Is your lender coming after your IO mortgage?

Dan:_4

mustrum_ridcully wrote: »

Yes true. But will they be in a position or willing to sell their home, pay-off the capital and buy somewhere to live if they haven't made proper provisions. You also assume that they are aware that they need to pay-off the capital.

Their house may well increase in value, but so will every other house.

Maybe they could get downsize or get a retirement flat, however it's quite reasonable to assume there will a lot of competion for those as the population gets older so the prices could surge. Maybe they'll have to go out and get a mortgage at the age of 50 or 60, when their friends/work mates have just finished with their repayment mortages - I'm sure they won't be happy about this.

They could move to a cheaper part of the country or buy an ex-council house, that assumes they're willing and in position to able to do this (i.e. they haven't just had to sell their ex-council house in a cheap part of the country). Perhaps they'll move-in with their children, assuming they're kids have enough room or are willing to accomodate them. Yet more things people might be rather unhappy about.

So irrespective of whether house prices go up, down or stagnate I can foresee IO mortgages being the next endowment 'mis-selling' scandal. I can see the ambulance chaser adverts now "Mis-sold an IO mortage? Then phone... and get the money you're entitled to"

All fair points.

If you have not made proper provisions and do not have the capital to repay the orgional loan then you will have no choice to sell up. However you would be sitting on a fair amount of dosh from the sale + you would have enjoyed 25 years of cheap 'rent' And this is worst case of course.

ninky_2

i have an IO mortgage. it's totally flexible and i took it out because being self employed i wanted maximum opportunity to make overpayments during periods of work and then also be able to take payment holidays or drawdown overpayments again to cover void periods. as it stands i have made massive overpayments but would like the lender to keep their side of the deal by allowing me to borrow back that money when i want to. a totally reasonable concept i would have thought.

i suspect this has nothing to do with concern for borrowers and everything to do with the lenders getting jittery over falling ltvs.

Bullfighter

Dan: wrote: »

All fair points.

If you have not made proper provisions and do not have the capital to repay the orgional loan then you will have no choice to sell up. However you would be sitting on a fair amount of dosh from the sale + you would have enjoyed 25 years of cheap 'rent' And this is worst case of course.

Maybe you could elaborate on this prediction. How much dosh will you have from the sale of a £250k house bought in 2007 with a 90% IO mortgage in 2032?

Strings

nearlynew wrote: »

The majority of people that take out IO mortgages don't do so because they are "financially savvy"


They do it because it lowers the monthly payment enough to enable them to "buy" (and move into) a house they couldn't otherwise afford.

Couldn't agree more, this is what we did.

chucky

Bullfighter wrote: »

How much dosh will you have from the sale of a £250k house bought in 2007 with a 90% IO mortgage in 2032?

do you realise that your mortgage outstanding stays the same?
but the value of the property goes up or down over that time - do you really think that house prices will be lower in 2032?

with average HPI of 2.9% over 25 years you would probably have double the mortgage outstanding in equity on that property.

Dan:_4

Bullfighter wrote: »

Maybe you could elaborate on this prediction. How much dosh will you have from the sale of a £250k house bought in 2007 with a 90% IO mortgage in 2032?

Likely to be worth 500K (minimum) in 2032 - im sure you can do the maths.

RenovationMan

nearlynew wrote: »

The majority of people that take out IO mortgages don't do so because they are "financially savvy"


They do it because it it lowers the monthly payment enough to enable thm to "buy" (and move into) a house they couldn't otherwise afford.

This is what we have done every time we bought a house. It's a great way of getting up the housing ladder. We're currently listed in a 5 bed 1700's stone farmhouse that was valued at £500k, with land and out buildings. It's absolutely lovely and somewhere where I could never have thought I'd be able to live in.

My first house was a 2 bed semi, the second was a 4 bed detached 'executive' style and the third is the farm house. We've had interest only each time and have maxed ourselves out each time. HPI has been a real help in building up our equity, combined with some large overpayments. We struggled with the deposit on the first house, but after that it's been quite easy to maintain a minimum 80% LTV on the other properties.

We'll probably never pay off the farmhouse, but it doesnt matter because we wont retire in it, its way too large for us. Once the kids have left home, we'll downsize to a cottage and use all the equity we've built up over some 40 years of home ownership to buy it outright.

With life insurances, critial illness and income protection insurances in place, and with a mortgage where you pay the minimum each month if things are tight and overpay when you're flush, it's a great way to get up the housing ladder fast and without too much effort or too much risk. After all, we're only paying the same each month as someone with a repayment mortgage, but we're living in a much bigger place and the HPI multiples are obviously much higher.

