People with interest only mortgages - do they really not realise?

(308 Posts)
minibmw2010 Thu 02-May-13 09:06:41

Have read and heard several stories on the news today where they're saying many people with interest only mortgages either don't know what will happen at the end of the term (or they'll owe a huge sum) or haven't made provision.

Anyone with an interest only mortgage in that boat? I'm genuinely curious as it was heavily emphasised to me when I bought first what would happen.

Ledkr Thu 02-May-13 13:29:25

I had useless endowments anyway so when dh fucked off with ow I stopped paying then as it was the only way to be able to make the mortgage payments on my wages. I cashed in the endowments and paid what little it was off the capital.
I pay interest only now and it's very little but I do know that as soon as possible I will need to sell up and downsize massively.
Nit a very secure situation to be in.

eminemmerdale Thu 02-May-13 13:30:21

We have IO - we wish we hadn't but can't afford a repayment right now but are in an area where house prices are absoluley riciculous and have equity of over £100K, so to be honest, if it's keeping us financially ok to 'live' we are not ever so worried - however, in June we are changing to one where we can pay a little more as nd when we can.

AnneElliott Thu 02-May-13 13:46:58

We had a salesmean try to sell us an endowment mortgage when we got out flat in 1998. He sat at his desk with his feet on the table and guaranteed that the endowment would pay off the mortgage and show us a profit. Sadly he declined to put that in writing and we informned the bank it was repayment all the way for us. We also got stared at as though we were mad... Receipie for mis selling if ever I saw one. Thankfully even at 19 I could tell that was a risky option and kept well clear.
My DB is on an IO and they are in negative equity. Have no option of moving or going onto replayment so stuck where they are.

minibmw2010 Thu 02-May-13 14:01:56

I'm glad to see that people here seem switched on. I've never thought IO is a bad option, just a risky one, hopefully it's not as bad a situation as the news stories are making out.

For me having an IO mortgage with no means to repay capital at the end of the term is bizarre. However, I can see that there is a place for IO mortgages in some circumstances.

We bought our house 3 years ago and it was a bit of a stretch. about 20% of our (massive) mortgage was IO. Since then we have overpaid and reduced the IO bit down a lot. Recently we also got a significant redundancy payoff and paid off some more. So, we no longer have any IO. If you can predict windfalls like that, or the ability to pay off some of the loan, IO may make sense for some.

K8Middleton Thu 02-May-13 14:12:25

We have one. It suits us and at some point we will switch to a repayment mortgage. We used to save into investment ISAs but stopped when I had first dc. We have some cash savings but want to be able to access them in an emergency (unfortunately we can't offset with current mortgage co).

But, we took out the mortgage at the beginning of our careers and quite young. We will probably move and so extend the term again making a repayment mortgage more affordable. Dh alone already earns what we both did when we took out the mortgage.

The other plan is to start paying off the capital when I go back to full time work. I will also start paying into my pension again. We're both under 35 so plenty of time to review and renegotiate when we're likely to be working until 68 or whatever.

We both worked in financial services so we're very clued up but I know some who are not.

Grammaticus Thu 02-May-13 14:21:22

Let's of the people who now say they don't understand just chose the cheapest option and turned a blind eye to the consequences. They've all been getting red letters for over ten years, if they've chosen to ignore them then that's their problem. Some people don't open their bank statements, I don't see how that's my problem either. Greed and stupidity - that's all.

noddyholder Thu 02-May-13 14:24:02

Agree grammaticus I can't bear the thought of the rest of us somehow paying for this in future under the guise of mis selling hmm

DewDr0p Thu 02-May-13 14:33:11

We have an IO mortgage and I am perfectly financially savvy.

It was repayment but when dh was made redundant and then set up his own business IO was a pragmatic way of keeping our home and reducing our fixed outgoings in the short term. I'm not too worried about it as our mortgage is relatively small both in terms of ultimate earning potential and the value of the house.

While interest rates are so low it literally isn't worth paying off the mortgage and effectively tie up that money, much better for us to save what we can into an instant access account and have that flexibility.

Obviously we are hoping to return to a repayment mortgage at some point in the next year or two.

ReculverTowers Thu 02-May-13 14:40:52

I can't see how anyone else will be paying for it but I rent, so i am paying for someone elses future instead (my landlord who is a multi millionaire) and it is like renting but with security of a long term home. If you don't understand why someone might do that then you most probably have not had to leave your 'home' with your family every 6 months of their life

pmgkt Thu 02-May-13 14:46:42

Io is not always bad, I have one on a rental property and on my own home, and I used to sell mortgages so know what I'm talking about. There can be many reasons for having one, from sheer need, to inheritance, or other lump sums. Mine is due to se, so irregular income. If you want to be totally failsafe (which seems to be what most people here feel is right) then you would have taken a long term fixed rate repayment when rates were at lows of about 4%, but people who took that 'risk' are now pounds out of pocket. I agree a lot of people don't understand or don't have any idea how to repay them, but others are taking a calculated risk. Anyone who has been paying into investment plans during the stock market crash, will have had great growth on that money in the last 6 months. If that happens a few more times then they will be able to pay off early, or get money left over and then people on repayment will look silly. As a long term solution I think the banks will just let them reset their terms over another 25 years, and just settle it from sales or estates on death. The banks won't care as long as they earn interest on that money. And if they force sales as the legal costs are high, and tend to get less than market value, so why bother. Hope that makes sense.

tungthai Thu 02-May-13 14:55:31

I'm not sure there will be a mis-selling issue with IO mortgages. We were advised against taking one out and received letters advising us to ensure that we were making provisions for paying off the mortgage.

