Interest only mortgages crisis

mark4183

mark4183

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I am surprised I hadn't seen a thread about this...

How irresponsible can people be IMO... I will put a bet on its the governments fault and they will bail them out someway or another... hope not, either make them pay or take their homes

why has debt lost its taboo status in the modern world? I actually blame social media for some which sparks the whole "keeping up with the Jones's"
 
What crisis? No different to renting really except at least with a interest only mortgage you have a property to sell and should be able to walk away with some money.
 
seen a lot of this recently, lots of people looking at it differently though.
apparently quite a few people are looking at it from a point of living in a better and bigger house while you have kids and stuff then when they gone selling it and downsizing etc.
banking the difference and paying off the outstanding mortgage.
 
A mortgage is a secured debt, fail to pay and the lender will call in their security. Nothing difficult to understand about that. Similarly "interest only" cannot be misinterpreted.

I can remember getting my first mortgage in 1996 and the lenders all being explicit that if you take an interest only mortgage you will not be paying back the capital so you will have to pay the full sum borrowed at the end of the term (and therefore you need a mechanism in place to ensure you have the money available - most of them tried to sell endowments to that end).

I do not believe the regulations about what borrowers have to be told before taking out a mortgage have become more lax in the last 22 years. People taking out IO mortgages without providing a way to repay the capital only have themselves to blame, no-one else. They won't be getting free houses out of it.
 
I'm guessing the "crisis" is because some people dont have anything in place to pay-off the loan at the end of the term?
I've never had an IO mortgage but in my view lenders do need to take a long hard look at themselves for allowing anyone to borrow money with nothing in place to pay it back. Not only is that irresponsible lending it also helps to fuel house price inflation as people think they can "afford" to borrow more, when they cant.
Having said that you are of course liable for your own decisions and anyone who had an IO mortgage with no get-out plan was setting themselves up for a fall.
I doubt the Govt will bail them out, they arent multi-national banks but a few individuals.

Matt
 
It might work for some people. I've had a look just now. If I went for interest only payment, my payments would be about 40% of current payments. I could sell the house now and it's gone up in value by about 20-25% in the three years I've lived there, so I'd make a profit.
 
omens said:
It might work for some people. I've had a look just now. If I went for interest only payment, my payments would be about 40% of current payments. I could sell the house now and it's gone up in value by about 20-25% in the three years I've lived there, so I'd make a profit.
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yes that is exactly what a large group of people are doing, simply riding the investment and living in a better house.

I suppose it is a bit like leasing car
I don't have an issue with it to be fair if they default they just get booted out and that's the way
 
omens said:
It might work for some people. I've had a look just now. If I went for interest only payment, my payments would be about 40% of current payments. I could sell the house now and it's gone up in value by about 20-25% in the three years I've lived there, so I'd make a profit.
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It's also a lot cheaper than renting.
 
nilagin said:
What crisis? No different to renting really except at least with a interest only mortgage you have a property to sell and should be able to walk away with some money.
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I think the crisis comes when people have interest-only mortgages for years, don't pay off the capital and when they get into later years, there is no equity in the property, the property is worth around the same as the dept. Mortgage companies are protecting their balances by not renewing when people are in this position so those people then have to sell up to pay off the debt and as there is no equity, they are stumped, cant afford to buy, and have to fork put loads more per month to rent than their interest only repayments were. There was some 70yr old woman on an R4 programme last week in this position bleating that it wasn't fair. She spends every last penny for years and whinges when things catch up with her. I used to be on an IO mortgage, great while it lasted at 0.5% interest repayments but I knew it wouldn't last so changed to a repayment.
You cant blame the banks for calling the debt in, why should they enter into a free for all with other debtors when someone dies in this position and the estate isn't worth the debts.
 
They have been around for years with no problems. They all used to be backed up with endowment policies that used to give a good return. Back in the 80s and 90s when interest rates were generally somewhere between 6% and 10% ( not counting the extremes of 10% to 14%): obviously things have changed dramatically now that we have extremely low interest rates and things like endowments produce no return at all. I had one interest only mortgage in 1988 for about £60,000. By 1991 the payments were rapidly rising and if I had had a repayment mortgage I simply wouldn’t have been able to afford the repayments, property prices had dropped and I would have had to sell at a loss but as it was io I could ride out the high interest rates and 5 years ago the endowment paid off the mortgage. I’m struggling to see the problem.
Obviously it wouldn’t work today as interest payments are so low. Everybody had to have a method of paying off the loan in place and unless you were incredibly stupid nobody had a problem.
 
gerry s said:
I’m struggling to see the problem.
Everybody had to have a method of paying off the loan in place and unless you were incredibly stupid nobody had a problem.
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Not everyone did or has a method to pay off the debt and therein lies the problem. My Dad's neighbour had an IO mortgage and couldnt afford an endowment to pay it off, so as he approached payup time he was bricking it.
In his case he was also divorced but couldnt pay her off either, so she too was liable, fortune shone on her, he died and the life assurance paid up - not exactly the best plan. Oh now she has the house to sell too, mortgage free.
 
