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??

banana - she will be near retirement age by then, so probably wont be able to. However, I'm sure it wont be an issue as she could easily sell it to an investor as they have a great ROI and wouldn't be any worse off and that's only if she hasn't paid it off by then.

I think it's fine as long as people have a plan B, namely are prepared to sell the house when the mortgage term is up and rent elsewhere, have another investment vehicle to pay off the mortgage, or plan to downsize back to the original house on retirement, if the buy to let route has been chosen while they live in another house. It's a way of getting more space for a growing family in expensive property areas at the time when you need it most, and usually cheaper than renting.

Noddy's attitude is a very common one unfortunately. God forbid other people do well and make money. .

ledkr yes - there are lots of good reasons to do it and I have to say, it does annoy me when people say things like 'IO mortgages shouldn't be legal' - why? Because some fool doesn't realise that if he borrows £100k now and has an IO mtge he will still owe the bank £100k in 25 years time?

I am amazed at this. I didn't realise they'd taken the mandatory endowment or other plan off IO mortgages. I can't believe that's sensible.

We started off with an endowment and IO mortgage. When we moved, we changed to a repayment as we knew our endowment wouldn't have even covered the first mortgage. We've now paid it off and own our house and we're not fifty yet (as you may have guessed).

What would happen to those whose mortgages are up and they've not the wherewithal to pay it off? They will then lose their home and have to go bankrupt.

It will end up with the banks having another shed load of houses to sell off cheaply.

Or smug people that say they'd never have an IO mtg - well, let's see what life brings you love. Believe it or not life doesn't always run perfect to plan.

I agree with Chipping. I have an IO mortgage and definitely won't be holidaying in the Maldives any time soon. I didn't do it to afford a 'better house'; I did it to afford a modest house that was adequate for myself and my DD.

For me it was a choice between private renting (lining someone else's pockets, no security, etc) at a cost of about £800/month, which was out of my reach financially; having a repayment mortgage for about £700/month, which was out of my reach financially; or having an IO mortgage for £550/month, which I could just about afford.

Since taking out the mortgage I have gained £45,000 equity in my house, which I believe belongs to me! The fact that I have no repayment vehicle in place does bother me sometimes, but if I was renting I would be even worse off financially.

People on low, fixed incomes don't always have the ability to take the 'best option'; they take what they can. In the same way that some people have benefitted hugely from low interest rates, people like me - who are on fixed rate deals because they need monthly outgoings that don't vary - can't afford the 'risk' of a fluctuating mortgage rate and are 'stuck' on rates like 5%.

Hopefully, when my current fix runs out I should be able to get a part IO/part repayment mortgage for around the same monthly cost (according to my mortgage advisor).

I feel a bit offended by many of the comments on this thread. Not everyone takes an IO mortgage because they are stupidly aspirational/want to live beyond their means, you know!

Almost50 - read the thread, the answers are all there for you :)

They won't be bankrupt though, just sell the house and pay off the mortgage? We may go IO again for a while when we move and overpay, if we go for the house we like which has the potential to do us until we are old and grey.

Woolly - people can be dreadfully smug. You did what was best for you and DD, you did it knowing all the facts, you haven't taken any unnecessary risk and you have A Plan. Ignore them.

It is actually a sensible idea. Pay the interest only and put the money you would pay on the capital into a high interest (albeit higher risk) investment. Your return will be much better and you will have more money when you finally need to pay off the capital. Obviously this is a long term plan and is working to great effect for us.

I think a lot of people on here don't understand the time value of money.
Whatmeworry - let me correct your figures, assuming 5% interest rate:

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.

A repayment mortgage will see you back pay £7k per year, inc interest, totalling £177k over 25 years.

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.

The mortgage will be zero and you pocket the full value.

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

If you pay it off interest only you pay approx £5k a year for 15 years, then £12k for 10 years, totalling close to £200k.

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

Assuming this is right, on repayment, you will start by paying 21% of your income, going down to 7% towards the end. On IO, you start off at 15% of your income, going down to 12% in the last 10 years. This might feel more smoothed out, but you will have a huge hike of your costs towards the end and you will spend more than £23k extra over the total life time of the mortgage.

This might be right for some people, but I don't think your figures prove the case for IO mortgages at all. You still pay a lot of interest in the early years and then have to pay off a huge chunk at once, which not everyone can plan for.

Almostfifty why would you 'go bankrupt' if you couldn't pay off your mortgage at the end of term? You sell the house, pay off the capital loan and keep the equity that you've built up, surely?

(And then rent somewhere.)

Well I wish people such as Bananna87 the best of luck, I really do. I guess to stand any chance of manking any money in this life you have to take a risk at times. People like myself who are too scared/cautious to will plod through life without any stress but also no chance of being a property tycoon.

My friend would dearly love to get it paid off now while mortgage rates are low, to have that security and to not be subject to the possible huge interest rates in a few years time - but you have to do what you can, what's best and for her, for now, this is the best option

I would, too, Chipping. If only I had the surplus income that would enable me to do the sensible thing!

woolly - you will have to stop taking all of those holidays to the Maldives then wont you!!

[Hides the knife from Woolly]

All you can do is your best isn't it - and play the EuroLottery!!

Your plan is a good one, don't let anyone make you feel bad about it.

Chipping, a caravan holiday in Bognor would be a start
Actually a caravan in Bognor may well be my retirement home. Who needs a house?

Ciske thats assuming you can down size my sister in law got this interest only mortgage in a really expensive area so her house was Tibet before she had children she ended. Up with twins and really needs a bigger house but can't move in the currant climate and even if the did wouldn't not have any deposit to do so to move to a bigger property

These days I don't think any one can predict anything it was only a few years ago buy to let was thought to be a sound buy

People with IO need to consider interest rates, currently at historic lows.

4% on your 200k house is only 8k a year but what if long-term averages were resumed? 8%? Well, that's 16k a year on IO. 12%? 24k... And so forth. IO mortgages are very susceptible to interest rate rises.

we have interest only, it was what worked out best pnd what we could get at the time, but DH saves up the rest then pays big lump sums off - I say DH as i am shite with money and SAHM but obviously what he's doing is right thing

In our experience its quite difficult to get an interest only mortgage now. Our mortgage is just at the end of its fixed term and we wanted to switch to interest only since my job is not secure at the moment and it gives us more flexibility if the worst comes to the worst. Despite our mortgage only being 55 percent of the value of the house and despite the fact that DHs salary could actually cover the mortgage payments, they initially refused to let us switch to interest only. They ultimately agreed but only on the basis that the term was reduced to 10 years so that if we got to the end of that and didn't have the momeny to repay we had time to take out another mortgage and repay it.

So obviously the banks don't think it's such a good idea.

... and the banks are always right of course...

??