How do you intend to pay off your interest only mortgage?

princeofpounds

But what was base rate for those 15 years? has that given them he chance to pay back debt quickly?

The point is that they may be paying back debt but they are only paying down negative equity, it's not actually a wealth-creating exercise but mitigating the destruction of wealth that has already happened.

Really2

princeofpounds wrote: »

The point is that they may be paying back debt but they are only paying down negative equity,

So every home owner who purchased in Japan for the last 15 years is in negative equity?

princeofpounds

So every home owner who purchased in Japan for the last 15 years is in negative equity?

Not every individual, but in aggregate yes.

Really2

princeofpounds wrote: »

Not every individual, but in aggregate yes.

Got the figures? You are clouding your own judgment on IR's like I said on what I am repaying.

My total mortgage term will be about 15 years because of recent and ongoing low IR base and the total I repay will be far lower than most as shortening your term could save anyone £1000's and could litteraly half the cost of what they pay for a house overall (or by more)

Although a low IR base is not a sign of a thriving economy, it does give that economy a chance to pay back debt.

There is no time machine so I fail to see your point on Japan unless you thin default is the better option.

But lets be honest the japan bubble was huge and backed up by some mad mortgages (was there not the 75 and 100 year ones).

You should join us on the nutter board. Sorry house prices.

silvercar

pingu2209 wrote: »

Scenario: You are a family with 3 children. You can afford a repayment mortgage on a 3 bed semi selling at £280k (mortgage of £200k), but you buy a 4 bed detached house for £400k (mortgage of £320k) with a repayment only mortgage.

In 25 years the 3 bed semi is worth £500k and the 4 bed detached is worth £625k.

Now your children have left home and you sell the 4 bed and have £305k interest. You can't buy a 3 bed semi, perhaps a 2 bed terrace?

Is it better to have a paid in full for a 3 bed semi so in your retirement you still have your home, but would have stuggled for space when your children were still at home. OR

Is it better to have the space when the are children at home and have to downsize to a smaller than 3 bed semi? Although either way you still own your final home outright?

Just an interesting scenario. No right or wrongs. Just what you want from life.

With a bit of wage inflation over the 25 years, the chances are that someone on IO will have made some capital repayments, even if not repaid fully. So they should have the option of buying that 3 bed semi.

Really2

pingu2209 wrote: »

Scenario: You are a family with 3 children. You can afford a repayment mortgage on a 3 bed semi selling at £280k (mortgage of £200k), but you buy a 4 bed detached house for £400k (mortgage of £320k) with a repayment only mortgage.

In 25 years the 3 bed semi is worth £500k and the 4 bed detached is worth £625k.

Also.

Why is the three bed inflating at 179% but the 4 bed at only 157%

Surely you would at least expect the same HPI so the 4 bed would be £716K

princeofpounds

Got the figures? You are clouding your own judgment on IR's like I said on what I am repaying.

??? Prices are down 60% from the peak. Unless EVERYONE went in with only 40% LTV then of course they are in negative equity. I'm sure I can dig up figures for you at some point - let me get back on this - but you really don't need to see them to understand what has happened.

There is no time machine so I fail to see your point on Japan unless you thin default is the better option.

My point was that I was asked for examples of instances where over the life of the mortgage house prices have not substantially increased.

My further point was that because such situations do happen that it is not a foolproof strategy to wait for inflation to erode the principal value of your debt. Many people in the UK and US seem to think it is, but that is simply because they have not had experiences of events like the Japanese.

I'm not quite sure where your time machine/default point is going, seems like you have misunderstood my posts quite significantly.

But lets be honest the japan bubble was huge and backed up by some mad mortgages (was there not the 75 and 100 year ones).

It probably was the biggest we have seen recently, but our own recent bubble has also been exceptionally expansive on any historical scale as the Shiller index also shown has illustrated.

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I think the general point you are trying to argue is that it doesn't matter if house prices fall because interest rates will be low and people will be able to pay back more principal.

There are two points I would make to that - house price crashes are not always deflationary (and therefore interest rate-lowering) events; the early 90s being a prime example of this where plunging house prices was very much a product of higher interest rates.

The second is that although this effect might help reduce the rate of default, ceterus paribus, it most certainly is not enough to compensate for the risks or loss of wealth, or the effect on the economy/banks which follows.

Any default will result in more loss per default as the bank will be under-collateralised, incentives to default are higher as they 'owner' is not walking away from any net worth, and there is a negative wealth effect as the stored wealth in housing evaporates crushing consumer demand and the like, meaning more likelihood of defaults.

It's all very well imaging everything from the perspective of the person who keeps continuous employment over the period, but you forget about the situation in the bank (which is the other side of the transaction and a viewpoint most people seem unable to comprehend), the situation if your income dries up and you need to sell and forcibly liquidate whilst in negative equity etc.

The questions is how much wealth is preserved at the end of the process. This is not a question of cashflow but of the optimum net present value decision. For example, let us assume that your thesis holds true and low interest rates enable you to make enough excess payments to keep at zero equity. If house prices fall 25%, then you could have just left that money in the bank, paid rent (assumed equal to mortgage interest) and been 33% richer at the end of the process. NEVER forget about opportunity cost when evaluating financial decisions.

silvercar

??? Prices are down 60% from the peak. Unless EVERYONE went in with only 40% LTV then of course they are in negative equity. I'm sure I can dig up figures for you at some point - let me get back on this - but you really don't need to see them to understand what has happened.

You are assuming that everyone bought at the peak. if you bought 30% below the peak with "only" 40% LTV you won't be in negative equity.

There are three factors that can erode the value of your mortgage, house price inflation will give you more equity, wage inflation will give you more money to pay back the capital borrowed and general inflation will give you more money either in terms of wage increases or in terms of house price increases.

You would have to be pretty unlucky to end up after 25 years on a lower salary with a house worth less than you bought it for.

Really2

silvercar wrote: »

You are assuming that everyone bought at the peak. if you bought 30% below the peak with "only" 40% LTV you won't be in negative equity.

There are three factors that can erode the value of your mortgage, house price inflation will give you more equity, wage inflation will give you more money to pay back the capital borrowed and general inflation will give you more money either in terms of wage increases or in terms of house price increases.

You would have to be pretty unlucky to end up after 25 years on a lower salary with a house worth less than you bought it for.

Exactly the assumption every one was NE was very flawed.

tiggerjj

Really2 wrote: »

So don't forget anyone in an offset mortgage is classed as IO even though the reality is they are most probably making capital repayments.

Eh? I dont understand? Please someone clarify