What I’m trying to say is until recently you had to have an endowment or other way of relying before you could actually get an interest only mortgage, it wasn’t an option.
 
We had an interest only mortgage plus an endowment. When it came to its end there was a shortfall on the endowment of about £11000. just took out a mortgage to cover the shortfall.
 
mark4183 said:
the crisis part of it, is people getting towards the end of the term and having no money to pay the at the end...

plus you also get the people who say they didn't realise what they were doing with an interest only mortgage and thought they were paying the house off
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They could sell it and buy another property, or move into rental. So they do have a way of paying it off. Just not paying it off and staying in it.
 
The only people I know on interest free mortgages are divorced parents, who have stayed in the family home until the kids turn 18 when they need to sell and split any proceeds with the ex. Is the change in not requiring endowments as much reflecting the change in society and legal rights as people becoming more reckless?
 
Everyone I knew who took out an interest only mortgage (backed by an endowment plan) in the late eighties/early nineties, ended up changing to a repayment mortgage in the mid/late nineties, when it transpired the endowment plans would never pay out (or a fraction of what they should have). I cashed in the endowment, losing or gaining absolutely nothing. I switched to the repayment which was only around £50 a month more, but guarenteed that the mortgage would be paid off - which it was a year ago.
I thought endowment mortgages were done away with years ago.
 
I too had an endowment mortgage when I moved here I sold the previous house traded the endowment and had £15 k to spend on this ex basket case of a house.
We bought the house here and I traded my endowment into a separate package.
Never looked back that was never going to make it.
 
andy700 said:
Everyone I knew who took out an interest only mortgage (backed by an endowment plan) in the late eighties/early nineties, ended up changing to a repayment mortgage in the mid/late nineties, when it transpired the endowment plans would never pay out (or a fraction of what they should have). I cashed in the endowment, losing or gaining absolutely nothing. I switched to the repayment which was only around £50 a month more, but guarenteed that the mortgage would be paid off - which it was a year ago.
I thought endowment mortgages were done away with years ago.
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My parents took out an endowment mortgage in the late 1960s and when it matured in the early 1990s it paid out three times the amount borrowed. Mind you, they borrowed £2500 so while the £5000 lump sum left over was nice, it was only enough for a second hand car.
 
gerry s said:
What I’m trying to say is until recently you had to have an endowment or other way of relying before you could actually get an interest only mortgage, it wasn’t an option.
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Our first ten years of having a mortgage was an interest only setup, the bank wouldn't let us have one without having an endowment to cover the entire amount and we had to lodge the paperwork with them before they would go ahead. Thankfully after ten years we were in a position to move to a repayment mortgage and kept the endowment on as well, so when we paid the mortgage off we had a bit of cash coming our way. Thankfully we didn't rely on the figures provided when we took the endowment out as there would have been a £7k shortfall
 
We bought a new house in October and we weren’t allowed to take an interest only mortgage, not that we would have anyway.

A friends mum got well and truly stuffed when her husband died. He handled all the finances and she didn’t have a clue. She couldn’t find any of the documents including his life insurance. She didn’t work and he was the only income earner, so she had to sell the house, but of course the house wasn’t worth enough to pay the mortgage off. Her kids ended up bailing her out and they were all young with mortgages and families of their own.
 
So 21 posts in and no data whatsoever to suggest there’s a ‘crisis’, not even any anecdotes to suggest people have been missold anything, that the government will be bailing anyone out or even that this is worthy of discussion.

So @mark4183 have you got any facts, figures or even an interesting insight? Or is the thread title just clickbait?
 
Phil V said:
So 21 posts in and no data whatsoever to suggest there’s a ‘crisis’, not even any anecdotes to suggest people have been missold anything, that the government will be bailing anyone out or even that this is worthy of discussion.
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:D

However, personally I believe there is a massive housing crash coming. I think it may even make the last one look small. There is a generation of homeowners who have never known a significant rise in interest rates. Also, there are some people that don't understand that if you can't pay your mortgage you don't *just* lose your home. The bank could actually come after you for the shortfall.

And yes, the "government" will need to fix this with "bail outs".
 
Phil V said:
So 21 posts in and no data whatsoever to suggest there’s a ‘crisis’, not even any anecdotes to suggest people have been missold anything, that the government will be bailing anyone out or even that this is worthy of discussion.

So @mark4183 have you got any facts, figures or even an interesting insight? Or is the thread title just clickbait?
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I suspect the ‘crisis’ will occur if the IO mortgages track base rate and those who took them believed that what they pay at the start will carry on as the base rate has not moved for a number of years so they believe it will carry on like that.
 
jamesev said:
I suspect the ‘crisis’ will occur if the IO mortgages track base rate and those who took them believed that what they pay at the start will carry on as the base rate has not moved for a number of years so they believe it will carry on like that.
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Again; that’s not a ‘crisis’ and it’s based on the assumption that people with IO mortgages are inherently more stupid than those with repayment mortgages. There’s so far no evidence to support this.

