MSE News: Interest-only mortgages could be 'thing of the past'

RenovationMan

shortchanged wrote: »

By going IO. What do you think I am going to say.

LOL!!!! Brilliant!!! :rotfl::rotfl::rotfl::rotfl:

I don't believe it! :rotfl::rotfl:

RenovationMan

Jeeze-louise, will someone tell dumbo just what happened here, I'm laughing too much! :rotfl:

Oh, where is jonnybravo when I need him, he'll love this one.

shortchanged_2

RenovationMan wrote: »

Jeeze-louise, will someone tell dumbo just what happened here, I'm laughing too much! :rotfl:

Oh, where is jonnybravo when I need him, he'll love this one.

Would you care to share the joke?

shortchanged_2

Come on RenoMan, what's so amusing?

jamesd

shortchnged, you've just objected to interest only on the grounds that it reduces options then said it's the option to use if in financial difficulty.

The problem with your argument is that it's illogical. If switching to interest only solves the financial difficulty, that person would never have had the financial difficulty if they had already been on interest only.

And that's what prompted the laughter.

If you want to have a mortgage and minimise financial difficulty risk it's best to start out on interest only. Then if you want to have a repayment deal, just make extra monthly payments to repay. And stop that or reduce or increase them whenever it makes sense to do so. It's pretty much the ideal mortgage product for a financially responsible consumer. It's not for a non-responsible consumer.

gingeralan

jamesd wrote: »

shortchnged, you've just objected to interest only on the grounds that it reduces options then said it's the option to use if in financial difficulty.

The problem with your argument is that it's illogical. If switching to interest only solves the financial difficulty, that person would never have had the financial difficulty if they had already been on interest only.

And that's what prompted the laughter.

If you want to have a mortgage and minimise financial difficulty risk it's best to start out on interest only. Then if you want to have a repayment deal, just make extra monthly payments to repay. And stop that or reduce or increase them whenever it makes sense to do so. It's pretty much the ideal mortgage product for a financially responsible consumer. It's not for a non-responsible consumer.

Epic fail! If you have am i/o mortgage and are paying 500 quid a month your lender is unlikely to be able to offer you assistance in reducing payments without increasing the amount you owe. This would ultimately lead to an increase in payment. If you are struggling with your mortgage payment it is probably due to a change of circumstance so if you were able to afford your mortgage on i/o then you had a reduction in income you would still be in the same situation. I do not understand your point at all.

jamesd

gingeralan, shortchanged was postulating a case where the reduction in income was not great enough for interest only to be unable to do the job. That's a different case from the one you've mentioned.

Lets consider the case you brought up, where there is a dramatic change in circumstances so that the new income is less than can afford on interest only basis as well. The interest only mortgage from the start offers these potential advantages:

1. The payments can be dropped to interest only level (perhaps from repayment level) immediately as a right of the borrower. If on repayment it's at the discretion of the lender and they might refuse until all savings are gone and it's just before repossession. Being able to act before things are desperate means that the person on interest only from the start may never reach the just before repossession point because it'll be delayed for longer by any given amount of savings combined with the lower mortgage payments.

2. Interest only these days requires a repayment vehicle and that'll often include some investments in ISAs. In such cases the repayment vehicle money can further extend the time until there's a crisis, provided the cause of the reduced circumstances is temporary. Eventually this money will need to be accumulated again to clear the mortgage. Or if the situation isn't going to improve, it'll allow more time for a sale without having a credit record wrecked, which will make it easier later.

3. Many of the interest only arrangements can be done by overpaying on the mortgage and withdrawing the money later. If there's been overpaying that money is safe from benefits means tests but still available for other needs. So the person with the flexible interest only types may be able to claim benefits earlier than the one with a standard repayment mortgage.

4. The potential crisis may not be loss of all income, but only loss of some - the shortchanged sort of case. Say one partner in a couple losing a job. Being able to make interest only payments as a right from the first day may mean that the financial situation is stable with no depletion of savings until the other partner gets a new job.

It's also worth remembering that interest only borrowers aren't all stereotypical first time borrowers desperate to buy a place. They include people like me who can now pay off the mortgage twice over or pay the interest and all of the other bills for life if I lost my job, plus clearing the mortgage by the time it's due.

property.advert

Or take a position where you don't have 25 years until the lender's age limit or you simply want a mortgage over a shorter period of time, say 10 years. With interest only, the term is immaterial in terms of monthly cost but with a repayment mortgage, the difference on a £500,000 mortgage at 4% over 10 years is £5062 per month versus £1667 per month or 3 times the amount, an extra £3396 per month.

It also means that to service that extra £3396 per month, a 50% taxpayer would have to pay tax equivalent to approximately the same again. Yet it could be that his business and tax affairs could deliver that £500,000 without 50% taxation attached before the end of the mortgage. QED forcing him into a repayment vehicle could cost the borrower hundreds of thousands of pounds in tax !

Bl00dy marvellous !

JimmyTheWig

jamesd wrote: »

shortchnged... The problem with your argument is that it's illogical.
...
[Interest only is] not for a non-responsible consumer.

Sorry to chop your quote up a bit, but I believe I've kept the meaning.

I think you've missed shortchanged's point. I believe his point was that of an illogical, non-responsible consumer. A consumer who would go for the largest mortgage he could afford, regardless of the repayment method. So this consumer (and there are plenty of them out there, including those already discussed on this thread who expect their salaries to significantly increase over the coming years) will take out an interest only mortgage where they can just afford the interest payments each month. If things go belly up for them then they are stuck.
If they'd got a repayment mortgage where they could just afford the monthly repayments then when things go belly up they have some breathing space (by going interest only).

RenovationMan

A couple of excellent posts there from jamesd (a regular source of sensible information) and property.advert.

I found my IO mortgage to be really useful when I was a freelancer. I had my personal finances set up so that if I was ever between contracts for any length of time we could 'batten down the hatches' on our finances and make sure that our outgoings were as low as possible each month. A large part of that was having the IO mortgage but also not having any loans, Sky subscriptions, Gym membership or anything else that is a regular monthly drain and has cancellation costs. By having an IO mortgage, I calculated that it would have allowed our emergency money last a third longer than if we were on repayment.

During contracts when money was flowing, we overpaid the mortgage with regular monthly amounts and the odd large payment if a contract was particularly well paid. On balance we over paid far more on the IO mortgage over the 3 years of freelancing than we ever would have repaid via a repayment mortgage.

As jamesd rightly said, being on IO gives you that flexibility where you can often prevent financial problems occurring, especially when you are in receipt of unemployment benefits and SMI which only covers interest payments.