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AIBU?

Share your dilemmas and get honest opinions from other Mumsnetters.

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:
Whatmeworry · 03/11/2011 22:11

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.

Its rude to quote from other threads, especially as its out of context. But onthat matter its clear that (i) you did not read what I wrote properly and (ii) you are crap at physics as you cannot tell the difference between velocity and deceleration.

Whatmeworry · 03/11/2011 22:16

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

You have to take a 25 year view, not a 2.5 year view.

LondonToEdinburghExpress · 03/11/2011 22:20

Whatme No, its not necessarily a bad thing, but for many it is as it is usually part and parcel of a bigger financial crisis for the family ie redundancies etc.

Like I said earlier, one friend 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. The DH thinks they should sell but they face a big loss on the sale because they bought at the peak, they don't have time on their side either as he is getting older.

I think its less of an issue if you are younger and can afford to ride out the bad economical times, hoping for better circumstances to come along.

BiscuitNibbler · 03/11/2011 22:21

I think you need to take a hell of a lot longer view than a 25 year view. Historically house prices have not risen at the rates they have risen in the last 40 years. You could say that rapidly (i.e. over 25 years) rising house prices are the exception rather than the rule.

ChippingInAutumnLover · 03/11/2011 22:25

mrsnw You asked if people on IO mortgages should be living in detached 4 bed houses. Well, I guess it depends if they have another way of paying the mortgage off at the end of the term or not. I think though, you are talking about the people who are 'living the lifestyle'...but don't really have the income to support it or A Plan for paying off the mortgage Yes? If you are, then either they are very very stupid and have gone into this unable to afford to repay the capital or they have gone into it being able to or having a plan to repay the capital and now find they can't (whether that's through investments having gone bad, pay cuts or redundancies etc)... However, whatever has brought them to this place they will probably either lose money or just break even on what they owe the bank if they sell and then have to pay the same amount of money each month in rent to live in a much smaller place - so until the interest rates go rocketing up, then they might as well sit tight. I would, but I would be cutting back on everything else, saving the money and definitely not still be 'living the lifestyle'!!

I think the issue is - is it a sensible, informed decision or is it 'live now, worry later' IO mtge?

londonone · 03/11/2011 22:30

biscuitnibbler - what period longer than 25 years can you point to where uk house prices have depreciated?

LondonToEdinburghExpress · 03/11/2011 22:31

I think the issue is - is it a sensible, informed decision or is it 'live now, worry later' IO mtge?

Yes, thats the thing isn't it I suppose, because there is a difference between the two.

TalkinPeace2 · 03/11/2011 22:33

the volume of home ownership since the 1950's has no parallel in UK history
BUT
the history of bubbles goes back 300 years and the rest
once an asset has a value just because it does rather than truly relative to other things, we are in a bubble
if every second home and empty house came on the market at once, prices would fall by a massive amount - the shortage of supply is artificial

UK housing (as measured in square metrage of habitable space) is ridiculously overpriced and is in need for an adjustment along with other debt

rubyrubyruby · 03/11/2011 22:34

This reply has been deleted

Message withdrawn at poster's request.

londonone · 03/11/2011 22:35

Are you suggesting we are in a 300 year bubble?

TalkinPeace2 · 03/11/2011 22:37

no, we are in one of the many many bubbles that have inflated and deflated over the decades

londonone · 03/11/2011 22:42

And how long would you say these bubbles generally last? Because overall the trend has been clearly upwards?

Whatmeworry · 03/11/2011 22:42

Whatme No, its not necessarily a bad thing, but for many it is as it is usually part and parcel of a bigger financial crisis for the family ie redundancies etc

Sure, but what are the alternatives? Dropping from repayment to IO may make all the difference between getting by and not making it, and there is the hope they can sort something out.

Selling in the current market and then going into rental is not ideal, whether youhave an IO or a repayment mortgage you can't afford!

LondonToEdinburghExpress · 03/11/2011 23:00

Whatme That's my point, that's why it sad, that for some there aren't any real alternatives, they just have to hope things improve.

Some people are stuck between a rock and a hard place due to bad situations, pay cuts etc.

Others, like I mentioned earlier feel the pressure to maintain a certain lifestyle - the right car, right clothes and because they aren't prepared to start reducing their expenditure have switched to IO to allow them to fund their lifestyle.

I guess some have no choice and others have other options but choose to spend their money on other things. If DH lost his job we might well end up on an IO, it might be our only choice. That being said though, we would never continue to buy new cars and expensive holidays in an effort to keep up with the Jones' whilst burying our head in the sand about an IO mortgage as some of my much loved, but a little foolish, friends are doing.

lovingthecoast · 03/11/2011 23:00

We did it for 2 years until last year simply to free up a bit more money which we put into savings. DH works for a large investment bank and, despite being very well qualified and very highly paid, his job was very insecure.

