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??

wildstrawberry - people with repayment mortgages progressively pay off the capital therefore as time goes by there is less to pay interest on, therefore rate rises affect them less. That's also why it is a good idea to pay off extra while you can (in times of low interest rates for example).

capital, not capitol . I can spell, honestly.

we have interest only, but we worked out the capital repayments and overpay those as well. love the flexibility of it.

if we stayed interest only the whole time, the interest never goes down. if however you look at it as equivalent to a rent and bank on capital values going up, it's quite doable.

unfortunately dh and i are too risk averse for that. obsessed with paying down the damn mortgage.

CallMeMrs - 'live like' what exactly? Have you actually bothered to read the thread or just the OP?

BUT - there seems to be an assumption that folks with IO mortgages owe lots -

I now owe less than £20K, the interest at 0.85% is peanuts - I have the money to pay it off in an investment earning more than inflation - hence making money. It makes more money than the interest I pay. IF interest rates rise I may pay off the mortgage - but it makes no sense for me to do it now.

Tru dat.

ByTheWay Yes, I think that there is that assumption out there because in recent years switching to an IO has been a quick help solution for people struggling to pay their mortgage that was originally taken out in a better economic climate. That is certainly the situation of my friends.

Not necessarily a big mortgage either, just one that is too big for them to pay in current situation ie. redundancies, no bonus being paid from work, companies forcing people to take pay cuts or reduce to 4 day weeks etc.

Of course, there are people like you and many others on this thread who are on IO because it is the best option for them financially and it is not a irresponsible thing at all. But, I think that because of more and more people switching to IO as a way of avoiding defaulting on their mortgage, due to tough times at the moment, it is what people assume when they think of IO.

Whatmeworry - I've not read the rest of the thread, but I have to respond to this.

You are forgetting that you will pay far more interest on the IO mortgage (still assuming the same interest rate) because the balance stays at 100K, whereas it goes down over the course of the mortgage lifetime if you repay it. You are borrowing more, for longer, and that is not free. Roughly speaking, that will cancel out the 'time value of money' as you call it. Inflation is (roughly) irrelevant - the higher the inflation rate, the higher the nominal interest rate. Of course, some people are relatively ihmpatient - they discount the future very heavily -it is rational for those people to borrow at the market interest rate. Other people are more patient, they don't discount the future so heavily - it makes sense for those people to borrow at the market interest rate. It also depends on your time path of income relative to your consumption needs. Finally, given you are going to save, paying off the mortgage is a pretty tax efficient way to do it.

Yes, London, I agree - its fairly obvious from the OP that she is not referring to people for whom IO is th best option financially. Most people on IO are on it because they have extremely large mortgages in relation to their income and claim that they cannot afford to be repaying it.

That's extremely shortsighted. As for pensions, yes I agree, many people have seen thousands knocked off their pension pots, and you certainly need to invest as carefully as possible. But frankly if you don't prepare financially in some ways for your old age, what on earth are you going to live on? I for one wont want to be relying on a shitty state pension, paid out at about 75 the way things are going!!

We have an IO mortgage, we are paying under £300 a month for a large 3-bed flat in a very good area of London - before we bought this place we rented a 1-bed for over £1000 a month in the same area. We are taking advantage of low interest rates for now but will have no trouble paying it off in the fullness of time. We have healthy savings, lump-sum bonuses etc and we don't live particularly lavishly.

Our lifestyle has not adjusted accordingly, as one poster suggested, we know we need to have a good buffer for when things change.

We invest, mostly in shares, with the money we would have used on the mortgage - just makes more sense to us. For now anyway.

But possibly that is the point, the op can't really know that IO isn't the best financial option for her acquaintances?

NinkyNonker No, not unless like me her friends have told her what a worry it is and how they are struggling to maintain their lifestyle for themselves and their DC. But as the OP hasn't been back we don't have more info than her original post.

Maybe they have told her. I have a few friends who are on IO and they've been quite upfront about the fact that it's because they have stretched themselves with big mortgages and don't feel they can afford to repay

Whatmeworry - let me correct your figures, assuming 5% interest rate

Ciske your calculations do not take the time value of money into account.

Repayment mortgages pay more (expensive) money today rather than paying very depreciated money later. That £100,000 the IO pays back in 15 years time is worth less than half of what it is today, so in relative terms thay are paying less than £50k to settle an £100k debt.

Also, there is a big difference in standard of living in the first 7 years beween paying £5000 for accomodation on an £33000 income and £7000 on same. After that it becomes less material as the dropoff in value brings them closer together.

Thanks for all your responses. So many different circumstances. No you are right I don't know their situations. But if you can only afford an IO mortgage should you be living in a big 4 bed detached house?

"only afford"
or
"choose to have"

it all depends on the level of financial literacy of the individual

and maybe the husbands only control their wives' spending habits by saying things are tight.

You are right 2 for 1 prehaps they are investing elsewhere. Just a bit envious I suppose as i know my dh would never switch to an IO mortgage in order to buy a bigger house

TalkingPeace Thats it exactly, people with poor financial literacy can make some awful situations for themselves through not understanding the financial products they have, likewise someone who is very financially literate can have the same financial products but make them work for them.

Its down to whether people are making good, informed choices or not. Sadly, going onto IO mortgage isn't a choice for many, its the only way to keep their house.

if it makes me sound less smug - I DEEPLY regret being persuaded to get endowment rather than repayment mortgages in the late 1980's

I knew the mortgage market had gone mad in the spring of 2005 when I heard about 100% self cert IO mortgages with no repayment vehicle

that was when I realised it was about the setup fees and short term reselling gain for the bank rather than helping people to buy homes

But if you can only afford an IO mortgage should you be living in a big 4 bed detached house?

An IO mortgage will be less per year than a repayment mortgage for the same property.

London to edin. I am excatly the same as you. Always feel like a poor relation!

but as whatmeworry drives without a seatbelt at the same speed as you'd hit the ground falling of the roof of such a house, planning for the future is clearly not a big thing.

mrsnw
think of yourself as NOT borrowing from your children like the politicians are.
nothing to be ashamed of

Whatmeworry - you are making a hell of a lot of assumptions based on "time value of money". There is absolutely no guarantee that that will be the case. Wages are stagnant and house prices rises are not what they were.

We needed the flexibility an IO mortgage could give is. We have set up automatic repayments which go in every month without penalty.

We can pay more when we can, or we can pay none if we need to.

We are young still (25) and have had the mortgage since 19. It's portable and very cheap with a low rate of interest for the lifetime of the term. We ported the mortgage last time we moved.

We also have the benefit of living in an affluent area where house prices haven't dropped.

We put a good sized deposit down and feel happy that even with a mortgage, we don't have that tied down feeling

Sadly, going onto IO mortgage isn't a choice for many, its the only way to keep their house

My point is that its not necessarily a bad thing, as:

(i) It is probably cheaper and definitely more secure than renting the equivalent

(ii)They get to keep any capital appreciation in the property - not an option when you rent.

(iii) They get something better now than on a repayment or rented option, and - as inflation is probably a given - their debt reduces over time in real terms.

(iv) over time their payments decrease as a % of income (inflation alone reduces that, never mind salary increases) whereas rent always rises.

(v) given that the debt reduces in real terms, they have a better chance of repaying it later.