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?

Interest only mortgages are great if you have a modicum of common sense.
They allow you to have a very cheap loan to live in a property which if you have extra money you can pay a chunk off the mortgage and if you don't then you just have a basic mortgage payment.

You can stay in the house for the length of the loan and not do anything just sell the property before the loan is up otherwise if you want to stay you have to make sure you have paid the mortgage off. It isn't complicated. No one is out to trick anyone. The name Interest Only mortgage says it all. You are only paying the interest on the mortgage

I must be very stupid but isn't most of the repayment at the beginning of the mortgage 'interest'?

So if you take out a normal mortgage the repayment would be 1000 a month but an interest only mortgage would be 800 a month?

But how would this payment come down if you are not knocking anything off the big sum?

(sorry again for my stupidity here)

They're a fab idea, I could never of afforded a 500k house on 20k otherwise

isn't most of the repayment at the beginning of the mortgage 'interest'

Yes, but for both interest only and repayment mortgages you pay the same each month.

For a repayment mortgage, as you pay off the capital, the amount of interest reduces, so if your mortgage is £100k, the first month you pay interest on £100k, the second month you pay interest on £99.8k in your example, and so on. After half the term you are only paying interest on £50k, so more of your payment goes off the capital and this increases every month and near the end, you don't owe very much so nearly all your payment goes off the capital.

For an interest only mortgage you pay interest on £100k every month from day 1 to the end.

Using this mortgage calculator for a £100k mortgage over 25 years with a 3% interest rate, you pay £474 pm repayment or £250 interest only. If you click on the link, it shows you how the capital reduces over time for the repayment mortgage.

Basically renting from the bank, probably afford something nicer than you could rent, may be able to get equity release later to pay off some of the capital or downsize. Ok if your pension or other savings will cover it.
Need a plan of what to do when it expires, still responsible for repairs.

We have an offset morgage. This gives loads of flexibility

This is going to be the next PPI, in a few years time. It is an absolute time bomb waiting to go off.

I'm sure that there are people who will sell their properties at the end of the term but that will increase the number of properties for sale which will then push prices down. I'm sure there will be plenty of people blaming the banks etc.

I agree this is a time bomb waiting to go off. I'm not from the UK originally and was so shocked when I found out my ILs (BIL, SIL, DH parents) ALL have IO mortgages. None of them are even attempting to pay off the capital. My MIL is now being hassled by the bank but she has no spare cash because she has spent all her money on holidays, stupid cars, and doing her weekly shop at M&S. Worrying about what people 'think' of her. If she had paid off her capital over the last 20 years she would be sitting pretty now. My IL's are professional, well paid people living financially foolish lives.

Also, don't people realise that these mortgages affect the housing market as a whole? People buying houses they actually can't afford to repay (because they somehow feel they 'deserve' to bring their children up in a home they can't afford) pushes up the housing market as a whole! If IO mortgages were wiped out the housing market would come down so everyone may be able to afford to actually buy and own their own home. Maybe the crackdown on IO is behind what is happening in London ATM?

Whilst some companies might calculate interest like Barbara ofSeville states from experience from when we did have a repayment mortgage it was calculated as interest up front. Lived in a house for a few years and when we came to sell I think we had paid of the grand total of £20.

Probably why people went on to IO mortgages. At least it was in their own hands what they paid off.

Absolutely agree with everything you have said @pandapacer.

I’m not sure it’s that much of a time bomb. As each year goes by and a load come to end of term they get dealt with - sold/changed to repayment - and are out of the system. Apparently the peak years which may be a concern are 2027/8 and 2032. But they are so far away at present anything could have happened before then. I’ve been trying to google the numbers involved but I can’t seem to find them.

Anyway, people have been saying io mortgages are a ‘time bomb’ since the credit crunch, and now we’re on 2018 nothing has happened. People like to think there will be some sort of catastrophe or crash because of it, I just don’t see that happening. They don’t represent a big enough share of the market.

Yeah but if the repayments on a mortgage at the start are mostly interest anyway so why would people opt for the Interest Only when it's such a small saving?

Like:
Mortgage Repayment: 1000 per month
Interest Only Mortgage: 800 per month

Surely you would be better off paying the repayment mortgage because the difference at the beginning of a mortgage is so little.
(again apologies for my stupidity here)

ThroughThickandThin01 I'm sure people said the same about PPI and bank charges. And many years ago endowment mortgages.

There are plenty of people who have taken out IO mortgages who have found themselves unable to remortgage or sell due to an unforeseen circumstance. So many people waiting for their fortunes to change or hoping for a miracle. I think it is being incredibly naive not to see that this will cause huge problems in the future. No doubt like PPI people will claim that they weren't warned, didn't know what they were signing up for, etc etc.

