MSE News: Interest-only borrowers could be mortgage 'prisoners'

edited 30 November -1 at 1:00AM in Mortgages & Endowments
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MSE_GuyMSE_Guy MSE Staff
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edited 30 November -1 at 1:00AM in Mortgages & Endowments
This is the discussion thread for the following MSE News Story:

"Many who took interest-only deals can't switch to a cheaper loan because lenders now have stricter qualifying criteria ..."
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  • gadgetmindgadgetmind Forumite
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    I've done interest only in the past (and have an open offer for another interest only offset mortgage on another property which I'm actually not going ahead with), but I'd never go above 50% LTV and have always had the money to pay off the loan elsewhere earning a greater return.

    Interest only is only for those who know what they are doing, or those who don't but need a "breather" regards repayments, and should never be seen as a way to borrow even more!
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

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  • steve237steve237 Forumite
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    I took a "breather" when my wife had our baby. Switched to interest only with Abbey (intention was for 6 months only). This ended up turning into more like 18 months as you get used to the money and spend accordingly (saved nothing). Meanwhile, the base rate dropped quite quickly to 0.5%. At that time I was on a 0.24% above base rate tracker and my mortgage payments fell to £30-something pounds a month. £34 from memory.

    I wish I had saved that extra £700-800 a month and overpaid on the mortgage or better saved with those interest rates, rather than overspent. My wife was earning a grand and a half a month plus bonuses, but that disappeared into the ether.

    Incidentally;

    After about 6 months of paying £34 a month, the tracker term ended so I had to remortgage. The bank I was with offered no tracker deals to anyone at this time, but (as a current account holder) did offer me a special 1% discount on a 7 year fixed rate (longest fix they would do) which was 5.39% with a £120 admin fee. I convinced myself that after 1-2 years of falling bank rate now having plumbited to almost zero, plus peoples talk of inflation forcing the bank rate upwards to keep things in sync, then clearly - in my mind - the best plan would be to lock into the lowest long term fixed rate with best rate I can with my my LTV (85% having upgraded). I think it was a pretty good deal and it meant that as I was paying reypayment again, after 7 years, I'd have paid loads of the capital, maybe bringing me into the best 60% LTV mortage rates.

    Don't forget, that if you can afford to overpay an extra £100-150 a month off your mortage, it can knock 5 years off a 25 year mortgage (depending on loan value), or continually reduce your monthly payments.

    Anyway, so far my plan hasn't worked as base rate is still at 0.5% and I'm paying almost a grand a month when others are on low trackers saving hundreds a month. However, (not that I want to temp fate on others), if bank rate flies up in the coming years, I'll have made the right decision.


    As to interest only mortgages, the above points, with fluctiating house prices on the long term, shows it's a huge gamble. Definitely not a :money:tip, I'm sure.
  • edited 7 October 2011 at 7:31PM
    jamesdjamesd Forumite
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    edited 7 October 2011 at 7:31PM
    steve237, interest only is ideal in some ways over the long term because inflation reduces the real value of the outstanding debt, making it more efficient to pay later than earlier.
    Inflation rate    Mortgage value after 25 years
    1%                    78%
    2%                    61%
    3%                    48%
    4%                    38%
    5%                    30%
    

    And I'll stop there because I don't really want to see inflation rates much higher than that, even though it would be great news for mortgage payers who could afford their monthly payments. I've assumed that savings and investments rate matching the mortgage interest rate are available, which is normally easy enough to obtain for trackers and can be even for your fix.

    It's easy to calculate the interest saved by overpaying but that's not the whole picture, in part because of inflation and in part because the money could be used for something else that can pay more.

    An interest only deal is a particularly good one for first time buyers early in their careers who may see far above inflation salary increases and a rapidly increasing ability to repay.

    Interest only can also be a great deal for those within ten years or so of being 55, even more so if they are higher rate tax payers, if they also want to efficiently provide a pension income later. The 25% tax free lump sum can be taken at 55 and used for mortgage clearing, leaving the rest to provide pension income later.

