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.

IO mortgages are fine if your eyes are wide open - we have one without an endowment and the paperwork came with so many warnings I don't understand people who say they didn't know what they were getting into. In my case my pay is heavily reliant on bonus (approx 40% of total comp) so we wanted to keep monthly outgoings low. When the bonus comes in, pretty much all of it goes as a lump sum towards paying off the mortgage - in this way we end up paying more of the capital than we would have done with a repayment mortgage, but with flexibility in case there's a bad year.

in other countries there ar not as many unscrupelous/accidental/clueless landlords.
in germany for example most rental properties are owned by companies and tennancies are much more secure (for both sides) and much more regulated. + banks there do not lend so easily to people.

I can see some bail out plan ahead like mis-selling. That will be the way it will be dealt with I think.

we have a repayment mortgage, over the shortest period we reckoned we could pay it off. this is because we know that we are not responsible enough to save as we go along.

however, i would rather io than rent anyday

There shouldn't be a bail out. If you spend instead of save on a IO mortgage, you are deluding yourself.

I have IO, we are on 0.95% above Bank of England base rated and have planned to pay it off very soon. However deposit accounts are higher than what we paying, so our deposits are subsidising our income.

I meet people about once a month who are earning £20k and have £50k on credit card and an IO mortgage. It is very sad how these things can get out of control.

The endowment misselling scandal has been and gone. There was no government bail out, the banks that missold put customers back into the position they would have been in if they had taken out a repayment mortgage at the same time.

This taught the banks not to missell loony mortgages. It was all 'buyer beware' in the early 2000s. If you have an IO mortgage taken out in this century your loan agreement will clearly state that you are responsible for repaying the lump sum at the end of the fixed term.

IO mortgages are good for people who will be moving and selling in a relatively short period. At the beginning of a repayment mortgage most of the payments are towards interest. If you are planning on buying somewhere and then moving within 3 years IO is cheaper. If it's not your family home it could work too, the rent earned could be a lot higher than the interest only repayment creating an income for investing, or to cover periods of lower income like ML.

The only problem is if you invest in equities to pay off an IO loan and a sharp fall in equity prices coincides with a reduction in lending (2008) so you have an asset that is difficult to sell and a repayment vehicle that is valued at its lowest point.

The mortgages are time sensitive. Nobody can safely say that when their mortgage comes to term their investments will cover it, just like we can't say how much annuity our pensions will buy.

I don't think there should be any bail-out as it has been very widely known for many years that there is a risk with these mortgages. In fact I will go further and say I will be really angry if I am expected to contribute to bailing folk out due to ignorance or irresponsibility.

We took an IO mortgage and endowment policy out in the mid-80s as it was the only way we could afford to get onto the housing ladder. In the 90s we moved house and it became clear that the policy might not pay the full balance so we switched to repayment. That was 15 years ago so this information is nothing new.

Some people are buying properties they could not otherwise afford by using IO mortgages. If 2 people are buying houses, one buys sensibly with a repayment mortgage, the second buys a larger, more expensive house on interest only then why should we, as a society, be expected to bail out / contribute to the profits of the second. They have had the benefit of living in a nice home and will, presumably, over 25 years, have made some profit. A bailout is a stupid idea.

Just reading on statistic about Critical Illness cover only 35% have it the country.

Only 20% of women even have it.

What happens if you or your DP is really sick?

A friend of mine has an interest only mortgage with no way of paying it off in a few years. They are already looking at claiming mis-selling in the hope that at the end of the mortgage they will get to keep the house.

I've only read pages 1,2 and 5, so apologies if this point has already been made, but is it not the case that 90% of borrowers with IO mortgages are deemed "on top" of their endowment policies? That it is only 10% of IO borrowers are heading for a projected shortfall? At least that's what they said on The Today Programme this morning. That seems to suggest to me that 9 out of 10 people are sufficiently financially literate and have had no problems at all with "getting" the concept of what an IO mortgage entails, and hopefully even use it to their advantage. That makes me think that the question of a bail-out just cannot be seriously considered. If 9 out of 10 get it, it can't be rocket science, surely?

I'm happy to tell you what I would do in your circumstances, but I'm not a licensed financial advisor. So it would be 'if I were you' as a mate rather than professional advice.

We took out an interest-only mortgage on the premise that it's relative value would be eroded by house-price inflation, and when we came to the end of it (or hit retirement/kids left home) we'd simply downsize - our LTV is about 50% and its quite a big house.

Of course that hasn't happened and we've now got 12 years left, should be able to pay it off with ISA investments and a good following wind...