I'm not sure people are going to be able to argue that they didn't understand that the words 'interest only' meant exactly that, unless they are also going to drop themselves in it in not being honest about all the declarations in the mortgage paperwork they signed which are likely to have included statements like 'I understand the repayments will not repay the capital borrowed' and 'I have other investments or arrangements to repay'.

Or will the basis of the complaint be that the banks should have protected people from themselves in this regard?

lucky You are not being stupid, but your example numbers may not reflect the reality. Eg, I used a mortgage calculator and a realistic mortgage amount and interest rate to come up with my figures, where yours look like they were plucked out of the air but will be correct for some combination of mortgage term, amount and interest rate, but I CBA working out if it's a realistic one.

Scaling my figures up, if the repayment on a repayment basis was £1000 pm, the interest only payment would be about £530 a month, so quite a big gap. Also, depending on finances, even an extra £200 pm might make the difference between being affordable/comfortable and not.

3luckystars it isnt about a couple of hundred quid each month it is probably nearer £1000 per month more.

£250000 mortgage paid back over 25 years is £10,000 per year.
Around £800 per month on top of your interest payments.

Ok thanks for explaining that to me. When we took out our first mortgage years ago, those were the figures (roughly). The Bank Manager said it was only a small difference because at the beginning of a mortgage, it was mostly all interest that you are paying, but it could be much more of a difference for other people.
Thanks very much for your reply.

they're, yeah, quite a sophisticated product, undoubtedly not right for everyone.

like so much of housing policy this is an issue where there's tremendous clamour against state paternalism when things are going well [making sure people can borrow as much as they like for as long as they like etc] & a tremendous clamour in favour of state paternalism [making sure people don't lose their houses etc, getting taxpayers to foot the bill] when things go wrong.

in today's drama queen world we just don't seem, as a society, capable of leaving people to live with their mistakes when it comes to this kind of thing. that to me points in favour of treating people in really quite prescriptive fashion, tightly controlling what they can & can't do. anything else is unbalanced & unfair.

We had an interest only mortgage, but we had to buy an endowment to pay it off when we first took it out, this was in 1990. I remember being astounded that it wasn't a requisite these days, I found that out on MN a few years ago.

Our endowment fell short, but we'd already changed over to a repayment so the endowment was used to fund new windows, a car and a holiday.

When we were sold ours we were made to take out an endowment alongside it . I'm fairly sure we weren't alone in that and ours has served us very well paying us over the odds but we have had letters every year telling us if it's online or not so I'm afraid I have no sympathy for these people .
We could have refused to take it out but that would have been daft .

The Financial Times did a good article on IO a few months back. The number of mortgages ending in the late 2020s tranches and beyond we're fairly insignificant in volume compared to the market overall if I remember correctly. And of course not everyone in that situation will have failed to make adequate provision.

And in any case, to be a tad provocative about inter generational wealth, I personally don't feel too sad for those who have to move out of the larger than they can afford to keep houses while the rest of us flatshare and put off even having families due to space constraints.

Like a PP mentioned, it is an interesting exercise in what level of nanny state oversight one expects and prefers for the population as a whole. From a regulator perspective, I suppose they have been missold and are in a vulnerable position.

I think it depends where you are in regard to flats. We bought ours on a repayment mortgage for 87k in 2007. We now rent it out and just had it revalued at £160.

Just to say not everyone who has a IO mortgage will be downsizing.

Moving to a different area we can afford a larger house for cash.

We bought on an interest only mortgage - suited us perfectly.

When we took it out mortgages were very different -

if you overpayed on a repayment mortgage it generally only came off the mortgage account annually, interest was recalculated annually, and you often could not overpay at all without penalty.

When we overpayed on our interest only mortgage it came off the mortgage account that day and interest was recalculated that day - without any penalty if less than 10% of the original borrowing.

Interest only mortgages were great if you remembered you had to pay them off, and had the means to overpay as and when.

Interest only was a complete no-brainer for us - it saved us a lot of money. A LOT...

Nowadays mortgages are different.

I believe I was completely missold an IO mortgage by an Abby National advisor. I was on a repayment one but they convinced me to swap. I was hesitant, said I’d read bad things. He swore he’d never had anyone with an issue and the endowment would definitely pay enough. Of course I realise now he was on commission.

Two years later I’m getting letters saying your endowment isn’t projected to cover it all, etc. So I rang them up and gave them hell. Straight away they offered me all the money back plus 7% interest.

Which of course I was really pleased about. But I do think that shows they knew they were in the wrong and I do wonder if I could have got compensation as I had two years where I wasn’t paying the mortgage off in effect.....think maybe I put the refunded money into the new mortgage though.