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

[mrsnw]

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??

Woollyideas I haven't said I don't approve. And please don't get annoyed with me, I'm just gobsmacked at the idea that you can just pay the interest without having some fall back. It wasn't allowed when we bought our houses (just one at a time, not at the same time ) and I do feel there could be a lot of fall back in the years to come.

You've made money on your house, but people who buy now may not make much if the market stays the same. It just seems a really, really risky thing to do to me, I'm glad it's worked out for you.

The main thing that ALL of us have to take from this thread is

Look at your mortgage
Understand your mortgage
Where will you be with it in 5 / 10 / 15 years time?
Will you cope if base rates rise to 4% - interest rates to 8% ?
Do you have concrete plans to pay off the capital?
Will you cope if house prices do not rise for the next 10 years?

and if you are renting, how secure is your landlord against all of the above?

if EVERYBODY did that, we would have sustainable borrowing for growth rather than indebtedness to our children.
Not a bad aim IMHO

Almostfifty - it's incorrect to say it's really really risky.

Why is it any worse than renting? In many cases it's a lot better than renting - often an IO mtge is 1/3 or 1/2 the cost of renting the same property, you are on the property ladder (admittedly the bottom rung going nowhere quickly), you have the option of paying the mortgage off in a variety of ways, you have the stability you don't get when you are renting, you can make it your own unlike when you are renting.

The worst thing (and it's highly unlikely) that could happen is that the house gets reposessed by the bank at the end of the mortgage term (as I said, highly unlikely as at the end of 25 years you will have the capital you started with and some appreciation (even if not a lot) so you'd sell it and you aren't likely to not be able to see it for what you owe on the mtge at least. If you don't sell it you can remortgage it.

How is it any worse than renting for 25 years?? The way I see it, it's a hell of a lot better.

Because you're stuck if you can't sell it. You'll have no home, no capital (cos the bank will sell it for as little as it will take to pay off what you owe them) and you'll be back at square one.

That's if you've not gone down either the stocks and shares route, or other ways of paying it off.

Almostfifty - and how is any worse than if you have rented for the same period of time?

It can be worse if the house is not going to sell - it gets reposessed, the mortgage company sell it on for a pittance - less than you bought it for - and YOU get stuck with the debt forever, and not being able to borrow a penny from that day forth until you pay off the mortgage company..... just saying......

Can someone who knows more about mortgages come on here and clarify?

If you are on a IO mortgage and make overpayments then those overpayments go straight against the capital of the loan.

Unlike my capital repayment mortgage. We fixed out capital repayment mortgage for 10 years at under 5% so feel a bit stupid about it all. But at the time we remortgaged we were about to have our first child and so I wanted the certainty of what we would pay every month.

But as I now understand it as long as you are disciplined and can overpay then an IO mortgage is better.

The banks don't tell you about this as they want to make money from people who only ever pay their IO mortgage and/or want mugs who pay the capital repayment method like me.

My DH and I have 100K equity in our house. But since having a child we feel very broke. We are not saving much money for the first time in our lives.
We are on our second house. But I can't believe that we bought our first house 6 years ago with only £12K deposit and did it up. Also it took me ages to get that deposit together as renting in London was so expensive.

FIrst house had no heating, no bathroom and I can't believe that I lived like I did but I had to do it - to get into a house. It turned out to be a lovely little house and it enabled us to buy another bigger house. God knows how you would get a house if you were a young person these day, unless you had some kind of family help. Anyhow a bit of a rant - but as I understand it a IO mortgage as long as you overpay could be a significantly quicker way to clear your mortgage??

YUP
that is what I do
I have three sub accounts within my mortgage
two have 10% per year overpayment limits, but the original (at base plus 0.5%) is totally flexible
so I overpay everything I can
AND I have fixed my repayment at double the interest charged
so I'm running an IO as a repayment AND will finish it at least a year early (even with DH and I earning bugger all this term because of the state of the economy)

BUT
Do not feel stupid - 10 year fix at under 5% is not bad
however it might be worth you looking at buying out of that deal if you can get a better one cheaply

what I strongly suggest to everybody (on here and in the RW) is write a spreadsheet showing all of your mortgage payments from start to finish and make sure that you are going to end up owing nothing on the last day.

We are on interest only and with hindsight it was the biggest mistake we have made. When I was on maternity leave we switched to interest only with the intention of switching back once we were on our feet. Then the recession hit and without going into specifics we saw our income take a huge drop and we couldn't afford to switch back, we were also tied into a very high rate so we haven't benefited from the low interest rates. Our fixed rate is almost at an end and we will switch back to repayment next month. We don't lead a lavish lifestyle, holes in my shoes and cuppasoup for dinner!

Lovethislife - banks vary. I am on an IO mtge because it works well for me. I can only pay off 10% of the capital per year without penalty. I don't know what the penalty is though, as sadly I've never been in a postion to overpay by more than 10% The odd thing is though, that I'm now on their SVR as my fixed term has just ended and for now I'm leaving it as it is. There's no early repayment fee if I pay the whole thing off - but a penalty if I pay off more than 10%. I've not looked into it too much as I'm probaby going to remortgage with another bank in the new year and wont be making any large repayments before then.

spugglers
before going back to repayment and locking into any rate, spend an evening writing a spreadsheet that takes you to the last day of your mortgage (you are more than welcome to copy chunks of the google one I linked to above - I'm proud of it but not precious) and work out where the options will leave you
DO NOT TRUST ANY BANK to tell you the right numbers

I have an endowments spreadsheet which shows that the figures on the red letters I get are utter junk
and when I speak to managers at the company they agree that my numbers are right!

Too late Tip, already agreed the new rate.

No worries
then still do the spreadsheet and monitor whether you can do overpayments and how much of each payment is interest and capital
you know it makes sense :-)

Good advice here - thanks for the response.

I will have a look at a spreadsheet.

What I was trying to get out is that if you are on a IO mortgage then your overpayments go directly against the capital - correct? Whereas any overpayment we go just reduce the total we have - so go against the total including the interest? I probably am not making sense.....

There are some good mortgage tools on this website:

www.mortgages-loans-uk.co.uk/

Look down the left side to the 'mortgage tools' menu.

If you want to see what position you're in with a repayment mortgage after a certain time at a certain rate, just use the 'overpayment calculator' but put '0' in the overpayment amount. It will then show you the repayments and the exact amount owed at the end of each month of the mortgage term.

lovethislife - no, it would go against your capital as your regular payments go against the capital and interest, the interest is (usually) calculated daily and added to your outstanding amount on a monthly basis - so each month you are paying the interest off & some capital, but the interest is paid to date so any extra you are paying off your capital.

Actually - I suppose that may depend on how your mtge is set up?? Why not just ring your bank and ask?

Interest only is what has messed up our housing market for our kids - it meant that people ended up being able to live in houses they actually can't afford to buy. This hiked prices beyond the reach of most people.

Zombie thread, but an interesting read 8 years on!

Where I live (very expensive area of SE) it's quite normal to have IO mortgage, although mine is repayment.

House prices are so high compared to earnings, it's a choice between IO and renting. At least with IO you have long term security and the chance to gain some equity over the long haul.

My cousin recently sold his house which was IO, and made so much money on it he was able to buy a similar sized house in a cheaper area outright, so is now mortgage free. A work colleague sold her IO house when she came to the end of the term and just downsized using the equity to buy a flat and is mortgage free.

It can work for some people. I know IO became very hard to get for a while but most of the big lenders are offering them again now, with no repayment vehicle required so long as Loan to value is low/deposit is high. Not much use to FTBs.