To qualify from my very small sample:

I know 2 people who’ve had IO mortgages, 1 following a divorce, one of the couple stayed in the house and chose IO until the kids had grown up at which point they rearranged their affairs (the property was worth over 4x the mortgage amount. The other is a couple with a decent income and a family, who ‘gambled’ that after 20 years they’d be able to sell up and buy something smaller.

The only ‘crisis’ occurs when people have negative equity, and whilst people have been bitten by this in the past, we all know that over longer periods it ceases to be a problem (eg over a full mortgage term). I’d imagine it’s exceedingly rare for a property to devalue significantly over 25 years.

Again though; as Jonathan pointed out, there is the possibility of a looming bust which will effect all property owners to some extent.

Edit to add. A 5 year old IO mortgage won’t have increased repayments in all that time, rent is likely to have increased significantly, what’s ‘better’
 
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There's a simple solution to base rate rises. Fixed rate mortgages. Lots have switched to fixed rates so it matters not one bit what the base rate is doing to quite a number of mortgage holders.
 
srichards said:
There's a simple solution to base rate rises. Fixed rate mortgages. Lots have switched to fixed rates so it matters not one bit what the base rate is doing to quite a number of mortgage holders.
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That's not strictly true. As most fixed rate mortgages are only for a set period. They also tend to be slightly higher than a base rate. So overall you may not actually save a great deal.
 
munch said:
That's not strictly true. As most fixed rate mortgages are only for a set period. They also tend to be slightly higher than a base rate. So overall you may not actually save a great deal.
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You're buying insurance against a base rate rise.

In fact, the relative cost of a fixed rate is a good indication of what the markets think about interest rates.
 
munch said:
That's not strictly true. As most fixed rate mortgages are only for a set period. They also tend to be slightly higher than a base rate. So overall you may not actually save a great deal.
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You can get 10yr fixed rate mortgages some being a lot less than non fixed rate mortgages.
 
nilagin said:
You can get 10yr fixed rate mortgages some being a lot less than non fixed rate mortgages.
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isn't 10 years not a fixed period?
 
But not capital clearing... (badum, tisch!) :coat:
 
When I got my first mortgage back in 2007 we went with an interest only. Our financial adviser told us that it was a good way of minimising the amount that you were contractually obliged to pay each month, so as long as you're the kind of person who can also save money each money (i.e. the amount of your monthly income that goes on housing is at least the same as if you're on a repayment) then it just provides you with a safety net against one of you losing their job or maternity leave etc. Interestingly there was no obligation to get an endowment or anything like that, we just had to say that we were going to save some money in an ISA each month (which they never checked if we could/would/were). The affordability due diligence is much more onerous these days though so I doubt that would still fly.

We had it for a couple of years and then switched to a repayment as rates had gone down and we were earning more, but I still stand by it being a good solution if you're smart and know what you're letting yourself in for.
 
at the end of the day its just a loan for a sum of money which you are responsible for so take your chances.
If I was in a similar situation where I could live in a bigger better house but not own it and hopefully get something back later on it yeah why not.
 
Mr Bump said:
at the end of the day its just a loan for a sum of money which you are responsible for so take your chances.
If I was in a similar situation where I could live in a bigger better house but not own it and hopefully get something back later on it yeah why not.
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Trouble is people become attached to their homes, so the cold blooded I'll sell it later and move often isnt very appealing.
 
MatBin said:
Trouble is people become attached to their homes, so the cold blooded I'll sell it later and move often isnt very appealing.
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what does it matter though, later down the line the bank will come calling people will have to sort it out but in the meantime you have had the house for the 25 years, its still better than renting I would guess?
 
Mr Bump said:
what does it matter though, later down the line the bank will come calling people will have to sort it out but in the meantime you have had the house for the 25 years, its still better than renting I would guess?
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Absolutely. Just it's such a wrench to move from the house you love when the bank comes a calling and it's fine thinking buy a big house now and down size when the time comes but after living in it for 25 years ......
(I had to sell my house a few years ago after being made redundant and it hurt like hell, nearly had to do the same with my current one but took equity release, which is probably worse than IO mortgage, and paid off the mortgage, kids wont get as much but hey ho they'll get a lot more than I did).
 
MatBin said:
Absolutely. Just it's such a wrench to move from the house you love when the bank comes a calling and it's fine thinking buy a big house now and down size when the time comes but after living in it for 25 years ......
(I had to sell my house a few years ago after being made redundant and it hurt like hell, nearly had to do the same with my current one but took equity release, which is probably worse than IO mortgage, and paid off the mortgage, kids wont get as much but hey ho they'll get a lot more than I did).
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indeed sometimes its just the way things goes.


I just look at it the same as leasing a house like people do with a car nowadays
 
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