is interesting. I understand risk, and I understand that roulette is a losing proposition on average so I wouldn't take the £20 bet. Buying a house isn't. Most people who bought on interest only mortgages (or any sort of mortgage) will come out ahead, because overwhelmingly most of them won't be forced to crystallise a loss. And to participate in the game they pay an amount which is comparable to that which anyone renting will be paying, and unless that renter eventually joins the game they will be paying that amount every month for their entire life, which implies vastly increased pension provision to achieve a like for like outcome.

So there is a massive potential downside for a long term renter and no upside, a relatively small downside for an interest only purchaser (the difference between sale price and buying price at the point a sale is forced if that happens) and a potentially very large upside over time. It's a bet worth taking. To turn it round, why would you inflict a lifetime of struggling to pay the rent?

So it's really demagoguery to claim that a house purchase is a bet similar to roulette, the maths doesn't support that statement. And then to use words like "zombie", which is like the "toxic" of "toxic assets", a word designed to create an impression rather than to convey truth accurately.

House price falls will create problems for some people, and the problems will be of various degrees of severity, from mild inconvenience through to financial ruin. Anyone taking out an interest only mortgage has their own set of problems, but most people doing that will overcome them.

That is without a doubt the most effective destruction of an opponent's argument that I have ever seen online.

Well done.

shakerbaby

geoffky wrote: »

you obviously have not been reading if you think i am a skint bear....far from it..

Don't worry it's the usual bull defence to try to deflect the conversation from their own massive debt burdens. :eek: Think about it, if you were extremyl over-leveraged would you want to be reminded about it 24/7 on a housing forum. :rotfl:

Thrugelmir

julieq wrote: »

Nice rhetoric, but doesn't really stand scrutiny.

Anyone buying on any type of mortgage at a peak before a crash is in negative equity, and has precisely the same problems. It really makes only a marginal difference if you're on a repayment mortgage in versus an interest only mortgage, and in both cases you have precisely the same option to fix the problem, which is to build up some sort of offsetting savings or investment.

Buying just before a fall is really the risk you run when you buy a house.

The roulette analogy is interesting. I understand risk, and I understand that roulette is a losing proposition on average so I wouldn't take the £20 bet. Buying a house isn't. Most people who bought on interest only mortgages (or any sort of mortgage) will come out ahead, because overwhelmingly most of them won't be forced to crystallise a loss. And to participate in the game they pay an amount which is comparable to that which anyone renting will be paying, and unless that renter eventually joins the game they will be paying that amount every month for their entire life, which implies vastly increased pension provision to achieve a like for like outcome.

So there is a massive potential downside for a long term renter and no upside, a relatively small downside for an interest only purchaser (the difference between sale price and buying price at the point a sale is forced if that happens) and a potentially very large upside over time. It's a bet worth taking. To turn it round, why would you inflict a lifetime of struggling to pay the rent?

So it's really demagoguery to claim that a house purchase is a bet similar to roulette, the maths doesn't support that statement. And then to use words like "zombie", which is like the "toxic" of "toxic assets", a word designed to create an impression rather than to convey truth accurately.

House price falls will create problems for some people, and the problems will be of various degrees of severity, from mild inconvenience through to financial ruin. Anyone taking out an interest only mortgage has their own set of problems, but most people doing that will overcome them.

JQ although I agree with your reasoning. There is a unknown quantity in the pack, in the form of multiple jokers. As 45% of all lending in 2007, for example, was on a self certified income basis. The impact of i/o has yet to be felt.

There is a general tightening in the market place on interest only mortgages. Which I an sure in part is down to the less than required checking of the original mortgage applications.

Chelsea BS are another lender in trouble. Not the last one would imagine.

A fact has gone unreported is that Bradford & Bingley have provided over £280 million for mortgage fraud so far. Dwarfs the Chelseas losses somewhat.

This game hasn't even reached the first quarter yet. So I would keep your powder dry for a little longer.

HAMISH_MCTAVISH

shakerbaby wrote: »

Don't worry it's the usual bull defence to try to deflect the conversation from their own massive debt burdens. :eek: Think about it, if you were extremyl over-leveraged would you want to be reminded about it 24/7 on a housing forum. :rotfl:

So which bulls do you think are overleveraged, and why?

I'm not, I can't think of any that are on this board.

You bears like to use sweeping generalisations, but I don't think the reality is anywhere like what you seem to think it is.