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

RenovationMan

property.advert wrote: »

There must be some agreement of a minimum living cost and some understanding of the taxation, pension and benefits system. If you need 10k to live which is 15k before tax but you attract 5k in benefits, then that is one part of the equation. Another is the net amount of your remaining salary.

£40k gives you just under £30k net. So in the argument above, you have £30k-£10k+£5k = £25k "spare".

If you have other commitments, such as kids, then this amount is reduced.

Finally you have to look at current interest rates, the rates achievable by the borrower, whether it is fixed or not and the medium term outlook.

So if rates were fixed for a minimum of 5 years, you might say they can afford to pay 2/3rds of their "spare" money or around £17k on a mortgage. On a repayment over 25 years at 4% that comes to around £260k. Go variable and you'd have to reduce that, even though the initial repayments (at this time) would be less.

I wish I had read further down the thread before replying to gingeralan as this post makes the point better than mine.

gingeralan

property.advert wrote: »

There must be some agreement of a minimum living cost and some understanding of the taxation, pension and benefits system. If you need 10k to live which is 15k before tax but you attract 5k in benefits, then that is one part of the equation. Another is the net amount of your remaining salary.

£40k gives you just under £30k net. So in the argument above, you have £30k-£10k+£5k = £25k "spare".

If you have other commitments, such as kids, then this amount is reduced.

Finally you have to look at current interest rates, the rates achievable by the borrower, whether it is fixed or not and the medium term outlook.

So if rates were fixed for a minimum of 5 years, you might say they can afford to pay 2/3rds of their "spare" money or around £17k on a mortgage. On a repayment over 25 years at 4% that comes to around £260k. Go variable and you'd have to reduce that, even though the initial repayments (at this time) would be less.

RUBBISH!

I have just done a calculation on this website, the monthly repayments on a 260k mortgage are 1520 per month. Have a think before you come out with such balderdash!

Two this of the spare cash you mention is around 900 quid of roughly a mortgage of 140k.

RenovationMan

shortchanged wrote: »

Well what happened to the UK housing market when these sort of restrictions were removed RenoMan?

Do you think the UK housing market is in a good position now?

Please don't take this the wrong way but I'm not debating with you anymore. It's pointless. You rubbished the advantages of IO mortgages during financial problems and then, when pressed, suggested that someone with financial problems should go onto an IO mortgage! Well, I mean. Come on.

You seem to be arguing just to score points on me rather than having any conviction in what you are saying, hence why you are making such a hash of things and lets be honest, making a fool of yourself in the process. This isn't the first time either.

You argue with empty rhetoric, soundbites and dogma. There is nothing to be gained from debating with you, no insight, no knowledge and no satisfaction. Sorry.

gingeralan

gingeralan wrote: »

RUBBISH!

I have just done a calculation on this website, the monthly repayments on a 260k mortgage are 1520 per month. Have a think before you come out with such balderdash!

Two this of the spare cash you mention is around 900 quid of roughly a mortgage of 140k.

I shall elaborate further. I was on my phone before so what I mean to say didn't come out quite right.

So, if you earn 40k gross, as I do incidentally so I am talking from experience, I take home £2,100 after deductions and pension every 4 weeks so per calendar month that works out to £2,275, so if we ignored the pension I would say it would be roughly £2,500.

So I will show a break down of finances as I see it and lets see if your calculation of £1500 available for a mortgage payment works out. I am having to estimate the running costs of a £260k house as mine is worth significantly less. But i think an estimate of £400 pcm before mortgage is not unrealistic. I have kept estimates on what I consider the low side.

House running costs 400
Food for 2 200
Car + fuel(ignoring depreciation) 100

So we have already spent 700 pounds, this is before we even consider children who will be a further drain in the financial sense i mean. Or anything fun that the house owners may wish to do.

This now leaves us with 1800. If one were to spend £1500 on a mortage:eek: I am sure you will agree does not leave you with much breathing room. Interest rates at historic lows will not stay that way for the next 25 years. I am not going to accept wage inflation is a suitable hedge against this as we have mentioned previously there has been none to speak of for the last 4 years, and everything else has gone up in price.

I would be interested to hear your opinion as to sensible lending options for this level of income and expenditure.

jamesd

JimmyTheWig wrote: »

I think you've missed shortchanged's point. I believe his point was that of an illogical, non-responsible consumer.

Could be. Wasn't how I read the posts or, I suspect, how they were read by those who laughed.

