interest only mortgages

[MARTIN R]

May as well rent if you only pay interest on a mortgage, the asset will only remain in the hands of the lender

[garetheves]

When me and the missus were looking for our first mortgage we looked into Interest Only ones as we thought it would help keep the payments down and let us get a more expensive house for less money. When we actually looked into it a bit more it doesnt quite work like that. Basically when you start it up, the bank creates 2 accounts, a) the mortgage and b) a savings type account. Basically each month you HAVE to pay the bank the interest but you also HAVE to pay a certain amount into that savings type account. This is to ensure that come the final payment, you can afford it. The way i understood it is there was no way round getting out of paying into that second account and therefore it didnt save you any money whatsoever each month. There really is no point to them, if you are having to pay, for example, £400 interest and £300 into the savings every month then you may as well just pay the £700-£800 every month for a full mortage.

[Pabs]

i think that only applies to some banks/mortgage lenders now though.... not all of them.

 

I know several people who have interest-only mortgages and only had to PROVE that they had an ISA or savings account - they do not need to pay into it and haven't done for a few years.

[JohnA]

There is no rip-off element here (if you're wondering!)

You just have to get your head round the concept of time-value of money.

Interest is the cost of borrowing money, and it reflects (mostly) the lender's risk in getting back something useless 25 years down the line. (if there is hyperinflation for example or a war and you have a totally fixed-interest loan, the bank would be forced to accept useless pieces of paper as final payment. That's a bit far-fetched perhaps, but also inflation eats away the purchasing power of your capital.)

 

So the sliding-scale of capital repayments is not a 'con' (unlike many of other banking 'practices')

 

If you go through the whole mortgage in one go, you may actually pay LESS money with a repayment mortgage, since these tiny drops of capital every month will need less interest to support them. Every little helps, and of course it depends on how the lender recalculates interest (some do it daily, others yearly!)

 

The biggest risk though is not the type of mortgage, but the amount of it, since the UK housing market has reached such a ridiculous bubble.

It's like musical chairs, and when the tune stops, whoever has paid £300K for a dodgy flat on an 'up and coming' area (shoithole) will cry the loudest.

[Konrad]

May as well rent if you only pay interest on a mortgage, the asset will only remain in the hands of the lender

 

 

It is similiar, but at the end you will have property, usually worth a lot more after 25 years, then it is worth today.

[Havard]

When me and the missus were looking for our first mortgage we looked into Interest Only ones as we thought it would help keep the payments down and let us get a more expensive house for less money. When we actually looked into it a bit more it doesnt quite work like that. Basically when you start it up, the bank creates 2 accounts, a) the mortgage and b) a savings type account. Basically each month you HAVE to pay the bank the interest but you also HAVE to pay a certain amount into that savings type account. This is to ensure that come the final payment, you can afford it. The way i understood it is there was no way round getting out of paying into that second account and therefore it didnt save you any money whatsoever each month. There really is no point to them, if you are having to pay, for example, £400 interest and £300 into the savings every month then you may as well just pay the £700-£800 every month for a full mortage.

 

That sounds like an endowment mortgage??

 

H.

[garetheves]

That sounds like an endowment mortgage??

 

H.

 

 

well im only going off what the banks and building societies told us when we asked about he Interest Only mortgages. As someone else said though, there is still no point taking one out IMO as you may as well be renting the place cos your not paying any of the capital off.

[Soop Dogg]

Interest only mortgages won't be around for long if house prices start to fall. Or at least they could still be around, but the proportion of the house value that you'll need as a deposit will be increased. I only see them as a good idea if you intend paying off the mortgage early - e.g. buy to let or buy to improve and then sell for quick profit.

 

The value of the house after 25 years is only part of the equation that the banks are interested in. They also have to factor in the performance of the national economy in general as this will affect employment rates - if a house owner loses their job after 2 years AND house values are falling, they want to be able to get ALL their money back.

 

Endowment mortgages were all the rage a few years back - until the share market crashed so badly that endowments lost so much money as to be insufficient to repay peoples mortgages. These are basically interest only mortgages but the lender insists that you take out a fixed term endowment policy to run alongside the mortgage that should be enough to pay off the mortgage at the end of the term.

 

These may be the only way to get an interest only mortgage again soon if house price deflation becomes a reality. Then there's little or no saving to be made as the endowment policy costs almost the same as the difference in monthly cost between the two types of mortgage.

[Robbie]

If your a developer or even planning on doing a fast turn around on a property then an interest only motgage could be a good plan. as the payments would be smaller while you develop the property= more proffit at the end.

 

If you rent property then the interest you pay on the loan is tax deductible = all the mortgage with interest only and only part with a repayment.

[Konrad]

well im only going off what the banks and building societies told us when we asked about he Interest Only mortgages. As someone else said though, there is still no point taking one out IMO as you may as well be renting the place cos your not paying any of the capital off.

