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

gingeralan

RenovationMan wrote: »

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.

Good, I am glad to hear you personally are managing your i/o mortgage properly, but I think that if you look elsewhere you will find many people on them who do not understand the product. For example, one recent encounter with a friend, we were discussing mortgages, he told me he had just finished his 25 year mortgage, but didn't realise what i/o actually meant, he was unaware he still needed to clear the balance!!

There have been other posts on here about people going interest only in the hope wage inflation etc. will allow them to ckear debt. I am sure i/o works for some, but this does not reduce the inherent risk of the product.

Uranium is a very dangerous product, but if used correctly it can create energy in an environmentally friendly manner (not wishing to start a nuclear debate, just making a point), therefore allowing a few suffucuently qualified individuals access to it beneficial. Yet wider availability would as you will surely agree is dangerous.

I know things works for some people, but the wider situation needs to be considered the fact that irresponsible or otherwise banks will lend or people borrow without a full understanding of the risk. This is the point I am making.

RenovationMan

gingeralan wrote: »

Good, I am glad to hear you personally are managing your i/o mortgage properly, but I think that if you look elsewhere you will find many people on them who do not understand the product. For example, one recent encounter with a friend, we were discussing mortgages, he told me he had just finished his 25 year mortgage, but didn't realise what i/o actually meant, he was unaware he still needed to clear the balance!!

There have been other posts on here about people going interest only in the hope wage inflation etc. will allow them to ckear debt. I am sure i/o works for some, but this does not reduce the inherent risk of the product.

Uranium is a very dangerous product, but if used correctly it can create energy in an environmentally friendly manner (not wishing to start a nuclear debate, just making a point), therefore allowing a few suffucuently qualified individuals access to it beneficial. Yet wider availability would as you will surely agree is dangerous.

I know things works for some people, but the wider situation needs to be considered the fact that irresponsible or otherwise banks will lend or people borrow without a full understanding of the risk. This is the point I am making.

What would you say are the inherent risk of IO? From your posts I'm assuming it's the fact that if no capital payments are made, then the mortgage gets to full term with the mortgage debt left to pay. Is this correct?

Are there any other inherent risks?

JimmyTheWig

RenovationMan wrote: »

Are there any other inherent risks?

That people borrow "too much" on the basis that they can "afford" it, when all they can actually afford to do is service the interest.

gingeralan

RenovationMan wrote: »

What would you say are the inherent risk of IO? From your posts I'm assuming it's the fact that if no capital payments are made, then the mortgage gets to full term with the mortgage debt left to pay. Is this correct?

Are there any other inherent risks?

That is one risk, second that if prices drop you will have a larger amount of negative equity, thirdly if you have some investment vehicle (remember endowment scandal??) that under performs, you week have to find another way to make up that shortfall (move onto repayment perhaps). Along with all the costs associated with running your own house.

If you are making capital repayments, and you intend to have repays your mortgage capital back them you are in a repayment mortgage in all but name, or you could always chase that pot of gold at the end of the rainbow with your endowment that is gonna make you an overnight millionaire.

RenovationMan

JimmyTheWig wrote: »

That people borrow "too much" on the basis that they can "afford" it, when all they can actually afford to do is service the interest.

Isn't that a problem with the banks own affordability criteria than an inherent problem with IO mortgages? Lend to much to anyone, regardless of what mortgage they are on, and they could get into financial difficulties.

Surely, having stricter affordability criteria would solve this without having to ban IO mortgages?

gingeralan

RenovationMan wrote: »

Isn't that a problem with the banks own affordability criteria than an inherent problem with IO mortgages? Lend to much to anyone, regardless of what mortgage they are on, and they could get into financial difficulties.

Surely, having stricter affordability criteria would solve this without having to ban IO mortgages?

What criteria would you suggest? The 3.5x income worked for many years, a repayment mortgage over 25 years. When banks starred offering complicated ways of allowing you to borrow more with some mad affordability calculation was when prices rocketed.

To ensure prices remain reasonable done means of tying prices to wages is essential.

RenovationMan

gingeralan wrote: »

That is one risk, second that if prices drop you will have a larger amount of negative equity,.