It was absolutely the right thing for us to do even though we had a 400k mortgage which we weren't paying off. However, when we looked at it as a 400k mortgage on an 800k home, we took the gamble that it wouldn't fall below what we paid for it even with prices crashing around our ears.

We are now back on a repayment mortgage but it's nice to know that little nest egg is there and I don't think we've done ourselves much damage in the long run. Being able to do it meant that if DH had lost his job, we wouldn't have gone under and he would have had about 6mths to find something else. With 3 kids I think it was the sensible thing to do.

FredFredGeorge · 03/11/2011 23:09

If you believe house prices are going to fall dramatically, then a repayment mortgage is just as lousy an investment as an IO only one, and you should not have either but rent and save money to buy later after the prices have dropped.

And if you don't believe they'll fall in that way, then IO is just as reasonable as a repayment.

ChippingInAutumnLover · 03/11/2011 23:23

LovingTheCoast - I think it was absolutely the right thing to do, the only thing that surprises me a bit about that is that you have gone back to a repayment mortgage already and aren't investing it in another way. Something you could pull the money out of and repay a chunk of the mtge if the rates start going up. Why did you do that?

ChippingInAutumnLover · 03/11/2011 23:26

FredFredGeorge - why would you rent when rent is more expensive than a IO mtge?

Nezzi · 04/11/2011 00:32

I have nothing to add to this discussion but I had to stop and say a huge thank you. I have learnt so much from this thread and have some great questions to ask before we get a new mortgage.
I didn't even know IO mortgages still existed but now that I do, they could prove to be a sound choice for us.

ChippingInAutumnLover · 04/11/2011 00:37

Nezzi :) Why do you think an IO mtge would be a good choice for you?

ihatebabyjake · 04/11/2011 08:31

I think you have to be very careful with IO mortages.

You should not assume the debt with be deflated away, nor should you assume house prices will rise over a 20+ year period. Take a look at Japan. After the real estate and credit crash of the last 80s early 90s they have been in a recession with deflation for 20 years. Debt has got bigger, house prices have stagnated.

Just because something has been observed behaviour for the last 20-40 years, doesn't mean its true over the next 20-40 years.

lesley33 · 04/11/2011 08:52

Its also really hard to know when you buy if if you are buying at the top of the market in terms of prices. We bought our first house 1997 for £29,500 when house prices had already fallen a lot. Both ourselves and everyone we spoke to didn't think prices would fall any lower. 7 years later we sold it for £28,000 and that was a lot more than it had been valued at by the 3 estate agents who came round.

The reality is that although overall house prices have went up over the last 25 years, in reality they go up and down in a boom and bust type cycle.

I am also a bit flummoxed by those who say they can earn more by saving than the interest they pay in a mortgage. I know that you can't just compare the overall interest rate i.e. paying 3% in mortgage, getting 4% in savings. The true mortgage interest rate in comparison is much higher.

I'm sorry I can't explain it as I can't rellay remember the reasoning, but i know when we looked at it paying off our mortgage was much better financially than the savings we earned. I think its to do with the fact that as you pay off more capital the amount of interest paid goes down. So the amount you save overall is quite a bit more than the interest you earn on savings.

We took out our mortgage when interest rates were very high and it was a lot to pay. But as interest rates were reduced we carried on paying the same amount thus overpaying every month. By 40 we had paid off the mortgage. It gives me a great feeling of security as even if I was made redundant we could just manage to carry on living where we are. Plus we have lots of extra income that we either save or spend on going out and great holidays.

lovingthecoast · 04/11/2011 09:08

Thanks, Chipping! We moved back as soon as was feasible because of DH's job. They do credit checks on us every 3mths and they need to be immaculate. Too long on IO and it wouldn't look good.

Lesley, for us it wasn't that we were getting more by saving the money rather than paying the mortgage, rather it just meant that the money was there in a saving pot should DH lose his job. Much more difficult to take it back out of the mortgage than to pop into the bank and withdraw.

lesley33 · 04/11/2011 09:24

Sorry the savings thing was mentioned by earlier posters. However one useful thing is that when we overpaid, with the ordinary mortgage we had, you could withdraw the overpayment at any time with no penalty. Yes you didn't get the interest on it if you did this, which you would have got if it was in a savings account, but it was good to know in case there was a real emergency.

SexyDomesticatedDab · 04/11/2011 09:46

Just to add you can split a mortgage and have part IO and part repayment - depends on provider etc. There are many mortgage calculators you can download and its very interesting to see how even small over payments in a few years makes a difference to either the total interest paid or when the mortgage will get paid off. For the last 2 years been overpaying at the maximum amount allowed by our provider.

Nezzi I doubt if you'd be able to get just an IO mortgager without being able to show them how the capital will get re-paid (besides selling the house).