Linton

Sorry, disagree on some points. Pity, but I guess we cant fight the bulls/bears battle all the time.

julieq wrote: »

Always amuses me when the bears start offering advice on what savvy people should do, given their lamentable track record on calling any aspect of the housing market. I'm sorry, but the bears are the last group I'd be taking lectures on financial acumen from.

There's nothing at all wrong with IO mortgages. Worst case you have relative costs decreasing year on year because of general wage inflation and wage inflation from promotion. At the end of the 25 years you have an asset which has increased in value compounding nicely in the opposite direction. If there's no repayment vehicle, then the house gets sold (the house becomes the repayment vehicle in this scenario). Most people will have sorted this out though with savings and investments, if they don't it's their lookout but it hurts no-one but themselves.

Overpaying a mortgage or buying a house outright is a very poor strategy too, because it ties cash into an illiquid asset. Given that even a moderate risk investment will beat mortgage rates easily, and you can get close to mortgage rates even with instant access savings, there is zero benefit and a lot of lost opportunity cost. Standard bear operating procedure, obviously, and correspondingly dumb.

First disagreement - do you really want to cover a house worth many times your income with a "moderate risk" investment. Isnt that what endowments tried to do? Fine if you have sufficient wealth to take the risk but not if you dont.

Second disagreement: I dont believe you can normally get instant access savings to nearly match mortgage rates - after all banks & building societies borrow from the saver to lend to the borrower, so they must in general have a higher mortgage rate than savings rate.

Also you need to factor in tax - paying off the mortgage is tax free, savings returns aren't. (OK you can have a cash ISA, but these in general provide lower returns)

So for most people, with limited capital, limited time and limited investing skills paying off the mortgage is worthwhile.

The most likely reason for this move is to blackmail bank customers into taking a poorly performing investment vehicle from the bank, using residual concern from the credit crunch as a lever. The banks get the first sales call to the customer, and they'll get a lot of the business as a result. It's pretty cynical really. No bank is at risk of default because of IO mortgages, there is therefore no risk to the financial system from IO mortgages. It's a marketing ploy.

Final one - Seems a bit conspiracy-theorist to me. I would have thought that the bigger reason was that the banks cant take the risk of being left with a shedload of poorly maintained repossessed houses that might theoretically cover the loans but in practice will be a hassle, expensive and time-consuming to dispose of. After all, the banks need to borrow to fund the loans they make, borrowings which need to be maintained until the house is sold.

Bullfighter

RenovationMan wrote: »

This is what we have done every time we bought a house. It's a great way of getting up the housing ladder. We're currently listed in a 5 bed 1700's stone farmhouse that was valued at £500k, with land and out buildings. It's absolutely lovely and somewhere where I could never have thought I'd be able to live in.

My first house was a 2 bed semi, the second was a 4 bed detached 'executive' style and the third is the farm house. We've had interest only each time and have maxed ourselves out each time. HPI has been a real help in building up our equity, combined with some large overpayments. We struggled with the deposit on the first house, but after that it's been quite easy to maintain a minimum 80% LTV on the other properties.

We'll probably never pay off the farmhouse, but it doesnt matter because we wont retire in it, its way too large for us. Once the kids have left home, we'll downsize to a cottage and use all the equity we've built up over some 40 years of home ownership to buy it outright.

With life insurances, critial illness and income protection insurances in place, and with a mortgage where you pay the minimum each month if things are tight and overpay when you're flush, it's a great way to get up the housing ladder fast and without too much effort or too much risk. After all, we're only paying the same each month as someone with a repayment mortgage, but we're living in a much bigger place and the HPI multiples are obviously much higher.

Fair play to you. But how long do you think this pyramid scheme of house price inflation will continue? Will your grandchildren be buying a 2 bed semi in Stabville for 5 million? If so, then either banks will be lending 20x joint income with 1% deposits or wages will have to inflate 20x current levels. Both are unsustainable.

I have never questioned that historically (over the past 40 years) house price inflation has existed, and I'm not blind to the fact that some people have made spectacular profits from HPI - I'm simply arguing that it just can't continue.

RenovationMan

Bullfighter wrote: »

Fair play to you. But how long do you think this pyramid scheme of house price inflation will continue? Will your grandchildren be buying a 2 bed semi in Stabville for 5 million? If so, then either banks will be lending 20x joint income with 1% deposits or wages will have to inflate 20x current levels. Both are unsustainable.

I have never questioned that historically (over the past 40 years) house price inflation has existed, and I'm not blind to the fact that some people have made spectacular profits from HPI - I'm simply arguing that it just can't continue.

I have no control over HPI, interest rates or the economy. What I do have control over is how I manage my finances to take best advantage of the economic climate that exists at the time. If the climate changes, then my plans will change.

I'm cetianly not going to help my grandkids by sitting wringing my hands at the unfairness of life while house prices continue to rise, regardless of my own feelings on whether this is a good thing or not.