AIBU to think interest only mortgage are a bad idea

[Lloyd45]

What happens when you come to the end of your term to pay the outstanding amount and you don't have it? Are we going to have a lot of OAP's homeless?

I took out one of these in the 80s I had to take out an endowment policy at the same time

Likewise. However the bubble burst on endowments and a lot left homeowners with a deficit. We changed to a repayment mortgage on our next and subsequent properties.

We have one and pay some off the capital every month too - we will have paid it off within 13 years. In effect it's the same as a repayment mortgage but we can choose how little or how much to pay each month instead of a fixed amount.

Problems only arise when people don't think about how they're going to pay the capital.

We have one. We pay some off the capital each month and I'm hoping that by the time the endowment matures it'll be ours rather than having to pay off the mortgage

As per pps I took one out in the late 90s and had to take out an endowment policy at the same time. Technically I suspect I was mis-sold the endowment as the mortgage broker told me nobody was likely to give me a repayment mortgage due to me being a single parent (!) and only having a small deposit.

It became obvious quite a while back that the endowment wasn't going to make enough on maturity to pay off the mortgage, but it did have inclusive death and critical illness cover at a level that I just couldn't get for that price. It has also never been valued at less than I have paid into it. So I saved, and managed to make a couple of lucky? judicious? investments and paid the principal off a couple of years ago.

I still have the endowment. It's very cheap and due to mature in about 3 years time. When it does, although I won't get my original mortgage amount I will get a handy tax-free lump sum that shouldn't be too far off it and in the meantime I still have the benefit of the insurance should anything happen to me.

I think IO can be a godsend as long as you are 100% sure you understand that the principal does have to be repaid at some point and have a plan in place (however tentative) to do that.

I think that, if a lot of people are getting them, or you’re seeing a lot of ads for them, it’s a sign of a housing bubble. I saw a lot of those ads when I lived in California in the mid 00s. The bubble of course burst in 2008.

The idea of some kind of lifetime IO mortgage appeals to me, even though I've got the cash to buy outright. But spending all my money to buy outright would leave me with no savings, meaning I'd have to carry on working until 65 (not a nice thought!)

At 40 with no kids (and no intentions of ever having any) I would have nobody to leave a property to, but I do want the security of tenure that comes with being a homeowner rather than a tenant.

The thought of only having a small monthly IO payment for the rest of my life, then when I do peg out the bank gets my house makes sense to me?

It depends i think.
Having an interest only enabled my dfriend to stay in her house and raise her 2 dc. She is now 50, dc are adults. She now had 150k equity she wouldnt have had if she had rented. She is going to move and get a smaller repayment mgage so she owns something before retirement.

The thought of only having a small monthly IO payment for the rest of my life, then when I do peg out the bank gets my house makes sense to me?

The problem with that is what if the bank wants its money back before you die? The mortgage is for a set term (eg 25 years) and unless you can continually remortgage then at the end of the term you either hand over the money you owe them, or your house...

My PIL had an interest only mortgage and no endowment. They divorced and MIL is now living on a state pension, paying a mortgage and is trapped because she hasn't got enough equity to buy something else.

I would be wary of them without a sound repayment plan in place (which is separate to the actual property being mortgaged) as I think there is a perfect storm coming where people haven't saved for a pension, partly because they can't afford to because living costs are high, but partly because they've bought houses, thinking they all sell to fund retirement, and there will be a glut of houses coming to the market. Houses cannot keep increasing in price if wages are stagnating....it's starting to happen in London and the SE, there are a lot of reductions!

The selling point was that there would be enough on the policy to pay off the mortgage and also give the borrower a nice bonus.

I’ve never understood this selling point.... Surely when you’ve just paid off your mortgage you suddenly have a lot more disposable income, and don’t need an endowment windfall on top! Surely it’s better for your mortgage payments to be less, giving you more money each month when you need it, not pay more in order to get a nice bonus precisely when you don’t need one!

I think they're great for those who understand them and who know how to save and plan. They're not so great for those who don't.

I have a friend with one and their mortgage payment is about half of what a repayment mortgage would be (she told me this). As their mortgage is less she stopped working full time to be at home with the children. They can afford their IO mortgage. What they can't afford to do is overpay or save. She said to me that she knows one day they'll need to do something about it but that it was a long way off yet. It's not really when you consider how much there will be to pay and they've made no provision. I know she worries about it because she told me but I think that she thinks that one way or another it will sort itself out and all will be ok. Who knows what the future holds but I do think that many people think like this.

I think the banks need to take more responsibility and should be insisting on some kind of savings platform as part of the deal.

We have one, it's been great for us. Our LTV is about 45% so even if we don't pay a single penny off the capital (which we have, and will continue to do so), when the DCs leave home, we'll sell and buy a smaller, cheaper house outright with the equity.

It means that we can afford to bring the DCs up in a home that we wouldn't have been able to afford on a repayment mortgage but still have a plan to pay it down.

The situation an elderly couple I read about in the Guardian find themselves in is ludicrous. I have very little sympathy for them and on that occasion, don't think the bank was irresponsible. The couple said they would sell it towards the end of the term and have gone back in their word. The need to sell it and rent, if necessary subsidising their rent with the £70k equity.

We had an IO back in the 89s/90s, then bit the bullet and switched to repayment over a shorter term. A close relative still has IO, and is now stuck trying to sell for more than I think the house is worth to fund a divorce, and I think the house was used to secure business loans as well.

They aren't a bad idea as long as you understand them.

If the market is stagnant, then an IO mortgage which you choose not to overpay can be effectively a cheap rental deal. The house is owned by the bank and your "rent" is the interest payment which is much less than it would be as a normal rental.