Surely this is a problem for repayment mortgage holders too, especially as most of the actual capital payments are loaded towards the end of the mortgage term? Very little is actually paid off at the start of the mortgage term, and certainly not enough to make a significant difference to negative equity. There is nothing stopping the IO mortgage holder from making overpayments to aleviate the NE problem. I'm on IO and have paid off more of my capital debt than I would have on a repayment mortgage.

gingeralan wrote: »

thirdly if you have some investment vehicle (remember endowment scandal??) that under performs, you week have to find another way to make up that shortfall (move onto repayment perhaps). Along with all the costs associated with running your own house.

If the investment underperforms then regular checks will keep you informed, allowing you to switch to better investments. The old (now defunct) endowments were difficult to monitor (no online access in those days, just annual statements) and virtually impossible to change to better investments. They were an outmoded investment strategy as soon as the economy moved from high inflation (and high BoE rates) to low inflation (and low BoE rates). ISAs are a much better investment. People who are not familiar/comfortable with monitoring investments can simply make cash overpayments onto their mortgage, there is nothing to stop them doing this.

gingeralan wrote: »

If you are making capital repayments, and you intend to have repays your mortgage capital back them you are in a repayment mortgage in all but name, or you could always chase that pot of gold at the end of the rainbow with your endowment that is gonna make you an overnight millionaire.

Yes, all but in name but with the added flexibility of being able to stop making capital payments if you lose your job and restart when you are back on your feet, which is not often the case with repayment mortgages because many providers refuse to allow you to change to IO. This is the main point we are making.

Endowments are no longer available and I seriously doubt that anyone now believes that they will pay off their mortgage and leave a surplus (though they often did when they were a viable product in the 70's/80's).

RenovationMan

gingeralan wrote: »

What criteria would you suggest? The 3.5x income worked for many years, a repayment mortgage over 25 years. When banks starred offering complicated ways of allowing you to borrow more with some mad affordability calculation was when prices rocketed.

To ensure prices remain reasonable done means of tying prices to wages is essential.

Salary multiples are a dull tool because they don't take into acount someone's debt levels and don't look at their financial history to get a picture of their spending/savings habbits.

I'd suggest that the banks do what my own mortgage provider did with me. Build up a reasonably detailed picture of their clients finances by asking for details of income, details of outgoings, details of other financial commitments such as car finance, loans, credit card debts (and their monthly costs) and details of any savings and investments (including the IO investment vehicle).

jaysb

I gone from IO with endowment, to part repayment part IO (following endowment shortfall projections) and now back to 100% IO (although I've cashed my endowment) so remaining mortgage is only 40% of original, and intending to make overpayments or ISA savigns to clear that in the next 5 years.....in hindsight I wished I had choosen repayment but the IO allowed me to get on the housing ladder as it was more affordable at that time.

IO could be a ticking timebomb for many in the next 10-15 years, if they bury their head in the sands and don't have a means to repay the capital.

IO suits some, I have done a mixture of contract/perm role, but you have to be responsible and reassess as your situation changes. Whereas I guess, repayment is both less risk and less effort.

Now that I'm knocking into the capital I did think should I switch to repayment for say 10 years and then make overpayments, or keep with my IO. I've decide to keep IO, make overpayments/ISA savings - but can't see there's a great deal in it - as I'm fully aware of the end goal of being MFW in 5 years.

gingeralan

RenovationMan wrote: »

Salary multiples are a dull tool because they don't take into acount someone's debt levels and don't look at their financial history to get a picture of their spending/savings habbits.

I'd suggest that the banks do what my own mortgage provider did with me. Build up a reasonably detailed picture of their clients finances by asking for details of income, details of outgoings, details of other financial commitments such as car finance, loans, credit card debts (and their monthly costs) and details of any savings and investments (including the IO investment vehicle).

It is not possible for your bank to really make an accurate decision on this basis.they only look back 3 months, so if you wanted to you could really cut your attending down for 3 months before applying for the mortgage.

Income multiples may be boring but they work, simple. There is no option for some spotty salesman to try and dupe you into a life of servitude with a mortgage you can't afford.