Interest-only mortgage crisis looms report

michaels

Xbigman wrote:

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

With most mortgages, even with a tie in you could put at least 10% of the capital straight into the mortgage if the need arose.

My comparison with renting was to make the point that once you buy you have taken the risk on prices falling or rising - the amount of 'equity' you have in the property is irelavent (unless you are trying to move and have no equivalent savings) and that if you have zero equity in the property and savings you are probably better off in terms of flexibiity than if you have that amount of savings in the property as equity and zero savings.

michaels

Xbigman wrote:

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.
X

I don't quite qualify for the above as I have a family but I am happily interest only and actually drewdown equity out on my house on my last remortgage as tthe fees were the same however much I went for and the extra money is earning tax free interest in my wife's name at 1% higher than I pay on the mortgage....

Claireybear

I have an interest only mortgage at present but it was my only option at the time of buying as i couldnt afford anyhting more. Luckily i paid a 5% deposit and i had the property valved and it has gained considerably so i wouldnt say its all bad ive probably gained more than ive paid out!!!!!

dunstonh

I have an interest only mortgage at present but it was my only option at the time of buying as i couldnt afford anyhting more. Luckily i paid a 5% deposit and i had the property valved and it has gained considerably so i wouldnt say its all bad ive probably gained more than ive paid out!!!!!

Whilst I understand your reasons, you are aware that this is a very risky approach.

What makes you think you will be able to afford it later? Pay rises dont come as frequently and as high as 10 years ago and that isnt likely to change. Especially with the influx of cheap labour.

Every year you delay setting up a repayment vehicle or switching to repayment, the monthly cost will go up (same amount to pay but shorter time to do it).

If a property price drop occurs you could end up owing 30% more than the property is worth preventing you from moving on.

JCL

Had to laugh at those who didn't realise they only have an interest only mortgage and thought they were paying the whole thing off. Some daft people around. Know what you're signing up for.

nearlyrich

The IO approach is OK short term if you have expectations of higher salary with career progression, trouble is there is always something more important like the expense of children etc, before you know it you are approaching retirement with no assets. Life is short and the security of owning your own home outright is pretty liberating.

lisyloo

With most mortgages, even with a tie in you could put at least 10% of the capital straight into the mortgage if the need arose.

No you CANNOT do this.
It's called "deliberate deprivation of assets".

You cannot spend money and THEN claim benefits.
It's a bit like spending your redundancy money on a new car and then asking for benefits.
It's not legal.
The poster had a good point, that you need to consider whether you might be likely to claim benefits.

lisyloo

The IO approach is OK short term if you have expectations of higher salary with career progression, trouble is there is always something more important like the expense of children etc, before you know it you are approaching retirement with no assets.

I presume you mean I/O mortgages that are not being paid off.
I have an I/O mortgage that I'm paying off twice as fast as a standard repayment so please don't make assumptions about us I/O mortgage holders.

We don't all have dodgy repayment vehicles or no plans to pay it off.

Life is short and the security of owning your own home outright is pretty liberating.

People with I/O mortgages CAN and DO make capital repayments.
I choose I/O because it gives me flexibility of when and how much.
For some people a regular direct debit is much better, but I am disciplined so I don't see why I shouldn't have the choice of when and how much I pay off.

EdInvestor

The I/O plus overpayment of capital route looks quite good to me - gives the flexibility to cope with unexpected problems like unemployment, relationship breakdown, as you can just stop overpaying, without going through the hassle and cost of renegotiating the mortgage itself.

An offset has potentially even more flexibility but is probably more expensive unless you have a large amount of savings. Any thoughts on how the two methods compare?

lisyloo

Any thoughts on how the two methods compare?

It used to be the case that offsets were only beneficial if you had a lot of savings. This is because offset rates were a lot higher than discount trackers.

I would say that the gap has narrowed a lot and offsets are now only a little bit more expensive than discount trackers (for example IF have an offset tracker for 4.55%).

Personally I still found a discount tracker to be cheaper (when I looked in Oct 2005) but I have a large mortgage and only a very small amount of savings that I want to offset. (I have ISAs but I don't want to offset them as they are getting a higher rate).

I believe that offsets are now coming very close to challenging the standard discount trackers.