For financially irresponsible borrowers my response to interest only is very simple: it's the wrong product.

Being responsible with money is a critical part to a successful interest only mortgage. That's part of why I'm not particularly unhappy with Barclays now requiring that a repayment vehicle must be in place for a year before starting the mortgage. At least it shows some sign of intent and future planning, not a hope or application form claim that turns out not to be reality.

jamesd

gingeralan, endowments did mostly do the job, though it's usually people who have trouble who mention them. What caused problems for some endowments was the combination of lower than repayment level payments into the endowment, insurance deducted from that to further reduce the investment and a change from high to low inflation environment that hurt investment returns as well. Add in people who just weren't monitoring performance and adjusting over the years to stay on target.

The current ways to do it are somewhat better but you still can't avoid the need to monitor investments and how much you pay if you're using investments as a repayment vehicle. Someone who won't do that just isn't a good candidate for an interest only mortgage with investments as the repayment vehicle.

Some of the most sensible repayment vehicle plans are similar to the ones I'm using: very large excess payments because a pension is the main repayment vehicle and I have a desire to be able to retire early. If investments didn't do the job I'd expect to delay retirement and have plenty of time to do that before the end of the mortgage. Add using the ISA allowance and investing outside those and it's an approach that has huge safety margins by the time the mortgage capital payment becomes due.

RenovationMan wrote: »

So one person on a £40k salary with car finance to the tune of £300pm, a £10k credit card debt, a personal loan of £15k (his house deposit) should be loaned the same as someone on £40k salary, with no debts and with £15k savings in the bank?

I had unsecured borrowing of something like 60% of my mortgage value when I took it out. The mortgage lender was happy for me to take out another mortgage of similar value to the one they were offering as well, having both at the same time. That's what lots of money in savings and investments can do when combined with buying an inexpensive property that's easily affordable for me.

gingeralan wrote: »

I agree people need to take responsibility but for this they need to be informed consumers which as a rule we don't have now.

The FSA proposals include things like mortgage lenders checking on repayment vehicles periodically.

JimmyTheWig

gingeralan wrote: »

Answer me then. What would the absolute maximum be that you think someone earning 40k could borrow? There may need to be further restrictions but what in your opinion would that figure be, and how would you come to that conclusion?

RenovationMan doesn't need to answer this. It's not his point.
The point is that someone earning £40k with a lot of commitments will be able to afford less than someone earning £40k with no committments. Surely you agree with that?
Your problem seems to be that people were lent too much money. RenovationMan isn't necessarily disagreeing with that.
If it is agreed that someone earning £40k with no committments can afford a mortgage of £140k max then someone earning the same with heavy commitments shouldn't be offered a mortgage of £140k.

JimmyTheWig

RenovationMan wrote: »

Please don't take this the wrong way but I'm not debating with you anymore. It's pointless. You rubbished the advantages of IO mortgages during financial problems and then, when pressed, suggested that someone with financial problems should go onto an IO mortgage! Well, I mean. Come on.

I believe I explained his reasoning on post #40.

gingeralan

JimmyTheWig wrote: »

RenovationMan doesn't need to answer this. It's not his point.
The point is that someone earning £40k with a lot of commitments will be able to afford less than someone earning £40k with no committments. Surely you agree with that?
Your problem seems to be that people were lent too much money. RenovationMan isn't necessarily disagreeing with that.
If it is agreed that someone earning £40k with no committments can afford a mortgage of £140k max then someone earning the same with heavy commitments shouldn't be offered a mortgage of £140k.

Yes he does as he started the discussion about affordability. The discussion had moved onto how i/o allows people to afford a mortgage, we cannot keep saying the same thing over and over.

Iwill state staying that I think lending both 140 rather than offering one 260k! Is much more preferable

shortchanged_2

RenovationMan wrote: »

Please don't take this the wrong way but I'm not debating with you anymore. It's pointless. You rubbished the advantages of IO mortgages during financial problems and then, when pressed, suggested that someone with financial problems should go onto an IO mortgage! Well, I mean. Come on.

It was you who brought up the point of breathing space on mortgages RenoMan.

I merely stated the fact that I disagree with you in that I believe you have more breathing space if you are suddenly in a difficult financial position if you started out on a repayment mortgage rather than an IO mortgage because you can possibly go onto an IO mortgage from a repayment one to temporarily reduce your outgoings. Some people already on an IO mortgage may well not have this option.

What is so difficult to understand about this point?