People with interest only mortgages - do they really not realise?

[minibmw2010]

Have read and heard several stories on the news today where they're saying many people with interest only mortgages either don't know what will happen at the end of the term (or they'll owe a huge sum) or haven't made provision.

Anyone with an interest only mortgage in that boat? I'm genuinely curious as it was heavily emphasised to me when I bought first what would happen.

Agree with those who say there is sneering. I get from friends too - sort of 'gosh, how awful'. As I said upthread, our house has already increased by £100K since we started buying it and the area we live is highly unlikely to go down.

No sneering here as had IO myself (now almost paid off)

• was hoping for a discussion from someone more knowledgable than I am. Im interested in how the economic conditions would make house prices triple in 15 years.. genuine non sneering question ? .

I think the simple answer is we do not know if prices woudl triple.
In the 70s which I remember (just) there were 2 years of inflation (England was on its knees) of 18%, 22% and 20% so everything went up 60% after a property crash. The whole country had very high inflation. It was dreadful. People's savings were almost wiped out. It must have benefited some people who had bought before the inflation years though.

There have been other times after that when prices rose. The price of my house would have risen from 97 to about 2002 (more than doubled, possibly trebled). I don't think any of us can know if the UK will move back to a period of very high inflation but the Budget which in effect introduced measures to prop house prices up and the political decision to keep interests rates so very very very low suggests a property crash is less likely than feared.

We are in a double not a triple dip recession. Whether we will be in the doldrums like Japan for 10 - 15 years no one really knows.

However I am pretty sure if people buy now in their 20s and hold property for 40 years they will probably find over time they do pretty well out of it and most importantly have a stable home rather than relying on landlords.

Ah - Ok. < puts away calculator>

I'm not sneering at people with IO mortgages. I had one on my first flat in London. I bought for £160k and sold for £210k so it worked out ok. I wouldn't have one now because I now live in an area where I don't think property will rise much, plus if I can afford repayment now it seems pointless to have IO.

One question I do have for people who know lots about mortgages on this thread: a few people are talking about when their mortgage is finished, in 10 years, 15 years whatever. Does no one else take out their mortgage on a 2/3/5 year deal and then change to a better deal when the intro offer is finished? I was under the impression that this was the best thing to do.

Akiss I think many people were caught out in that they tried to remortgage but were unable to after lenders tightened their lending criteria up.So they had a 4 year fixed rate but then were struggling to get a new deal especially if they has taken on a high LTV or used the "equity" in their property to fund their lifestyle ie increased their loan but found they were in negative equity. I dont profess to know much about mortgages though.

AKiss, never had to look at it in that much detail. Mine is 2.6% above base rate. In the old days I think we just took out one that tracked base rate on a repayment basis may be because I'm a risk taker or I'd rather just follow base rate by and large.

I mentioned a 10 year mortgage - I meant the term. When we moved here we decided we could afford to repay over 10 not 25 years and wanted that financial discipline. That is rare and certainly most younger people cannot afford it although it can pay off if you can afford it. I am paying mine (divorce debt) off fairly quickly at the moment whilst interest rates are low.

DH and I are both self employed.

We bought this house with one of the very, very first buy to let mortgages (November 1996 : according to stats we were in the first 200 ...) which meant we rented out our old house.
Mortgage was with RBS

When the DCs were no longer able to fit on the back seat of an MGB we borrowed extra to buy a car.
As an accountant I'd always suppressed both our net incomes for tax purposes, so our income was within £7 of the multiple required for the loan.
RBS said yes within an hour.
I called them to check .... "we know that the self employed fiddle their figures so we take half way between turnover and profit to work with"
BUT
their fee was based on the amount advanced - so they had a vested interest in making that be as high as possible.

I'm happy though because its 0.55% above base till the mortgage ends in two years :-)

We went into IO with out eyes open, knowing we wanted children and would have to pay childcare.

We started paying against the principal as soon as we could after the penalty period had expired, setting aside money whenever we could -we did have an ISA but the state of the stock market meant it was a joke in terms of paying off the mortgage so we left it.

Had things not changed we'd have paid off about 5 years early - as it was, we inherited when MIL died and paid off halfway through the term.

I don't understand the whole idea of a house as a financial investment, we bought ours knowing we wanted to raise a family in it (and so chose one with enough bedrooms). We have no intention of moving unless we win the Lottery, or unless we absolutely have to because of work.

And now Talk I understand that is not possible as they changed the law and they want tax returns, cost of your child care, gym membership monthly cost (even for the employed) because the law now requires that I think for the self employed or rules made under the abolition of self certification.

Some people have a house as an income stream. Most people buy one house to live in and do not plan to see so increases in its value do not mean much (except those of us paying husbands on divorce find increases in prices means we pay out more)

Xenia
Do not believe what you read in the press.
Self certification is alive and well : I did a mortgage reference for a client a couple of weeks back that specifically asked for "estimated earnings in the curent tax year" : so I could write whatever I liked .....
Then again being my client I gave him a harder time about repaying it than any broker ever would!

I might be wrong but in late 2011 the FSA as it then was was consulting on abolishing them by law and I thought that had happened. Also if a bank were requiring an accountant to confirm earnings then surely that means it is therefore not a self certified as instead they are asking others like accountants to certify the amounts? Anyway I cannot find regulations on it so may be it was never brought in as a law change.

Our interest only mortgage is over a period of 30 years. I'm not worried about the end because we will sell it or remortgage using the equity. Honestly, it's SO unlikely that in 30 years we will have NO equity...it's not a irresponsible choice if you know what you are doing.

Friends of ours bought their house in London in 2001 for £450k, IO mortgage. They have just sold it for £1.2m. The strategy has worked for them, I don't think there's a black and white answer to this.

We will likely sell and expatriate in the next few years lifeofpo. Also we haven't lived there for 5 years, it's now rented.

Xenia, they weren't actually abolished but effectively abolished because from next April (2014): 1. Mortgage applicants must satisfy lenders that they can repay a mortgage, and lenders must check these assurances; 2. Interest-only mortgage customers must prove they are relying on more than just rising house prices to repay a home loan; 3. "mortgage prisoners" on old deals will be given some leeway to remortgage, even if they would normally fall foul of the new rules.

However, those with an annual income of more than £300,000 or with more than £3m in assets will face a less stringent affordability check which means that the "old rules" will continue to apply to about 0.5% of the population. Dh and I are both self employed and without this proviso, would be stuffed. We expect when we next buy that we would probably have to use a specialist broker.

Thanks, novice. That (1) - "must check the assurances" is exactly what I was after.

I suppose to prove you have income over £300k, though you must provide evidence so therefore the change means for everyone there will be no self certification.

But surely one of the problems with IO is that although you will make a profit on your home, if you want to buy an equivalent home you won't be able to afford it. In the meantime you've paid thousands in interest.

So a 250k IO that's worth 500k, when it's sold you get to keep 250k but it is only worth half what you paid for it if used for property.

It's fine to say you are going to downsize but it is a compromise over paying off the capital. Each bit of capital that you pay off is like investing money that will increase in value with the property.

I think the next generation will suffer more than any for our easy money attitude.

Xenia is right they are on their way out and also if people want to remortgage to better rates etc they will be re assessed and may not meet the criteria This has recently happened to a friend of mine Nightmare!

Noddy...do you remember all the tv adverts a few years ago for remortgaging? Seems like it was every other ad at one time.
Seems eons ago now....