MSE News: Is the interest-only mortgage dead?

Perelandra

Well, they're not quite dead yet- on Saturday I received an AIP (subject to valuation) for my own home- so still some life in them yet!

squeeks

Almost all products that involve borrowing money seem to have repayment vehicles and more often than not a fixed interest rate over the duration of the loan.
I am thinking here of personal loans, paying car insurance by instalments instead of yearly and the like.

The only product I can think with out a repayment vehicle and variable rates are credit cards with lapsed balances, and mortgages.

I am probably very naive in the world of financial products, but it does seem daft to borrow probably the largest sum of money in your life without knowing how much it will cost you to do so on a variable rate with no provisions to pay back the capital; assuming you ever intend to pay back the capital of course.

I would argue the most fixed rate mortgages are really also variable, as none of them seem to fix for the duration of the mortgage these days, unless it is a very short term mortgage.

The_J

For the masses, I agree squeeks. But for the financially astute if I can increase the value of money by 30% in the stock market (that's actually what I'm up this last financial year, by no means spectacular but I haven't been doing it full time) why would I waste money by investing it at 4% or whatever the mortgage rate is?

BritRael

The_J wrote: »

For the masses, I agree squeeks. But for the financially astute if I can increase the value of money by 30% in the stock market (that's actually what I'm up this last financial year, by no means spectacular but I haven't been doing it full time) why would I waste money by investing it at 4% or whatever the mortgage rate is?

Because the financially ignorant will earn 4% with no risk, whereas the 'financially astute' are not guarenteed 30% and could lose everything.

Do you remember all those financially astute Americans jumping off their ivory towers on Wall Street during the great stock market crash of 1929?

The_J

No, I wasn't alive then. I very much doubt those were the financially astute ones.

Those that were financially astute became incredibly powerful after that crash. As is always the case, in the good times prepare for the bad times, in the bad times prepare for the good times.

Pincher

What is a 30 year gilt?
How about a 10 year corporate bond?
What about a five year fixed rate ISA?

They are pretty happy to borrow my money on an interest only basis.

Before anyone says sovereign debt is safe, please remember Argentina and the more recent Greek "haircut"

The cashflow of a debt needs to match the activity.
Compulsory capital repayment only matches lender paranoia.

The_J

Well said Pincher but that is so out of the box for some of these people that if they even try to understand it in that capacity their heads will explode. I hope you can live with that on your conscience.

regbrown

While there are sound reasons to tighten up on them, I think this is the usual hammer to crack a walnut approach as per usual by the banks. It could well end up harming folk who are smart enough to get the point but have their reasons for wanting interest only.

Like us for example. We went interest only for the simple reason we will be starting a family very soon and wanted the flexibility of knowing we can just fall back to interest only payments for as long as we need.

We are basically over paying to make it a repayment but having the safety of interest only when we go down to one wage for a while to give time to the sprogs. We took advice, know what we are doing and will repay well before the term ends so no worries about that.

Lets hope there are still deals about in a couple of years if we chose to have another one...

The_J

Important to note it's not the banks it's the FSA who are pushing these changes.

brit1234

chewback wrote: »

Why should they be?

So first time buyers will be on an equal footing with buy to let landlords. Interest only and gearing is a great instability in the UK housing and banking industries.

Anyway we have the EU regulations being formulated on buy to let coming in shortly. Hopefully that will sort out the bias.