    A plan to get rid of the mortgage by the end of the term is definitely required, though. And that plan needs regular monitoring.

    Sorry to read that your fixed rate plan didn't work out. Best to plan on Bank Rate being around 0.5% for another two years, quite possibly longer. That won't change until economic recovery is well established or inflation becomes very excessive.
  • dy1geody1geo Forumite
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    I think even worse news lies round the corner for many, due to the replacement of working and child tax credits with universal credits

    Under the new draft Universal Credit legislation if you have "realisable" assets over £6,000 you will for every £500 over this amount they will add a notional £1 to your income, if you have over £16,000 you will not qualify for any universal credit.

    This will hit many who are leying on ISA's and many of those on Endowments where the lender has deassigned the policy, who were hoping to use these to pay off the mortgage balance at the end of the term. If you can realise an asset yourself it is classed as your asset.
  • getmore4lessgetmore4less Forumite
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    jamesd wrote: »
    steve237, interest only is ideal in some ways over the long term because inflation reduces the real value of the outstanding debt, making it more efficient to pay later than earlier.

    Only works with wage inflation.

    Many will see real wage deflation during their mortgage lifetimes.

    As you say early career will most likely see decent wage inflation but this will be during the period when they are likely to increase debt as they move up the house ladder.
  • JimmyTheWigJimmyTheWig Forumite
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    Mainly a good article with sensible advice (i.e. pay off your mortgage when you can!) but am not convinced by this:
    But not everyone is so lucky. An interest-only borrower on a typical £150,000 mortgage paying 3% interest, who is then moved to a 4% deal, which is a typical SVR, faces a £125 rise in monthly costs from £375 to £500.
    Surely a repayment-mortgage customer would face the same increase when coming to the end of their term?
    Or are you suggesting they could remortgage onto something better? What deal are you suggesting with greater than 75% LTV (to make it fair as otherwise the interest-only customer could remortgage) with no fees, etc?
    I appreciate that they may not be able to move onto a long term fix which a repayment mortgage customer would be able to, but that's not going to be sub-4% anyway.
  • JimmyTheWigJimmyTheWig Forumite
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    Giving the benefit of the doubt, msween, that that isn't spam, I would have thought that in today's market such a product would be associated with huge interest rates, huge fees and huge and lengthy exit penalties.
    When house prices aren't soaring I don't see the point in rushing to get onto the ladder.
  • brit1234brit1234 Forumite
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    msween wrote: »
    This is an interesting post however some companies like Arun estates are offering 100% mortgages. It could be a good way for first time buyers to get onto the property ladder without the large deposit. These kinds of mortgages open doors for those who would otherwise not be able to pay towards owning a home for a very long time. I found a link for Pittis who are advertising on their website.

    That is a highly dangerous product and suicidal in a falling market.

    First time buyers are better saving a deposit whilst renting watching the house price falls.
    :exclamatiScams - Shared Equity, Shared Ownership, Newbuy, Firstbuy and Help to Buy.

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  • MeeperMeeper Forumite
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    Interest-only borrowers being mortgage "prisoners" is not news. That has been the case for about 2 years now.
    I am an Independent Financial Adviser
    You should note that this site doesn't check my status as an Independent Financial Adviser, so you need to take my word for it. This signature is here as I follow MSE's Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
  • Wh05apkWh05apk Forumite
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    Meeper wrote: »
    Interest-only borrowers being mortgage "prisoners" is not news. That has been the case for about 2 years now.

    Since when has MSE let fact get in the way of hysteria?:D
    I am a mortgage adviser.
    You should note that this site doesn't check my status as a Mortgage Adviser, so you need to take my word for it. This signature is here as I follow MSE's Mortgage Adviser Code of Conduct. Any posts on here are for information and discussion purposes only and shouldn't be seen as financial advice.
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