We have a part interest only mortgage, we are overpaying to cover the amount that we would need for a repayment mortgage. When we pay off the repayment section 5 years early we will then continue to overpay until the interest only section is gone. At the time it was the only way we could afford the house.

Nobody ever checked we had a payment plan.

Couldn't agree more noisytoys. When we are eventually able to buy - who knows when, it has taken us a year to save £5,000 - we will be buying a small house for us and 2DDs or even a flat. And once we do buy, that will be it, a house is a home and all that.

I have an IO with 2 endowments on it. Taken out in 1993 and 1998. Converted to part repayment a while ago but will still have a shortfall of around£13000 when mortgage ends in 3 years time.

I am seeking financial advice but expect to just take out another mortgage at the end of the current term. I luckily have alot of equity in the property. We plan to move in around a year anyway so will get a new mortgage then anyway.

I got the endowment at a time when they were really being pushed. Made sense at the time when there were high interest rates. I was given a lump sum for miselling and paid some of it off with that.

I don't expect a bailout. Not sure why anyone would think that likely.

From your figures Schmaltzing, I would continue the endowment, but if your finances allow convert the whole of the mortgage to repayment. In an ideal world, then you have all outcomes covered and get to keep your home.

I expect that if you cash in your endowment now you would be hit with penalties.

I think its great that your mortgage is so low compared with the value of your home, it could be a hell of a lot worse.

As a mate I would say, convert all of your mortgage to repayment and keep your endowment. If you are near retirement age or on a very restricted income it may not be possible, and then I would try to be aware that it would be good to save in cash as much as possible to meet any potential shortfall of the endowment. There might not be a shortfall, keep your eye on the statements.

If you sell up anytime now between the 2021 maturity, you can pay off that mortgage with the proceeds of your house, continue the policy that matures in 2021.

I don't know how old you are or what your income is. These would both be factors that could make a big difference. Unfortunately the younger and richer you are the better, but nobody needs to be told that.

What I would do personally if I was on a restricted income or approaching retirement age would be to ensure the roof over my head and clear all debts.

Sorry if my advice seems really general, its just what I would do, to protect my home and my family.

I guess interest only mortgages have their place if people go into it with their eyes wide open and have a payment plan, but I've heard plenty of bad stories in the media about them.

I know a few couples who started out with repayment mortagages, but switched to interest only when circumstances changed. Presumably most, if not all of them, plan to switch back when circumstances allow.

The worst one I came across was a young woman whose payment plan consisted of counting on her parents to die and leave her lots of money to cover the capital on the mortgage before the end of the mortgage term

I also don't think that there should be a bail-out - AFAIK, the risks of interest only mortgages have been widely known and highlighted for many years.

Until 1979, mortgages could only be offered to people who had an existing relationship with the lender and lending ratios were tightly controlled.

In 1981, Margaret Thatcher and Nigel Lawson deregulated the market to allow fresh sales of mortgages.

With the "Big Bang" in the early 1980's mortgages other than repayment were permitted, and with interest and return rates at 8% a year and companies taking pension holidays and huge up front fees for salesmen,
endowment mortgages rapidly took off and created a housing bubble

• lenders eased multiples to allow greater up front fees.

The party went on even as rates began to fall.

Then in 2004, Gordon Brown relaxed the rules to allow interest only mortgages with no repayment vehicle
and the bubble inflated as people looked at what they were servicing on the debt rather than what the true value of the debt was.

House prices rose because the fees made by everybody involved in the sales side were front loaded to the value of the house.
THe sooner borowing controls are brought back in to deflate the market the better.
and yes, a lot of current "owners" will discover they were actually renting.

PS I have an IO that ends in two years : but the balance will be nil by then because I understand the maths ... see link on site stuff

www.mumsnet.com/Talk/site_stuff/1715581-Cost-of-credit-cards-and-mortgages-the-spreadsheets?msgid=38832415#38832415

ShadowStorm when we took out our IO mortgage (it is fine for us as per my earlier post) the mortgage providers weren't interested in how we would be paying it back. We told them 'inheritance' as one of our methods of paying it back and that was absolutely fine as far as mortgage company was concerned. They needed no proof or figures, just our word

Surely with an IO mortgage if you need to pay it back you just sell the house and rent somewhere to live?

They shouldn't really be in negative equity if the bank has set a reasonable loan to value ratio. If they are in negative equity then it might be a shared responsibility between the bank and owner... I mean, after 20-25years surely the value of any property should have increased? (unless flooding or subsidence or another 'big' issue). Certainly in the city I live in no property has gone down in value over the last 25years taken as a whole (prices now are about equal to 2003).