Quick question re: interest only mortgages

Gemmzie

Sorry if this seems like a daft question

If you have an interest only mortgage and the mortgage term ends. I assume the bank expects you to pay off the capital? Should you be saving alongside it or have an endowment?

In the current climate, I can't really understand why people prefer to have an interest only mortgage over renting - are you any better off?

Dan_Collins_2

You are better off monthly as I/O i cheaper. In the long run as you say you will never reay the capital and u need to repay it when the bank asks for it.

Once upon a time, you would have had an investment running along side to repay the loan, you may know them as endowments! These fell short as the providers lowered the guarenteed payout to get cheaper policies for all and then the markets when the wrong way.

In MOST cases a repayment mortgage is better, however not all.

mpsavuk

Mortgage Endowments were just another in a long line of cons by so called "financial advisors". Some of these people would quite happily ruin your life in a heartbeat just to make their commission.

dunstonh

Of course, there are plenty of good endowments out there paying surpluses and other investment backed mortgages doing the same. The issues are not quite as simple as mpsavuk suggests. It was a combination of events that caused the downfall of endowments.

It is worth remembering that both the media and the Consumers Association recommended endowments as the best route.

Jim_B_3

Dan_Collins wrote: »

You are better off monthly as I/O i cheaper.

Except in cases like mine, where the rent is cheaper than the interest alone would be on a mortgage for the same place. It's horses for courses.

silvercar

depends where you want to live, in certain areas there are no properties to let so you have to buy. In other places it is easier to find rental properties.

Its not always about the cheapest option, its about making a home.

Consider the non-financial costs and benefits, like the upheaval of having to move at the end of a 12 month AST.

sheslookinhot

of course, property appreciation has been a big factor in people buying over renting.

Buy at 100K and pay I/O. At the end you may still owe 100K but property may then be worth 200K.

rent for 20 years and you never have the opportunity that appreciation presents.

Jim_B_3

Likewise, you could buy and find the value of your purchase dropping; rent through a crash and you make out like a bandit conmpared to people who bought at the top (I'm not saying there will be one; this is not a thread on the cyclic nature of the property market, I'm just pointing out that for each upside, there's a downside, depending on what you want out of it and the state of play at the time).

As silvercar points out, if you're renting you could have to move on if your landlord chooses not to renew your contract. On the other hand, if you buy you're tied to the place, whereas renters know to the day when they'll be able to up sticks and move on. At the risk of turning into a cliche machine, it's swings and roundabouts.

UK007BullDog

For me personally there is only one way. A repayment mortgage where the mortgage is paid off before I retire. I ensure this by overpaying regularly.

Why? Because when i am retired and living off my pension I don't want to be lumbered by any mortgage payments, loan payments or a rent which will probably increase more than my pension ever will. Nor do I want to have to keep moving about because the rent has increased or the owner wants the property back or sells it.

For me my house is my HOME. It is not an investment vehicle but a shelter from the elements outside and my refuge when I am a pensioner. A safe haven for the kids and possible grandkids.

Gemmzie

Thanks for the clarification. Was just asking for future knowledge and interest really.

My parents mortgage is £70k repayment, the other £30k is interest only with an endowment alongside it (which I'm terrified won't be enough but who knows).

UK007BullDog

Gemmzie wrote: »

My parents mortgage is £70k repayment, the other £30k is interest only with an endowment alongside it (which I'm terrified won't be enough but who knows).

Get your parents to write to the endowment supplier and ask them for a forecast. They should be getting one every year. If it is not performing then the parents need to reorganise their mortgage to ensure its paid off before retirement.