If the market grows steadily over the course of an IO mortgage then it is possible for a couple to pay the interest on for their large family home in an expensive area for 25 years then sell, pay back the original capital and have enough equity left over to buy a cheap smaller place outright.

If you want to repay the mortgage over the course of 25 years but have a variable income (eg creative professionals, consultants etc) depending on many short term contracts with fallow periods in between, then IO is ideal as you can live frugally when income is low and make lump sum payments into the mortgage when you can.

If you are a canny investor and can identify areas of the financial markets where return on investment will be higher than your mortgage interest rate then instead of paying off the capital of the mortgage directly, you can invest the same capital-repayment money into other parts of the financial market and hopefully after 25 years you will be better off than if you used the same money to pay off capital. This can go wrong if financial markets don't produce a good return.

IO mortgages work well for a lot of people.

They go horribly wrong if taken out by idiots who don't understand what their obligations and risks are. This is true of many financial products.

I've only ever really had io. They are by far the most suitable for us, and repayment would have been a bad idea. Fluctuating income means some years I pay off large chunks, others I invest in other stuff, when on maternity leave it was no bother and we paid interest. I could repay the capital tomorrow but at the rate I have it would be foolish to. The key thing is any mortgage should suit the borrower and their circumstances. Repay,net would not have suited me at any time.

We've had an offset IO for the last 10 years and it's been brilliant. In fact we should pay off the mortgage in the next year. As it was so flexible it has enabled us to make regular over payments with the knowledge we could pause or reduce repayments if something happened. Our (very small in the beginning) savings were built up a little at a time which, as it was offset, reduced the interest. This in turn meant we paid more towards repayment. We are now at a stage where we pay no interest so every penny of our mortgage payment goes towards the capital and we'll come out with a nice savings balance.

Although we've had tight times (childcare costs were 4 times what we could pay in mortgage at one stage) we always prioritised putting what we could towards the mortgage. I think our IO worked because we went into it with the plan that we'd use it as a tool to maximise our payments rather than reduce them.

Does anyone know if you can get a fixed term interest only mortgage, say for two years? We'd like to do this so that I don't have to hurry back to FT work, but don't know if this is something you can do?

I don't think anyone has mentioned the risk of interest rates rising. IO mortgages are fine when interest rates are artificially low, but will rapidly become unaffordable when interest rates rise. People who are using IO mortgages for flexibility, i.e. paying off capital haphazardly when they can will be fine as the balance will be lower so interest rate rises won't hit them as hard. People who are in denial about interest rates and not repaying significant capital are the ones at high risk.

I work for an IFA/mortgage broker and we have enquiries almost every day from retirees looking for lifetime mortgages and equity release. Most have had an interest only mortgage for decades, have no money to pay it off and don't want to move. Endowments haven't kept up and banks appear to be chasing for the mortgage to be paid off quickly.

My IO mortgage was a lifesaver when I became a single parent. It meant I could afford to keep my house!

I paid IO while I needed to pay nursery fees. Then raised payments when just wraparound care was needed and now overpay that no childcare is required. Have also continued to pay into an endowment.

Am asset rich and cash poor at the moment but the end is in sight.

Depends on what else you're doing with the money. We invest in stuff which has a much higher yield than our mortgage rate so it makes sense.

Plus as pp have said, by the time we need to pay off our mortgage we won't need such a big house so we may well downsize anyway.

I think they're great for those who understand them and who know how to save and plan. They're not so great for those who don't

^^This. Every so often there's a story in the news about someone who says they didn't understand that the term 'interest only' only meant that they were paying the interest on their mortgage and not the capital and then are in the shit at the end of the term when the bank want all the money back, especially if they don't have enough equity to downsize, eg someone taking out a 30 year interest only mortgage in the late 1980s when prices were high and also in areas of the country where prices haven’t risen that much, might still have hardly any equity, especially if they bought an overpriced new build property so can’t downsize mortgage free in the same way that someone who bought a larger house in the south east that’s skyrocketed in value in that time would be able to.

Or like someone I know, who paid a lot of money for a big house, spent a stupid amount of money doing it up, all on an interest only mortgage, but now can’t sell it for the amount of money they need to downsize mortgage free.

They can probably currently afford the interest only part, as they are on a very low lifetime tracker, but they will come unstuck if interest rates rise, or the bank won’t let the mortgage continue at the end of the term and they still can’t sell the house unless someone with more money than sense looking for a massive house in the middle of nowhere comes along.

It worked very well for us when we had to move to the other end of the country to take care of MIL in that we took out an interest base rate + 1.1% tracker for the life of the mortgage when interest rates were 5.5%, so simply by keeping the mortgage payment the same we've been able to pay a fair chunk off over the first 10 years.

You can still get them easily for investment properties, but if you want one for a residential mortgage most lenders will require a combined income of over £100k with one partner earning at least £75k.

Many years ago a friend and I came up with a ‘great’ idea - a National Lottery mortgage. It worked like an IO mortgage. The repayment vehicle for the capital meant buying a certain number of lottery tickets per month that, on the balance of probability, would lead to a win large enough to pay off the capital. The lottery ticket purchase ended up somewhat shocking to say the least.

I never bought a lottery ticket again...

I had an interest only mortgage, taken over a period of 10 years. In the ten years I had the property it lost £10k. On the one hand I think the bank were irresponsible to lend in that way, on the other I have been able to buy another property which we now live in and the interest only property has been remortgaged onto a buy to let. So we now have an investment property which yields a reasonable return. However we were only able to do all this due a rather fortunate set of circumstances none of which could have been foreseen.
So op yanbu based on my experience.