Interest-only mortgage crisis looms report

Red13

Interesting read in yesterday's Guardian in case you haven't seen it -

http://money.guardian.co.uk/property/mortgages/story/0,,1825967,00.html

'Research by the Council of Mortgage Lenders shows that 200,000 borrowers with interest-only mortgages failed to set up a repayment vehicle, and more than 60,000 of those are first-time buyers' - but my guess is they're not visitors to this site )

Miss_Penny_Pincher_2

We recently bought our first home and the first independent mortgage advisor that we went to see was really determined to push an interest-only mortgage onto us!! He was adament that getting interest-only was the best choice financially!

When we saw him we were very naive and hadn't even heard of MSE. Mr Pincher was convinced we should get the interest-only because the mortgage advisor strongly recommended it. The reasons the advisor gave were:

a) people don't stay in same house for 25 years so foolish to have repayment mortgage.
b) better to use the money on investing in the house rather than use it to pay off capital.

Mr Pincher was sold on it but the thing that held me back was that I hadn't seen any figures to prove this - even with my slim grasp of maths it just didn't seem to stack up as would end up paying more over the term with interest-only. The other thing that made me reluctant was that shockingly he didn't even suggest a savings / investment vehicle! He just said at the end of 25 years downsize and that will pay off the mortgage!

Mr Pincher kept quoting him and we had several arguments about this! But I still wasn't convinced. My argument was that I didn't want to pay an interest-only mortgage for 25 years that didn't cost that much less than a repayment mortgage per month to then have to sell the house to move somewhere smaller!

Anyway my point is that I can see how many people are sucked in without realising that they also need to save/invest to pay off the capital at the end!!

Pobby

Phew----I know a few myself who are using an IO mortgage.I think on the form that you have to tick a box to say that a repayment vehicle is in place.A further problem for these folks is if it comes to the property being repro`d,there could be a case brought by the lender for fraud.I know btl wallers that use this type of mortgage.Anyone who has gone into btl since 2004 without a very substancial deposit is asking for trouble.

Sadly,this situation has come about because of very high property prices.All things run in cycles and imho I would not be surprised to see property prices starting to fall as cash strapped btl people all rush to the exit.

Cara79

I have a friend who not so long ago entered an interest only 100% mortgage, and then put debts on top. Absolutely barmy!

But, I don't think they have any idea. They thought this broker was great. She recommended him to all our mutual friends and I know a couple went to see him.

Luckily neither of my friends have taken it any further with him. Certainly one of my friends cannot afford to buy her own house, although he did tell her what she could afford (!) by mortgaging herself up to buy a shoe box studio flat. Luckily once she saw the studio flat she decided against it.

I really do feel for my friend and her fella. I have a feeling that the heart ruled. They'd not even been together long, never lived together. Now have a £180k interest only mortgage and I'm pretty sure no investment vehicle!

I personally agree with Pobby, I think think property prices are going to start to fall and alot of people are going to get burnt.

x

EdInvestor

Most BTL mortgages are interest-only because you only get tax relief on the interest, not on repayments of the capital.At least a 15% deposit is usually required for a BTL mortgage and the rent must cover 120-130% of the repayments, so this lending is not particularly risky.A fall in prices will not affect landlords as long as rents remain reasonably stable.

Most BTL investors with a portfolio will normally expect to sell one property eventually in order to pay off the mortgages on several - and then use the rental income from the others to pay their pensions.

An alternative to downsizing for an owner occupier is an equity release lifetime mortgage after retirement.

As the article says:

The options would be to sell the house and move to a smaller or less expensive property, or to enter into an equity release plan, no doubt conveniently provided by the lender.

Quite so.

michaels

Generalising on this is rubbish (in my humbler opinion) - if you are not using your full cash ISA allowance you are much better using this up rather than paying capital off your mortgage unless you are on the wrong rate. Not only can you benefit each ytear from paying a lower rate on your mortgage than you receive on the ISA but also as the ISA allowance is a use it or lose it affair you will lose out on the tax benefit for as many years as the ISA tax advantage continues.

Secondly paying interest only puts you in the same position as renting - ie you are not putting capital in to property - I don't hear everyone who is renting being criticised in the same way.

Finally a case could be made for minimising the amount of capital in your residential property as it is very tax efficient in terms of capital gains. THe capital can then be used for other purposes/investments - I would say that the majority of people in this country are much too exposed to poroperty as an asset so investing elsewhere rather than in repaying the mortgage could be seen as a valuable diversification.

ByToLet is mentioned above - in this situation as interst payments can be offset against income there is a definite advantage to maximising the interest payments and hence minimising the capital tied up in the property.

A final arguement to prove my point. Whether you have equity in your property or not you are running the same risks with respect to capital loses/gains - but with no equity in the property if prices fall you may actually be able to give up the asset and let the lender take the capital loss rather than suffer the loss against the capital you have put into the property by paying down the mortgage.

I hope all this makes sense and you think about it before rejecting capital only out of hand...

lisyloo

I agree with you about the ISA.

Secondly paying interest only puts you in the same position as renting

Not sure I agree with you about this bit.
If you buy at the market peak and your house price goes down then you have a liability for a debt that you cannot pay.

£200K mortgage holder loses job and owes £200K regardless of house value.
Renter owes nothing.

(I do accept however that this works the other way but we are specifically talking about the risk here).

I do agree with you about not generalising.
I have a I/O mortgage and I'm paying it off twice as quick as a standard repayment mortgage.

Cara79

Lisyloo,

If you have an I/O mortgage and you're paying it off twice as quick as a standard repayment mortgage - how does this work? Are you making overpayments onto the capital?

Sorry, just want to understand.

x

Xbigman

Interest only is an option for those who are financially savvy and who have secure jobs/careers, limited commitments (IE families) and plenty of free income to play with. That rules out over 99% of the population.

In the case of an IO mortgage and then downsizing. This could work in theory if you start with a decent sized property and are prepared to downsize in 25 years time. How many people want to go back to a FTB property in their 50's or 60's? In retirement maybe, but not earlier.

As for stacking money into an ISA. What if you lose your job? You would be expected to spend that money before you could qualify for any benefits. That could be a real problem.
Regards




X

lisyloo

If you have an I/O mortgage and you're paying it off twice as quick as a standard repayment mortgage - how does this work? Are you making overpayments onto the capital?

Yep, my mortgage has no penalties and the interest is calculated daily, so every month after I've been paid I just walk in to the branch and give them a cheque.

You could of course do the same thing with a repayment mortgage, I just have more flexibility to pay LESS if I ever need to with interest only.

lisyloo

As for stacking money into an ISA. What if you lose your job? You would be expected to spend that money before you could qualify for any benefits. That could be a real problem.

You have a good point there.

For me personally it isn't an issue because if I lose my job my husband will be expected to "keep" me and I will not get means tested benefits.
It also works the other way round. If he loses his job, I would have to "keep" him, so the chances fof us of getting means testing benefits are very small.

We could of course both lose our jobs together but there hasn't been a remote chance of that over the last 16 years so in our case we think it's extremely unlikely that we'll ever be in a posistion to claim benefits.