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AIBU?

Share your dilemmas and get honest opinions from other Mumsnetters.

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Original poster

to be surprised by the number of friends on interest only mortgages?

245 replies

mrsnw · 03/11/2011 14:41

We are thinking of moving next year so conversation has turned towards interest rates and mortgages. We live a an affulent area of Herts and many people hold down good jobs. I know everyone situation is different and many of the mums are SAHM. Just guess am suprised. Oh and would you move giving the state of the eco??

OP posts:

AnnoyingOrange · 03/11/2011 14:46

we have a offset mortgage which is technically interest only. It's very cheap and flexible -what's not to like?

LondonToEdinburghExpress · 03/11/2011 14:47

I had a conversation with friends recently and, like you, was surprised at how many had an outwardly affluent lifestyle but were paying an interest-only mortgage to keep themselves in the lifestyle they are accustomed to.

I always feel like the poor relation when we get together, my clothes aren't the right brand and our car isn't new and so on but now I realise that we are probably better off than them (though more scruffy and dated looking) because we are overpaying our mortgage and have savings, albeit not much.

ohbabybaby · 03/11/2011 14:49

Are they also paying into an endowment? In which case it is just a different type of mortgage choice.

If they are literally just paying the interest, then that doesn't surprise me either actually. I am amazed at the size/cost of houses most of my colleagues have, I know their salaries, some have had help from the bank of mum and dad but not all, their mortgages must be huge, and therefore a fair number of them must be just paying the interest.

tiredemma · 03/11/2011 14:50

We took on an interest only mortgage in Feb this year. It was the only way that we could afford to move into this house at that time (we wanted to move before we had to make applications for secondary school for DS1).

In two years time, when our loan and CC payments have finished- we will be approx £600 a month better off and able to go onto re-payment. It was a short term decision for long term gain!!

LondonToEdinburghExpress · 03/11/2011 14:52

One friend in particular is quite worried because her husband is older than us so not too far off retirement and the mortgage is paid from his income (she doesn't work) but they have had to switch to interest only. They won't pay it off before he is due to retire so they have some tough decisions ahead. He thinks they should sell but they face a big loss on the sale because they bought at the peak.

It makes me very glad to have a lovely, humble little house with manageable payments rather than a grand mansion and overwhelming debt.

bogwobbit · 03/11/2011 14:53

Part of my mortgage is interest only, basically because we were ripped off when we had an Endowment which failed to deliver. Much as I would dearly love to change it over to a repayment one, I just can't afford to. I am trying to make additional payments to reduce the capital because it worries and depresses me that I may never fully own my home but so far haven't made much inroads into it.

I think it's one of these things that don't seem to matter when you're young but once you get a bit older it hits you that you're unlikely to own your main asset and that time is running out to actually do so.
Oh, and I don't have an affluent lifestyle.......sadly :(

reallytired · 03/11/2011 14:55

An interest only mortgage is fab, although you do have to plan how you pay it off. Life is very exoensive with a pre schoolers. Either one parents stays at home or you have horrendous nursery fees. In later years when children are at school and both parents are working then you can pay off more of the mortgage.

We do pay off our mortgage when DH gets a bonus from work. Also when rates are low it makes sense to over pay and then just pay the interest when the interests eventually rise again. In fact we have paid off more of our mortgage than many people on repayment deals.

If you have an interest only or an offset mortgage you have to be very disciplined as it all has to be paid back at some point. Otherwise you will end up having to sell the house to pay back the loan.

Prehaps your friends are hoping that an inhertiance will pay off their mortgage.

Beamur · 03/11/2011 14:55

My DP's house is on an interest only basis - it was all he afford to pay out his ex wife. Our plan is to move and downsize once the older kids leave home. I part own another house which is on a repayment basis.

NinkyNonker · 03/11/2011 14:55

Depends if they see it as a permanent thing. We went interest only for 2 yrs while we retrained as our salaries were non existent.

LondonToEdinburghExpress · 03/11/2011 14:56

Bog Sorry, I wasn't generalising, I was just talking about my circle of friends in particular.

They were saying the pressure they feel in their peer group to maintain a certain lifestyle - the right car, right clothes, regular beauty treatments (all the things I don't have!) and they weren't prepared to start reducing their expenditure incase people thought they weren't as well off as they used to be.
I guess they are the 'secretly poor' that there was a thread about ages ago.

Deliaskis · 03/11/2011 14:57

I think YABU to be surprised, but it's what people do. Some people do it with a clear plan in mind, i.e. their income is low now for specific reasons, so they need IO to tide them over until income goes up, then they go on repayment. The thing is, so many people have them with no clear plan of when they are going to go onto repayment, or how they are going to find the money to pay off the actual loan.

I have seen what LondonToEdinburgh describes where people are basically on IO to keep their lifestyle at a certain standard. I know that's not everybody, but it is some people.

