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??

We have an interest only / endowment mortgage. We've been very careful with our money and religiously paid off some mortgage whenever we've had spare cash (ie bonus). We also kept the payments at a level we were comfortable with despite being able to drop them considerably whenever we've paid off some of the equity. So we have always overpaid our mortgage. We are now at the stage that when the endowment pays out, the mortgage will have already been paid out so that we have the money to play with. Should be just in time for DS to go to uni - hurrah!

When DH got his first mortgage almost 20 years ago, they were the done thing. He still has an endowment he's paying into that will also give us a lump sum very soon. New kitchen is in order me thinks!

As other posters have said, if you have a plan then it is not a problem. When we bought our first house together, the building society would not lend us the money without proof that we had an endowment in place to pay off the money at the end of the term. Although they were less picky when we bought our current house and we did a mixture of repayment and IO.

We're renting at the moment so I'm a bit in the dark on what everyone else does with their mortgage, I did sort of assume the norm was a repayment so its quite a suprise to me, I thought interest only was a sort of emergency situation resort like if you got divorced or lost your job?

I did know a friend of a friend who had a IO of about £1k per month, in the north, the couple had average 25k type admin jobs, so goodness knows what they'd be paying on repayment.

I'm so naive, I'd rather get a small, modest house on repayment and I'd love to be paid off in my 50's like my parents!

The low interest rates saved 10s of thousands of repossessions. We were regularly ribbed by our friends about our 2nd hand cars and basic holidays over the years. Individual debt in teh Uk is . people want it all NOW it is a strange way to live

Interesting too in the comments about people relying on inheriting a pile from parents. Many people are going to be very shocked that their parents have also also been living well beyond their means for a long time and have done a lifetime or equiy release mortgage without mentioning it to their grown up children so there is no equity left in their home if house prices fall.

But the mortgage isn't just linked to one place Bananas, when you move in theory you take it/equity with you. It isn't lost when you move! I don't get your DH's theory at all, many, if not most people aren't living in their 'forever' home.

Horses for courses.

We have an IO mortgage but use DH's bonus to whack a huge amount off it once a year. Plus we have investments.
DH earns alot so having even a large mortgage is not a particularly big deal.

I can totally see why some people want to have repayment though but doesn't suit us.

As for the comment about understanding why some people have big houses, they don;t lend you more because you're IO you know!

Taking 5% as an average inflation figure over the next 25 years, the house you live in will be worth c 3-4x what it is now on inflation alone. So will your salary, even if it only keeps up with inflation. Paying back an IO mortgage in those last 10 years will be a lot easier.

We are IO. Like Coraltoes we make one off extra payments with bonus/share dividents and will probably be mortgage free within 10 years. We have paid off more than half the value of our home already.

However, if the situation changed and it looked likely that there would be no more lump sums, we'd switch to repayment. That would be a no brainer!

Of course prices will rise. Its part of the economy and inflation. I just see no point pouring loads of money into paying off a mortgage when we could be using that money to invest in other things (like more properties, which is what we do).

Coraltoes and wildstraberryplace, you kind of do have a repayment mortgage, in that you make repayments as and when you can!

The difference is when people have an IO mortgage and just assume one day they will win the lottery or their parents will cover it... I don't think they have considered they may well be retired by the time their parents kark it!

"a waste of money to pay off a mortgage on a place we will not be in in 25 years time" that pretty much boils down to saying that saving money is a waste of money. the actual property and whether or not you'll be living in it is, in many ways, irrelevant. if you pay off the loan you will have an asset (a house - might be a different one - that you can live in, sell for cash, do what you like with) at the end of the day. if you don't pay off the loan you'll have nothing.

Bananas - surely if you have several properties and pay interest on all of them, even if the prices do rise, you must have lost that added equity in all the interest repaymentso over the years?!

I would say it's better to have a couple of properties with the intention of owning them (and thus ALL the equity when you sell) that have you name on lots of properties but actually you are 'renting them from the bank'

I'm with you MrsOzz, I'm quite confused.

