Lazy repost - Interest only, the ticking timebomb say Daily Mail

kabayiri

DervProf wrote: »

True, but one leaves the customer's trousers round their ankles, the other around their knees.

The endowment issue has been known for quite a while now, and I would think that a customer who took out an endowment is more likely to be wise and able enough to "bridge the gap" than someone who took out IO and hasn't paid much/any of the capital back.

For the most part I agree with this, providing they have the ability to make the extra saving.

They will rely on good advice, and the growth figures being provided seem too optimistic. Someone relying on their endowment to grow at even 4% for the next 5 years might be in for an unpleasant surprise.

Being lulled into a false sense of security - low IRs and over optimistic predictions can both have this effect.

pinkteapot

shortchanged wrote: »

Many people who more recently took out IO mortgages where doing so on no more than a wing and a prayer and a hope of HPI.

I don't quite understand the long-term plan. You take out a mortgage for 20 or 25 years. The capital is still owed at the end of that time. Historically, house prices have of course risen over this period. But surely it forces you to downsize at the end of the mortgage. You won't have the option to stay in your family home in retirement if you want to (unless you've saved/invested some other money to pay off the capital).

My parents bought a family home in 1990. I dimly remember that it cost something like £80k then (I could be off by quite a bit on this). Suppose they'd bought on an 80% LTV as some people in these stories are on then that's a £64k debt. They sold the house sometime ago but today, 22 years later, it's worth in the region of £300k. A £64k mortgage on a £300k house doesn't sound so bad, but for people coming up on retirement it's still a hefty sum to find; enough that they're unlikely to have it lying around.

My parents-in-law are still in their family home and I doubt they'll ever downsize. For people saying IO is fine in the long term, surely the issue is that they are likely to have to downsize in retirement (rather than having a choice). Also, they'll have to downsize by quite a bit more than people who are mortgage free.

shortchanged_2

This is where IO has gone all wrong pinkteapot.

In the past there were more stringent checks for repayment vehicles. However over the past decade this went to pot and lenders didn't really give a monkeys about how the capital was going to be repaid until now.

Selling and downsizing was seen as a repayment vehicle but this is dependant on high HPI because they need to clear the debt and have money left over to purchase a smaller house. I'm really not sure if this is a feasible option at all now.

ukcarper

Is the 35% of all mortgages including BTL can yo still get a 100% mortgage on a normal mortgage.

RenovationMan

pinkteapot wrote: »

I don't quite understand the long-term plan.

That's because the long-term plan mooted on here and long term plans that exist in the real world are completely different. The long term plan on here is that IO mortgage holders never pay back their capital. The long term plan in reality is that a LOT of people get an IO mortgage on their first home because they want the extra money to furnish/decorate the house and then after a few years they remortgage onto a repayment mortgage. Other people keep IO mortgages to full term and have repayment vehicles in place, either endowments, ISA, pension or they do what I do and just make overpayments.

I took out my latest IO mortgage in 2010 for £300k. If I had a repayment mortgage it would now stand at £276,290.32 but it actually stands at £250k, which is £26k less on my IO mortgage than on a repayment.

What is interesting is that as far as the banks (and media) are concerned, I have no recognised overpayment vehicle and so I'm listed as one of the mortgage holders who everyone should be worried about.

Emy1501

RenovationMan wrote: »

That's because the long-term plan mooted on here and long term plans that exist in the real world are completely different. The long term plan on here is that IO mortgage holders never pay back their capital. The long term plan in reality is that a LOT of people get an IO mortgage on their first home because they want the extra money to furnish/decorate the house and then after a few years they remortgage onto a repayment mortgage. Other people keep IO mortgages to full term and have repayment vehicles in place, either endowments, ISA, pension or they do what I do and just make overpayments.

I took out my latest IO mortgage in 2010 for £300k. If I had a repayment mortgage it would now stand at £276,290.32 but it actually stands at £250k, which is £26k less on my IO mortgage than on a repayment.

What is interesting is that as far as the banks (and media) are concerned, I have no recognised overpayment vehicle and so I'm listed as one of the mortgage holders who everyone should be worried about.

The FSA seem to think differently. they seem to believe that something like 80% of the IO mortgages over the next 10 years have no repayment strategy. I suspect they have done research to back up their theory. The fact that you may fit in to the other 20% does not mean the problem does not exist.

shortchanged_2

RenovationMan wrote: »

The long term plan in reality is that a LOT of people get an IO mortgage on their first home because they want the extra money to furnish/decorate the house and then after a few years they remortgage onto a repayment mortgage.

At which point they realise they can't really afford the equivalent repayment mortgage.

ukcarper

shortchanged wrote: »

This is where IO has gone all wrong pinkteapot.

In the past there were more stringent checks for repayment vehicles. However over the past decade this went to pot and lenders didn't really give a monkeys about how the capital was going to be repaid until now.

Selling and downsizing was seen as a repayment vehicle but this is dependant on high HPI because they need to clear the debt and have money left over to purchase a smaller house. I'm really not sure if this is a feasible option at all now.

I'm not sure how high the HPI has to be a HPI averaging 3% a year over 25 years would give you over 50% equity even with 100% mortgage.

I can see that 100% mortgages can be useful as a short-term measure but I believe that they are only suitable for a few people in the long-term. Mind you long-term renting is not a very attractive alternative unless you can get social housing.

wotsthat

Emy1501 wrote: »

The FSA seem to think differently. they seem to believe that something like 80% of the IO mortgages over the next 10 years have no repayment strategy. I suspect they have done research to back up their theory. The fact that you may fit in to the other 20% does not mean the problem does not exist.

Renoman fits quite clearly in the 80% i.e. the FSA think he has no repayment plan.

The FSA haven't a clue about people's repayment strategy. That's why these IO threads are so unsatiffactory - we all end up making assumptions based on incomplete data and just guessing how bad it'll be - just like the FSA.

My guess - the 'problem' is massively overstated.

shortchanged_2

RenovationMan wrote: »

I took out my latest IO mortgage in 2010 for £300k. If I had a repayment mortgage it would now stand at £276,290.32 but it actually stands at £250k, which is £26k less on my IO mortgage than on a repayment.

You love to paint this misleading picture about IO mortgages Renoman.

If you pay the same amount via repayments and overpayments to an IO mortgage and a repayment mortgage over the same period, the end result will be pretty much the same.

So stop trying to make out that because you are on an IO mortgage you are somehow £26K better off.