I personally would be terrified to be on IO with no clear plan of how to pay it back. It's not like anyone is looking at massive appreciation of property values anymore (and I don't think we will ever see that again, properties tripling in value over the course of a mortgage for example).

noddyholder · 03/11/2011 14:59

I am always amazed at this too. It is like renting from the bank at the end of the term you are still owing the full cost of the house and unless you have the funds you can be kicked out! You do all the maintenance and repair and you don't really own it until you pay the capital off.

bogwobbit · 03/11/2011 14:59

Hey, no offence taken. I can understand why people do it and tbh being 'interest only' didn't bother me and dh till a couple of years ago when we realised that time was marching on and the time left to pay the mortgage back was running out. Very depressing.
Oh, and reallytired it's not just when children are pre-school that they're expensive....sadly. I now have two at university (as well as two at school) and it's costing me a fecking packet...

LondonToEdinburghExpress · 03/11/2011 15:00

Yes Delia, the friends I am talking about have no long term plan to pay it back, they have gone onto IO just to keep going at the moment.

FWIW I think going onto interest only for a short time, whilst retraining or similar, is an excellent idea. Its about having a long term view though and being disciplined and organised to make it work for you long term.

headfairy · 03/11/2011 15:02

I'm the same op... lots of my friends are on interest only mortgages. I could never understand how they had such big houses and so many children on two average ish salaries (one friend had 5 children, 2 salaries in the mid £30k and a huuuuuge house beautifully decorated - they were interest only)

My sister thinks I'm bonkers having a repayment mortgage. Their house has doubled in value from £475k to more than £850k and they have two 6 figure salaries coming in so they could more than afford it. But I guess their lifestyle has adjusted to the extent that they'd have to cut back quite drastically on the rather nice lifestyle they have to go repayment - they have a yacht, 4 or 5 holidays a year and lots of new toys - ipads, tvs, iphones etc.

Their choice really but personally I like looking at our mortgate balance reducing. Dh reckons by next year it'll be below £100k

noddyholder · 03/11/2011 15:03

I think very few people have a plan to pay back and just bury their heads while the repayments are low at the start. Most people are relying on massive price increases which will enable them to sell and relocate/downsize. Did you hear that phone in on R5 in the summer about this. Not one person who rang in had a plan to pay it back and quite a few didn't realise what IO really meant. It is especially risky in an unstable market and where any savings investments you plan to cash in to pay off the capital are earning 0 interest.

Megatron · 03/11/2011 15:04

I can see why they are attractive to some, like in Tiredemma's case where is was a means to an end for a short period of time. I can also see what the OP is saying as we have a few friends who are on IO mortgages too, some because it's the only way they can do it for the time being, and some because they like the lifestyle they have and don't want to change it.

It wouldn't be for me as I feel totally relieved to see the amount we owe reduce every year when we get the statement in, but it's bloody hard work paying it off, we had to really tighten our belts. But then so does everyone at the moment no matter what type of mortgage they have (unless you're very lucky).

tiredemma · 03/11/2011 15:07

I think to be completely ignorant to the concept is suicide. I know in two years that I won't see my mortgage reduced- if you don't take heed of this most important aspect then you are setting yourself up for a MASSIVE fail.

LondonToEdinburghExpress · 03/11/2011 15:07

Head Yes, we're the same, we just want it paid off as soon as we can. My brother is the exact opposite and he is a live for the moment on a IO mortgage, every spare penny spent on iphones and holidays. Its just different ways of doing it I suppose. My way would bore my brother, his way would terrify me!

We are paying as much off as we can at the moment but I am a SAHM at the moment with a 1yr old and a 2 yr old, as soon as I go back to work (assuming I can get a job) we will put almost all my income into the mortgage.

noddyholder · 03/11/2011 15:09

The problem is you do get used to the lower repayments and your lifestyle adjusts accordingly and no one can see into the future. I personally think they should be banned I have seen several people come a cropper in the 80s.

Aworryingtrend · 03/11/2011 15:09

How does IO work then? If you only pay the interest until then end of the term (25 years), does the house get handed back to the mortgage lender? Scary.

Whatmeworry · 03/11/2011 15:10

If you look at the inflation figures, paying a mortgage off in 25 years time is typically a lot cheaper than paying now. 5% Inflation means the value of money halves about every 15 years.

reallytired · 03/11/2011 15:11

An interest only mortgage with a repayment option works well if you are disciplined enough to make repayments. Our mortgage allows repayments without penalty. It works for us.

I suspect we will extend the mortgage to pay for ds to go to uni in ten years time.

I think there will be a propety boom again, but we will have to wait ten years. The massive level of immigation and more single person households will create demand for property.

SexyDomesticatedDab · 03/11/2011 15:11

Yes - IO is like that. I thought most lenders now ask you for what repayment vehicle you'll be using.

noddyholder · 03/11/2011 15:11

You don't own it at all. The bank owns it. Never heard anyone with an IO say they are renting from the bank though! You are supposed to have a repayment plan in place eg bonds/savings/investment etc to pay into to cover the capital. This used to be required for an IO mortgage now it isn't mandatory which is hugely irresponsible.

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