DoingItForMyself Thu 02-May-13 15:03:11

My plan is to sell the house as by that time I hope the children will have moved out and I will not need such a large house.

Even with interest only, the mortgage is about half the price of rent round here. I can't afford repayment or to pay into an endowment etc so this is the cheapest way for me to live in a house. That is why.

eminemmerdale Thu 02-May-13 15:08:57

It is a bit unkind to assume people who have them are a bit thick about money! We're just in a position where it is the way it is! Hopefully, by the time it ends, the children may want to take it over or we will sell, make some money and get somewhere cheaper, or things will have changed and we will have been repaying.

OliviaP Thu 02-May-13 15:12:34

As many have said, I think it is a mixture of wanting to be a homeowner mixed with a misleading sales pitch that makes people sign their lives away so easily. Add to that the fact that you don't have to worry about it for 25 years means you can put the thought of paying out of your mind for a very long time. I think they should try paying with these messed up new Churchill £5 note
eveningharold.com/2013/05/02/bank-of-england-regrets-outsourcing-printing-of-churchill-5-note/

racmun Thu 02-May-13 15:14:06

It's the next mis selling scandal waiting to happen.

I think that it really helped fuel the boom in property prices by making 'unaffordable, unrealistic prices' dare I say it affordable.

For example go back say 9 years when I first bought a house things were really booming. We couldn't afford full repayment so we went interest only- it was the only way to get on the property ladder. If that hadn't been an option to us and many thousands of others we wouldn't have been able to pay that price for the house and the market would have had to naturally correct surely? (I'm not an evonomist btw this is just my simplistic view). You didn't even need a repayment vehicle.

I reckon there is probably about another 10-15 years before the shit really starts to hit the fan and like someone else said the tax payer will probably shoulder the brunt of it.

Ledkr Thu 02-May-13 15:15:00

Hang on! How will anyone else be paying for anything?
I do not for one tiny second expect anyone to bail me out I don't even know that's possible.
Have you read any if the reasons people ended up with these mortgages or is it just easier to throw out wild accusations of stupidity and entitlement.

BoffinMum Thu 02-May-13 15:18:45

If you have your head screwed on IO is a great product that really gives you good leverage on your investments. It's not good if you are sentimental and only have one house.

louschmoo Thu 02-May-13 15:23:08

We have an IO mortgage. We got a spectacular interest rate as our mortgae advisor was amazing. So instead of repaying every month to the bank we invest the money instead via DH's work sharesave scheme and ISAs and other investments. These generally operate at a higher interest rate than our mortgage, so we should either be able to repay the balance early, or repay at term and have money left over. We also have a fair amount of equity in the house so if worst comes to worst we can sell to repay. Totally agree that it is worrying if people have IO mortgages with nosolid repayment plans.

BackforGood Thu 02-May-13 15:27:57

It would be totally wrong for tax payers to bail out anyone. I took my first mortgage out as an endowment in 1990, and have been bombarded with letters telling me it won't meet the original predictions. The whole issue has been all over the press at regular intervals for 15 years. If people chose to spend all the money they saved from the interest rates on those mortgages coming down from 15% to about 2-3% they are now, on something other than paying off some of the capital repayments from their mortgage, then that was their choice. No-one can genuinely claim not to know that they will have to pay for the lump sum at the end of it somehow though.

flossieraptor Thu 02-May-13 15:36:13

I bought my London flat on a 100% mortgage, 5x my salary including a top-up loan in 2004, so I imagine I'm one of those people getting called stupid. It went up in value and I sold it last year keeping 125k profit which I invested elsewhere because by then I had got married and my financial set-up had changed.

My mortgage adviser recommended I buy somewhere that needed doing up so I could get the very most for my money and put the money I had saved for a deposit into renovations, then get it revalued, new mortgage deal etc.

I did well out of it but the mortgage company were insane to lend to me in that way (yes, Northern Rock, no longer lending) because with no investment in the property I could have walked away at any time, as has happened a lot in the US. I escaped negative equity, but having lived through the early nineties crash, I would just have hung in there, rented it out (oh yeah, 2400 per month, not a bad business).

Yet now DH and I have a 40% deposit ready and waiting but NO-ONE will lend to us. Unless we pretend it's a buy to let of course. Lenders are a bit of a joke if you ask me.

Lazyjaney Thu 02-May-13 15:50:39

IO isn't always stupid, it's very rational in high priced areas like London as private rental is expensive and unreliable, so you get something better and more stable for the same outgoing. If prices rise, you get the benefit and not the Landlord. If not, you've had a better deal renting from a bank than a landlord.

If you do it early in your career so much the better as salaries rise you can pay more off.

The only real risk is if prices fall, you get stuck with negative equity and you have to sell in that period. I know people who had that happen in the late 80s crash, they declared bankruptcy and are fine now.

The government, FSA etc saw what was happening in the noughties but let it happen.

noddyholder Thu 02-May-13 15:52:02

flossie why will no one lend to you with a 40% deposit?

Lazyjaney Thu 02-May-13 15:52:44

The disparity between buy to let and owner mortgage deals is odd, IMO buy go let is a scandal waiting to happen.

noddyholder Thu 02-May-13 15:54:47

ledkr you may not expect and many others BUT if the problem becomes too big the govt may well implement some sort of scheme or label it mis selling in order to 1.Garner votes and 2. avoid mass repossession/homelessness! Most people aren't talking about those who are finance savvy and can see the short term benefits of IO more those who have a long term family home with no way of paying the capital at the end. You can extend the term with some banks but that depends on your circumstances and age etc

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