People with interest only mortgages - do they really not realise?(308 Posts)
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.
we've just changed back to repayment after 2 years at interest only. We had to switch, as our incomings just weren't covering the outgoings. We're much more financially stable now
I can't understand why people stay on them longterm, unless they're in VivaLeBeaver'ssituation and have someone telling them its all ok
I suppose interest only and then selling asset at the end to cover is very similar to renting but with the advantage of a secure long term home
We have a 10 year IO mortgage. However it suited our financial situation - and we will have no problem in paying off the balance in 8 years. Our situation is/was maybe different from most - in that we had a lump sum of cash (approx. half the value of the mortgage) so we offset the interest against that £ sat in the bank.
Yes, there are people out there who don't understand the concept - but their banks have been lax in giving them this type of mortgage if they don't have the repayment vehicle in place.
In ten years time there will be a whole new "claim back your miss old IO mortgage" industry.
Given how many people don't think about a pension, I can see how the offer of having less to pay every month and not having to think about it until way into the future could appeal to buyers when prices have been so high - especially when banks were pushing it.
We were offered interest only/endowment and I said "no I want a straightforward repayment mortgage, otherwise I will just worry, I want to know it will be paid off." The bank person looked at me as if I was from planet zog and didn't have a clue. Like wanting to be sensible and on top of things was so lame when we could take a massive risk instead.
Some people don't understand the fact that they have an interest only mortgage.
I used to work in a building society and the number of people that got to the end of their mortgage term and had no funds to pay it back was unbelievable.
Some had cashed in endowment policies years ago and spent the money (they are not supposed to be able to do this if it is to pay off a mortgage but many have managed it).
We'd just have to extend their term and move it onto a repayment mortgage.
I always thought it strange how people could bury their head in the sand about such a large amount of money. It's not like they weren't advised of it every year via their statement.
The best was one man who rang up asking why he'd been paying £400 odd every month and his balance hadn't reduced.... I told him he had only been paying interest and his response was, 'well why are you charging me interest?'
My sis and bil have an IO mortgage.
They want to move desperately but can't as they bought at the height of the market and are in negative equity
Bil earns shed loads. He could afford the repayments on a repayment mortgage.
I agree with noddy...the govt will have to bail them out eventually.
We were really pressured by our mortgage adviser to get an endowment.
For the simple reason he would have got more commission.
We said no.
We have only ever had repayment mortgages.
We have 3.5 years left on our fix ATM.
God knows what the IR will be then but as we don't plan to move it doesn't really matter.
I have worked out we can cope if IR go up to 10% but we will struggle if they go higher.
I can't see the problems with IO mortgage as part of a range of options for people with different needs. Buy-to-let or people who want to live in a house for a long period of time, but are perfectly ready to sell to pay off the original loan. Seems sensible to me. Like renting but you get a house at the end to sell and hopefully you pocket some profit. Over a lonnnnggg period of time of course. Property ups and downs notwithstanding, housing will always increase in price in the long term.
In my view, the root problem remains that house prices are unaffordable. IO mortgages, like other subsidy approaches such as the government's latest schemes and the bank of mum and dad, only serve to make the problem worse, because prices simply rise further to take account of the additional money chasing not enough houses.
Ie it's not unreasonable for eg a family of 4 where the parents are average earners to aspire to live in a 3-bed semi. What's madness is that the 3-bed semi requires financial engineering or subsidy to be affordable.
Bringing house prices back to the point of sanity would require a land value tax, significant new house building, controls on overseas buyers (a major driver of the prime London market which drives the rest of the London market which drives the south-east market, ie ~20m+ people), regulated lending limits of say 3.5* earnings, etc. Finding new models of housing that suit the major shift in demographics (many more singletons) would also help, eg new types of apartment with more shared services.
It is not like renting with a house to sell at the end! How do you know when to sell and what you will get? Where will you live next. It is actually not for long term but fine for short eg property developers or for maternity leave career breaks etc.If you know you are going to sell quickly it is fine in a rising or even static market as the capital doesn't decrease the 1st few years. Most banks aren't offering them now without very strict criteria. I agree house prices is the problem and this govt has just introduced a scheme which will keep them high and rising!
I don't understand this either. We took out an endowment in 1999. It was clearly explained that it might not meet the target amount. A few years later we took out another small policy to meet a projected shortfall. We now seem to vary between red letters and green ones but have agreed that we'll keep paying in to the existing policies but not add any more. Our endowment is £39,000. When we moved a few years ago we took out a new mortgage and most of that is on repayment with just 39 K as interest only. I think we had to show we had a 'vehicle' in place to repay it. In any case it matures in 9 years when dh and I should still have around 20 years of working life ahead of us so we're comfortable we can deal with what's atm likely to be only £1-2000 in shortfall.
We took out interest only because we purchased a property which required a fair bit of work, any time we had spare money we paid a chunk off, £5k or £10 k at a time, these mortgages are ideal for the self-employed or those who earn bonus payments at the end of the year. We were always aware of the outstanding balance but considered the improvements we made to the property were increasing our equity which meant we were in a similar position to someone one with a repayment mortgage. Yes we took an IO mortgage but we were responsible and always worked on reducing the outstanding balance but a tour convenience.
We switched to interest only after dh had to take a substantial pay cut when the recession first hit. We are only in a small property so couldn't downsize. We have been back on repayment for almost two years. The money we effectively lost by paying interest only for 5 years is staggering!
Lots of people on interest only thought their financial situations would change for the better but it hasn't turned out like that.
It's still better than renting though. If your financial situation improves at least you can switch to repayment without the hassle of applying for a mortgage. Lots of people who are renting have no savings and will need to be bailed out with housing benefit when they retire.