Yes I am glad you mentioned this inheriting thing is suppose thats what oh sister thinks is going to happen as in laws a very well off but to be honest I thinks it will end up going on their care in old age and will be used to top up their pension as they lead a very nice lifestyle indeed

and if you pay it off early you'll pay less interest

banan87 - what you are doing is high risk. Borrowing more and more money and hoping rising prices will pay off your debt for you. You may be wrong, you may be right.

Have you considered what you will do if prices dont rise or if interest rates rise?

I have IO, and to be honest its the best thing I ever did. I don't use the money for holidays, but use it to otherwise invest, and ovr aperiod of 15 years have increaseed the value of the equity by significantly more than the price rises. But it is not for everyone. I have a number of investments including tradtional ones, stock, shares, bank accounts, bonds, and less traditional ones, art, wine etc. However mainly what I have done is used leverage. At no stage in those last 15 years have I earnt less in interest in the bank than I was paying on the mortgage, (after tax on the earnings). Now I have had some very good mortgage deals over the years, but even nowI can earn more on savings than I pay in interest. I have some risk, but I am happy with that as I am very sure I am better at managing money than any bank has been demontrated to be.

"of course prices will rise" is part of the reason the economy is in the state it's in. Not the whole reason but part of it. The assumption that the bubble just gets bigger and bigger and everyone gets richer and richer.

There's always a 'point' to paying off debt, as you are acquiring an asset/equity, which you can at a later date choose to do something with, be it spent it, re-invest it in a bigger house etc.

Some people relying on inheritance are in for a big shock unfortunately. Many elderly people will lose the equity in their house to pay care home fees and with the rising number of elderly people I think any help in the future from the Government will be reduced even more.

Should have also said, whilst there is always 'point' to paying off debt, I'm not saying it's the right or only thing for everyone all the time.

Those with IO mortgages who are investing the money wisely or have a clear plan of paying it off (i.e. lump sums, endowments, etc.), are not really the ones that this thread is about, I suspect...

D

Hatwoman - very true about the interest saved. I've worked out that every £500 we pay off over and above our normal repayments will save us nearly £1000 in interest over the lifetime of the mortgage. Plus, if we get into difficulties we have built up a healthy reserve which will mean we can stop paying the mortgage for several years.

banana87 - what will you do if house prices fall, or interest rates go up?

House prices in Japan are still lower than they were in the early 1990's

I have friends still paying off their negative equity from the 1991 collapse

DO NOT bank on house prices beating inflation

if mortgage lending is squeezed back to income multiples as it was in the 1980's and 1990's we are looking at a 50% collapse in prices.

I bought my house in 1996 for £63,000
down the road just sold for £249,000
I mentally value my house at £135,000 and my mortgage is well below that

I think a lot of people on here don't understand the time value of money.

Assume you buy a house today for £100,000 at 100% moortgage of £100,000.

Assume joint salaries are £33,000 to cover it.

Assume inflation is c 5% and both house and salary rise in line with it

A repayment mortgage will want you to pay £100000/25 = £4000 pa, on top of interest, ie c 12% of your income now per annum when you are yong and poor.

In 25 years time, the house will be worth between £300,000 and £400,000

The Mortgage will still be £100,000

If you sell the house to downsize you pocket house sales value less £100,000 mortgage.

Your Salary will be between £100,000 and £133,000 in 25 years time.

If you pay it off in the last 10 years you need c 10% of your salary for only 10 years.

And that is assuming neither house prices nor salaries rise due to other causes.

IO is not irrational, even if you never plan to pay it back, as you can see.

i know severalo friends with huge imo morgages 350kplus, that they will be paying off until they are 70...

not sure i'd really want to kill myself to have a massive house

Hatwoman saving money is a waste. Investing money is not. So we invest our money (shares,property, starting businesses, investing in business). Our properties are our pension, we don't waste money paying into those either.

It is high risk, but when you think about it, £1 today is not the same value of £1 7 years ago. Inflation is constantly rising. Also, look at house prices 25 years ago. You will not find one single house that you will make a loss on today if you sold.

But I can see why people make payments on the flip side too.