 

 

Riight... Let me explain it like this. You buy house today for 100k, pay interest only (which would be like renting). You can do whatever you want in this house (repaint, knock wall off, put another heating system, extend garage etc.) After 25 years because of inflation your wages are double to what they was when you started, your house is worth triple it was and you still have to pay off 100k you lended from bank initially. So it is not really same like renting, because when you rent, all money gone to void and I doubt someone will rent you house for same money for 25 years.

[Digsy]

That sounds like an endowment mortgage??

 

H.

 

 

I think that before "proper" interest only mortgages came out, some lenders used to call endowment (or any mortgage based on an investment vehicle) "interest only". Repayment mortgages were sometimes called "capital and interest".

 

 

My girlfriend and I are planning to rent both our houses out and get a joint place to do up. We'll probably go interest only on the rental properties and repayment on the new one - or maybe interest only on all three, depending on how long we want to keep the new place.

[tbourner]

It sounds like a lot of people actually believe that house prices are gonna fall!!

If people honestly think that over a 25 year period your house will be worth less than when you bought it then they're a bit wrong in the head!!

[JohnA]

....If people honestly think that over a 25 year period your house will be worth less than when you bought it then they're a bit wrong in the head!!

Over a 25 year period chances are that houses prices will not fall, most probably they will rise in real terms (NOT worth talking pound terms obviously)

Land (chosen carefully) can become a very scarce commodity (hence profitable)

As an old-timer millionaire used to say "they don't make it anymore";)

 

But when every Dick, Harry and grandma see themselves as 'property developers' and speculate their savings and loans on it, then it's time to sell and watch the fools lose their shirts.

Then the smart guys buy cheap yet again.

Same as the stockmarket really....

[tbourner]

Over a 25 year period chances are that houses prices will not fall, most probably they will rise in real terms (NOT worth talking pound terms obviously)

 

 

Why not talk in pound terms? We're working out whether interest only is a worthwhile option.

 

Say inflation stays at 3%, your pay rises go up 4% pa, and house prices over 25 years average out at 6%, you'll be earning 270% of what you're earning now, and your house will be worth over 400% of what it is now, yet you still only owe the bank £100k - sounds like a good deal to me.

[Soop Dogg]

It sounds like a lot of people actually believe that house prices are gonna fall!!

If people honestly think that over a 25 year period your house will be worth less than when you bought it then they're a bit wrong in the head!!

 

 

My comments about house price deflation were tied into the general performance of the economy and jobs market. When prices fell in 1989 (and for a few years following that) a recession bit hard and lots of people lost their jobs. The price of these houses today has risen - but that didn't alter the fact that the banks had to try and sell repossessed houses at a loss back then.

 

The forecast of a secure income (or as secure as can be expected these days) is what the banks want too when they look at potential customers. If a borrower should lose their job, be that through redundancy or incapacity or whatever, they need to know that they will get their money back if they have to repossess a house. If this happens 2 years into a new mortgage, then house price deflation DOES matter to the bank. The fact that it will be worth more in 25 years time won't matter to them as they will need to sell it ASAP.

 

If the economy starts to slip into recession (or if it looks like a recession might be on the horizon) the banks will stop offering interest only mortgages without some sort of assurance in the form of a policy (such as an endowment) or a 30+% deposit.

 

Of course we all know that long term, property will appreciate in value, but you need to still be in possession of it at the end of the mortgage to benefit from that!

[JohnA]

Why not talk in pound terms? ...

Because in an economic environment with positive inflation value in pound terms will keep going up anyway.

[tbourner]

 

All true.

So, do YOU think interest only is a good idea in a particular situation?

 

(what is the most stable job anyway? Undertaker?)

[Soop Dogg]

All true.

So, do YOU think interest only is a good idea in a particular situation?

 

(what is the most stable job anyway? Undertaker?)

 

 

I only see them as a good idea if you intend paying off the mortgage early - e.g. buy to let or buy to improve and then sell for quick profit.

 

Lol at the undertaker thing!

 

 

I didn't mean that a particular job might be more secure than another really - more that the employment market and the performance of the economy will be taken into consideration by the lender in their decision making process.

 

Obviously in hard times, external economic influences should be given more weight in their decision making, and they'll probably be a bit more careful about who they lend money to and might place more restrictions (like higher deposits) on the mortgages they offer - after all - they want to protect their own interests.

 

Interest only mortgages expose the lender to higher risks in times of uncertainty - they will inevitably try to do whatever they can to reduce that risk.

[Supragal]

I dropped mine to interest only when I was a bit skint. Still made loads of K on the house value. I just need to bump it back up to repayment and overpay now to catch up...

 

or wait for my lottery win. yeah, that one.