I have long thought IO mortgages are a ticking time-bomb and a mis-selling 'scandal' in waiting.
Similar thing happened with endowments taken out in the 80's. We were fully aware of the risks when we took ours out and switched to repayment years early to make sure it was cleared when we had an amber warning on it.
There was a lot of coverage on the problem and efforts to alert those affected over the years. I can see the same thing happpening now with IO.
I believe the problem is that some people really do believe that they should be able to get "something for nothing" and that it is somebody else's job to sort out their problems. They are probably the same people who have "injury lawyers 4u" on speed dial! It hardly requires a financial mind to realise that if you borrow money then you will be expected to pay it back but these people choose to ignore the issue because it's "inconvenient" and will then expect to be bailed out by us taxpayers when they can' afford it. Rant over.
Personally, we do have an IO mortgage but this was a considered decision based on the fact that we did not plan to move in short-term and our incomes (especially DH) are not predictable. Consequently we have been able to make some one-off repayments and the capital outstanding is reducing as we planned. So I appreciate IO is not best for most people but it is ideal in our circumstances.
You cannot just 'switch' to repayment that easily. that is a problem atm a lot of people are not in good enough financial shape to qualify for repayment on their own loan! They are for the financially savvy not for getting your monthly payment as low as possible with no thought to the future. I have had a couple for house renovations as I knew 5 months max it would be gone but wouldn't entertain it for a long term family home
I agree barefoot lots of people will try and 'blame' the banks for their own stupidity.
It's a real 'head-in-hands' moment for me, listening to the stories on the radio. I cannot understand how people don't know that they're getting into trouble - I had an endowment on the first house I owned. It's long since been sold, and DH and I have a repayment mortgage, but I kept paying the endowment as it'll come out at a nice time for us, and will still (just, we hope!) be more than I paid in. However, every year I get a letter from the insurance company telling me that the endowment will not cover my mortgage. I keep telling them I no longer have that mortgage but they're obliged, I think, to keep telling me. I guess the thing is that financial agreements can be so complex that people don't even try to understand them and just hope it'll all work out in the end.
I feel even more despondent when I see people with massive credit card debts blaming the banks for giving them the credit cards. No, take some responsibility, you took the credit card and ran it up to the limit, and then took another one and another one and another one... Who did you think was going to pay off all that money?
I think people are in different situations and you can't out and out rubbish interest only mortgages.
We have paid interest only for about 4 years (since our DC2 was born IIRC) just to keep our financial options a bit more open - and intended to start repayment when he returned to school but now I'm pg with DC3 and we have re-located and are renting the house out anyway so it is slightly different situation for now.
We have invested our money in different ways. So for example we spent £40K cash on a house extension (which has added that amount and possibly slightly more to the value of the house as confirmed before and after by estate agents) - in that sense we have used that money to up the value of the property rather than pay it off but essentially doing the same job when we come to sell, i.e. increasing the equity in the property. We are lucky that in our area house prices are still rising albeit slowly, so we are better off paying interest only than not owning at all.
We also invest £250 per month in a share save scheme through DH's work, which is really lucrative and tbh is money far better spent than paying off our mortgage - if we used this investment to pay off our mortgage we would do it quicker than if we had spent the money on a repayment mortgage.
There are cases where IO is feasible but for most people it should be a last resort, for example financial difficulties, and even then the aim should be to get back on repayment ASAP.
Too many people are living in the present with no consideration about what they will do in 5, 10 or 20 years.
People are advised of the implications of IO - as others have said, endowment companies must advise customers regarding possible shortfalls, and mortgage providers must provide annual statements
which come with all the FAQs that people appear to ignore until years down the line
We have IO because our capital is tied up in two other properties. One is a rental which is generating a small amount of income for DH and is currently in negative equity although with no mortgage. The other is my MIL's house, which my DH bought into about 15 years ago. Now that that house can be sold, I will look to move to repayment I think, offset by the capital I can plough in.
Lots of people did take them out because house prices would rise forever / it was cheaper than renting (which is possibly a valid argument in some circumstances) / they wanted the shiny house and it was the only way to afford it. I would not be surprised if this becomes a mis-selling scandal, and how any kind of clamp down is possible without the sort of re-regulation which is very unpopular.
I have IO mortgage. It costs me approx £300/month LESS than renting the same property would. I now have approx £60,000 equity in the house. I got an IO mortgage because I couldn't afford a repayment mortgage and didn't want to keep paying high rent and having to move at the whim of a landlord. Because I did this, my DD has been able to stay in the same area/same schools, etc. and I have not had to fork out moving costs every couple of years.
There are lots of outraged people on this thread talking about irresponsible borrowing, but IMO people do what's best for them at the time. They are not necessarily irresponsible or stupid.
I've provided my DD with a stable home for the past ten years and 'earned' some equity. So shoot me.
The people most in trouble now took out their mortgages in the late 80s & early-mid 90s; there was a mis-selling scandal with compensation paid out and all, iirc. In 1998 DH came home from some bank meeting saying how we should get an endowment mortgage & I had to slap him around the head because even I knew they were too risky, but it wasn't as well publicised before mid '90s.
In 2007 colleague of DH & his fiancee bought a newbuild house (a mere flat would be too small for 2 of them ) on IO mortgage. They promptly got married in big wedding, went on Honeymoon, bought a vintage vehicle to restore & a superduper £2000 entertainment media system. All the while saying that they would worry about investing capital to pay off the mortgage later. I often wonder how that's turning out.
How can it be in negative equity if its got no mortgage?
I don't think there's any suggestion of bailing anyone out. I see today's 'news' more as a profile-raising exercise.... a shot across the bows.
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