UKs biggest lender ends IO mortgages without evidence.

DervProf

RenovationMan wrote: »

I would say that it makes no real difference whether I have an interest only mortgage or repayment one when rates start to rise. Strip out the repayment part of the mortgage and both will cost the same amount.

And looking at your statement again, you might (just) be able to defend your last sentence, but if you read the preceeding one, and take my explanation into consideration, you might see the weird logic you are employing.

So thinking about what we have been discussing, if you were on a repayment mortgage, is the above statement correct ?

You might say "that it makes no real difference", but only if you can get a repayment mortgage that is an IO mortgage, which is what you have now.

But you did say "an interest only or repayment". Would that repayment mortgage be one of those ones where you don't have to pay the capital ?

DervProf

If I were trying to be clever, and trying to bamboozle me (which it appears you are), then why not try this........


"I would say that it makes no real difference whether..........."

DervProf, I stated that "I would say", implying that I didn't say it. Therefore everything makes sense.



There, that tidies eveything up, and I bow to your excellent (and subtle) use of the english language. :rotfl:

Here, here's the pint I owe you. It was fun(?) wasn't it ? :beer:

julieq

Derv is right I think (on a quick scan of the thread only) that it costs more in interest over the course of a mortgage if you do IO against repayment, but only on the assumption you don't have an offsetting investment. That's because you're paying interest on the full capital sum over the full period, rather than on a diminishing amount.

However if you have an offsetting investment, you're ahead provided you beat the interest rate on your mortgage, on the assumption that you pay the same into your investment you would into a repayment. The cost of the interest on the mortgage nets off against the return from your investment.

Actually you're in a better situation if you just get a cash return equal to the mortgage rate, because you have a pile of cash. That greatly increases your options for buffering trouble, and for investment in general, and is why overpayment is a less than optimum strategy. As I think was pointed out a few days ago, this does rely on self discipline, but there isn't much point in owning a fraction more of a house if you become unemployed, and if you think house prices are likely to drop, anything you lock into equity will drop with them so if you have to sell you've lost a lot of money. Against this you would potentially lose out on benefits by having a cash pile, but I'd live with that for a period of security personally.

It is counter intuitive, but if you have to borrow to buy a house, the best option is to borrow as much of the cost as you possibly can for as long as you believe you can beat mortgage rates with investments. That's not that hard because mortgage debt is pretty cheap generally. That's why IO mortgages can be quite a savvy choice. Though obviously they may also be taken up to reduce initial costs until income catches up, and there are risks attached to that as a strategy too.

DervProf

^

Dear me, I don't know where that was heading, but it was a good attempt, was it not ? :rotfl:

Maybe I shouldn't consider what people post so much, and just accept more.

It's like a quiz I attend the other week, there was a question........

"If a farmer has 15 cows and all but 8 die, how many cows has he got ?"

The thing is, the trick was on the person that issued the question, as he thought the correct answer was 8.

Jimmy_31

DervProf wrote: »

Don't let RM hear you say that.

It depends how you handle your finances during the building booms.

If you are willing to work hard during the boom you can bring home between 30 to 60k a year working the sites no problems or even more if you get lucky and get on a site with decent prices but you have to allow for when the boom ends and work drys up, i allowed for the boom to end and saved my cash but most of my friends did the holidays and cars thing and then when most of the cash had gone they decided to buy an overpriced house not long before the bubble burst.

I decided to keep hold of a large chunk of my cash for a house deposit and spent a large amount to upgrade all my tools and work vehicle so i can go after different aspects of carpentry or joinery work which so far has enabled me to keep earning a decent wage for a minimum of ten months of the year whilst a lot of my friends are getting a weeks work here and there because they are not able to go after every type of work due to not investing some of their earnings in tools or transport.

Conrad

A cap rep mortgage is more suitable for those that wish to see a reducing balance each month come what may.

An interest only basis is more suitable for those seeking a lower minimum monthly commitment either now or at a time when such a reduced committed outgoing is helpful.

Int only with overpayments to equate to that which would have been paid under cap rep will thereby mimic what a cap rep mortgage does and produce the same outcome and the same total cost as long as those capital payments are made monthly on a daily or monthly calculated mortgage interest basis.

All features such as offsetting apply to either style.

It can be argued a cap rep basis is more suitable for many as it diciplines them, it forces them to pay down capital monthly, but for those with the discipline and where with all, an int only basis is perfectly suitable and in some instances preferable (self employed fluctuating income for example).

Horses for courses.

Lenders on balance take the view clients are not to be trusted to overpay, hence the new stricter procedures, plus it keeps the FSA happy as the FSA love nothing more than a bit of tick box procedural 'action'.

DervProf

RenovationMan wrote: »

Actually, it was. :beer:

You still think you are right, don't you ? I hope so, because I still think I'm right. :beer:

julieq has just dropped by. I see she agrees with me. To be fair she's agreeing with my understanding of the effects of interest costs with a repayment mortgage as opposed to an IO. My argument with you was more subtle than that, as we both know. And I think, deep down, one of us know who got this one right, but I don't think either of us will admit it, sadly.

One thing I'm sure you will consider is a REAL repayment mortgage when you renew your deal. There is nothing like "chipping away" at the capital month by month. Old fashioned attitude, but I think its not a bad one. If you are really good with your money, the IO option is good if you are reasonably sure how your finances will be in the medium term, and you can resist excessive expenditure (due to not having to make regular capital repayments, like you would have to on a REAL repayment mortgage. I liked a lot of flexibility with my mortgage, hence the offset, unrestricted overpayments, daily interest calculated one that I chose.

Conrad

Jimmy_31 wrote: »

I allowed for the boom to end and saved my cash but most of my friends did the holidays and cars thing and then when most of the cash had gone they decided to buy an overpriced house not long before the bubble burst.

Me too - I was to be frank paranoid about the crash, and it was this that thankfuly saved my bacon when business took a nose dive.

I often used to hold a little jealousy for fellow brokers that had expanded rapidly and in some instances had 100+ staff, and plush offices - it left me feeling generaly a little inadequate if I were honest.

But 3 years into the crunch and 70% of brokers have gone, not to mention almost 100% of packagers (these were big flashy firms that sat between broker and lender).

It sometimes pays to be 'a little' gloomy:beer: although I would never go to the other extreme of being a slave to cash building as that for me misses the point of life - it's a balance, some fun and frolicks, some caution. If you live to 80, thats about 19500 awake days on Earth - far too short to end up like a neighbour of mine - a real slave to building cash and always curtailing her natural instinct to just enjoy each moment. I'm damned sure when she is 75, she won't have happy memories of counting her cash pile - life is only memories in the end.

DervProf

RenovationMan wrote: »

We are both right in our answers, we are just answering different questions.

It's down to how you interpret your original statement.

We can't disgree on that !

And suprisingly, nobody has stepped up and given an honest opinion on how this turned out. Probably a wise move .

Conrad

DervProf wrote: »

It's down to how you interpret your original statement.

We can't disgree on that !

And suprisingly, nobody has stepped up and given an honest opinion on how this turned out. Probably a wise move .

I did try and go back over it all - but honestly it got pretty entangled and I just don't have the time to work out who said what, so I kept the response fairly general.

Almost certainly from my time on the borads, you 2 are somewhere talking at crossed purposes.:D