Is interest-only really a ticking time-bomb?

shortchanged_2

michaels wrote: »

Your1 00% facts seem to disagree with the facts quoted in the original post which suggest that almost all IO mortgage holders have at least some equity in their properties.

Ahhhh, this is why the government wants to keep up house prices. To help reduce the effect of the IO ticking time bomb.

grizzly1911

michaels wrote: »

So are you disputing the numbers in the report that suggest that only 6,000 mortgages have less than 10% equity?

No not arguing with the details posted but 105 is nothing when you get in repo land.

Don't dispute there are some that can manage IO mortgages and the subsequent capital repayment exit but I expect there are considerably more who do not have a defined exit plan.

IO mortgages were historically used to buy people time when over committed or for short term projects until a "real" mortgage could be arranged. (I am discounting those mortgages which had some form of capital plan (e.g. endowment plan) either formally/informally charged and monitored in support which have probably all run their course by now.)

sabretoothtigger

noh wrote: »

I too have an interest only mortgage,
It is an offeset mortgage. For some time it sat there 100% offset. When the interest rate dropped to 1.5% I withdrew the full balance and put it in savings accounts.
I suspect I'm not alone.

That sounds perfect, so what difference do you manage to get between the two and is that an indefinite arrangement

Interest only is only a bomb if houses rise much slower then interest rates do. (Banks should be worried)
In future that is likely, housing will stagnate for many years most likely; but rates have to rise to stop oil prices and other things becoming impossibly high and stopping all business.

If oil goes to 200 a barrel as I think Asia higher production will force it to then our exchange rate to dollar has to go up as the UK doesnt produce enough oil. This requires more interest given to holders and lenders of sterling

grizzly1911

sabretoothtigger wrote: »

That sounds perfect, so what difference do you manage to get between the two and is that an indefinite arrangement

Interest only is only a bomb if houses rise much slower then interest rates do. (Banks should be worried)
In future that is likely, housing will stagnate for many years most likely; but rates have to rise to stop oil prices and other things becoming impossibly high and stopping all business.

If oil goes to 200 a barrel as I think Asia higher production will force it to then our exchange rate to dollar has to go up as the UK doesnt produce enough oil. This requires more interest given to holders and lenders of sterling

I was looking at historic exchange rates v. now and going back say 3 years the £/$ and $/China are not that much different to now. The oil price has been steadily rising though which suggests it is more to do with supply and demand rather than devaluation. Don't dispute that a stronger £ would help but the exchange rates are not massively different going even further back.

Agree with your point about interest rates will rise and hosing across most of the country stagnating at best. Of course the SE will be different and that will drive other policies adversely affecting the rest of us.

Degenerate

noh wrote: »

I too have an interest only mortgage,
It is an offeset mortgage. For some time it sat there 100% offset. When the interest rate dropped to 1.5% I withdrew the full balance and put it in savings accounts.
I suspect I'm not alone.

Just one example of how in the right circumstances an interest-only loan can be a perfectly logical choice in the best interests of the borrower.

After a chat with my accountant, we worked out that it would be advantageous to refinance most of the outstanding balance on my BTL property with an interest-only loan and divert the capital repayments into long fixed-term ISAs, using my full allowance every year. It might seem strange, but it works:

- The tax-free interest on the ISAs roughly matches the rates I can get for the mortgage (I have a decent LTV ratio). So the ISAs offset the extra interest accrued due to the lack of capital repayments.

- However, as the loan interest payments will not be reducing with the capital, I can claim maximum tax relief over the lifetime of the mortgage, rather than watch it gradually dwindle away. As a higher-rate taxpayer, this is worth 40% back on the interest payments.

- In the example we worked out it would save me about £5K on a £70K loan over 10 years.

- Changes in mortgage rates or savings rates could conceivably derail the scheme, but it would be easy enough to unwind.

- If everything goes to plan, at the end I will have a choice: I can use the ISA cash to pay off the capital, or maybe I will have other means to repay the capital, and can keep the £70K cash in it's lovely tax-free ISA wrapper for some future date.

- This is a safe repayment vehicle. It's as safe as it gets, with all the money held in FSCS guaranteed accounts.

Am I sitting on a "ticking time-bomb"? I don't think so, but my ISA saving scheme is independent of the loan, so I don't see how it could figure anywhere in statistics as a recognised repayment vehicle. Interest-only mortgages have been taken out by many people for many reasons. They are a product for the more financially astute who can use them appropriately. The idea that they've all been taken out by the financially f eckless with no eye on the future is just bearish wishful thinking.

Thrugelmir

Emy1501 wrote: »

I suspect no one really knows whether the problems is going to be a ticking time bomb and only time will tell.

Well NRAM still hold around 250,000 mortgages.

Lloyds HBOS around 2.8 to 3 million mortgages.

So there's a substantial sample.

Add in Santander, and you've got the interest only market fairly well accounted for.

sabretoothtigger

Handing the keys back could mean you owe the bank 30k on a house that was worth less then the mortgage. Thats alot worse then paying rent for most people
A disaster even because you have to repay an expensive unsecured loan on top of rent then

Anyone worried should just get a fixed rate I reckon, its the biggest danger

going back say 3 years the £/$ and $/China are not that much different to now. The oil price has been steadily rising though which suggests it is more to do with supply and demand rather than devaluation.

We cant just pick 2009, 10 months earlier the oil price was 100 dollars higher so its pretty uneven ground to take a view on

I agree its mostly about supply and we dont have supply of oil which makes us beggars to the world market.

Even USA which has tons of oil still imports and the money thing matters because they handed out so many IOU that foreigners own all their oil production for a decade into the future; if they choose to do so that is.

Right now they choose to hold bonds and collect 2.2% every 10 years, personally I'd take the oil. Its dam obvious what is worth more, rates have to rise or USA (and UK) has to half its oil use

Absolutely all about supply and demand, housing is a weak market for years to come but rates are something else

Thrugelmir

sabretoothtigger wrote: »

Right now they choose to hold bonds and collect 2.2% every 10 years, personally I'd take the oil. Its dam obvious what is worth more, rates have to rise or USA (and UK) has to half its oil use

China pegs the Yuan against a basket of currencies to maintain a competitive edge. Previously was a fixed exchange rate to US $.

sabretoothtigger

I think China favours cheap currency as it puts the wealth abroad but in the control of government not private citizens
They'd get higher growth allowing their own people to be customers as well as sellers.

Having to ship things 5000 miles in order to sell it to people who dont pay with anything physical just tokens to use around the world, thats not the fastest way to do trade.

China has its own problems, they have no choice but to change policy. If they determine our rates, it will change

He aint and wont be paying any money to them, ever.

Bankruptcy and/or leave the country. I know people who did that also, the banks have alot to lose as they are short term funded still I think they need honest customers

grizzly1911

sabretoothtigger wrote: »

We cant just pick 2009, 10 months earlier the oil price was 100 dollars higher so its pretty uneven ground to take a view on

Agree on that but that was a blip in the steadily upward trend. It was really the exchange rates I was comparing which are pretty much inline or improved in our favour.