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.

badguider
Over 25 years, prices have indeed risen.
Has everybody in your street lived there that long?
Or have any of them bought within the last ten years when LTV rose to as much as 110% on an IO basis
THOSE people are facing negative equity.

I have a client still paying off the negative equity on a house he gave up in 1995.

for some people IO will not be a problem though as they may have purchased the property when it was cheaper, the house goes up in value and they live there paying a low payment whilst there families grow up. Then there families grow up and leave home - so leaving possibly two bedrooms empty.

Now they are nearing the end of there 25 term and they can sell up and make a profit - then use that profit to buy outright a much smaller property, as they don't need a lot of space any more.

So they had cheap rent from the bank for a larger house - then buy a property with the profit and can retire in that flat/house whatever.

But if somebody bought their house in the last ten years surely their mortgage lender won't ask for the money back for another fifteen years?

Or are lenders just deciding in the middle of the loan term to demand the money back immediately?

the frist property we had was 25k - we had an interest only mortgage - that property is now worth £140£150k, I could certainly find a flat to move to worth 100k or there about, which would mean that if we had stayed int he first house with an IO we wouldn't be in trouble when 25 years was up

When we took out our first mortagage we had to have a repayment method in place (endowment) and not sure why they seemed to stop making that a requirement. It seems to have left people in a right old mess.

As soon as we realised the endowments wouldn't cover the mortgage we switched to part repayment and will be mortgage free next year. Yay! In fact the endowments haven't done so badly after all and may have a bit of cash to spend too.

Not sure I could sleep at night with an IO mortgage and I do realise that we were fortunate to be able to afford what we did.

What do people do if they can't sell off their houses to pay the mortgage?

badguider
what if they need to move for work or children or anything like that?

what if - like the bank of Ireland customers this week - the mortgage rate on the loan hikes up so you can no longer afford the repayments

very few people under the age of 40 stay in the same house for 25 years

I guess I just don't really have much experience of negative equity, I have always been in a position where I could sell and at least break even on what I borrowed (maybe because I put in a reasonable deposit to start with).

I bought when the market was highish and then married dh and had to sell after the crash but although it took 6 months I still broke even (just). I guess I have been lucky.

I have also always chosen the type of house/flat that doesn't depreciate much (old and traditional rather than newbuild).

I took out mine (with an endowment) knowing full well the risks, but given I was 25 and was in a position where my salary would definitely increase substantially, I figured that the future risk was worth it for the smaller immediate payments and getting on the housing ladder (this was '98 or '99).
The endowment payments went up a few years ago, but it is on track. When I moved house 5 years later the new part of the mortgage is repayment. The endowment matures 5 years before my current mortgage, so if a shortfall does arise I have some time (plus will still be some way off retirement). My current mortgage plus endowment payment is less than it would be if 100% of my mortgage was repayment.
I would not get an IO mortgage again but I stand by it being the right decision at that time for me.

No its only a problem when the investment vehicle (endowment, cash, some other equity plan) is at a low when the term of the mortgage is due. At that point you have to redeem the lump sum. If it's a property you can sell easily then great, if it comes at a time where house sales have slowed then it's not. It's certainly not elevated economics to think that a slump in house sales might follow a dip in equities.

Anybody would be fine in an interest only owned property, as long as they had the cash to redeem the mortgage, or it was a buy to let or a short term buy, or you don't give a shit about being able to live there after a fixed term. If its your family home then there has to be a proper means of paying back the loan, either a repayment mortgage or a shit load of cash from another source.

My brother was in negative equity following the 1993 crash for ten years : he rented out the flat and sat and waited.

Being trapped in a house you can no longer afford is utterly horrible for those of my clients it affects.

You also have the problem that people like me - who bought 17 years ago - could not get a mortgage to buy my own house today because of its increase in "value"

goodasgold
but for six years, interst only mortgages were sold with no repayment vehicle : the only way to pay off those loans was going to be rising house prices ...

We have an IO mortgage. We are well aware that it's just renting from the bank but it costs us £500 a month less than renting from a landlord, we can do what we want to the place without having to ask permission and we will get back any investments in improvements to the property when we move. We don't plan on being here long, and fully intend to take out a repayment mortgage on our next (long-term) house.

They do seem very risky as a long-term option. Our Building Society sends out regular letters reminding us that we will still have the full amount to pay at the end of our term. You'd have to be seriously stupid or in denial to not know that you will lose your house if you can't repay.

badguider - the mortgage lender won't ask for the money back until the end of the mortgage.

But if someone bought at the height of the property market and is in negative equity, then they're not in a good position if they need to sell the house for whatever reason.
Especially if they've got an IO mortgage, because at least with a repayment mortgage, the amount of money you owe the bank gradually decreases, so eventually you'll repay your way out of the negative equity.

We bought our family home 3 years ago on IO; I'm currently a SAHM while the children are small, but plan to go back to work some time soon and will start making overpayments. Our LTV is 46%, so we have a lot of equity.

I wanted to buy our 'forever home' while the children were small. We could have actually afforded to buy a small 3 bedroomed house outright, but I didn't want to live in a tiny house when we could afford to live in a far more spacious one. My view it that we're renting it from the bank for an awful lot less than a private landlord, plus we have the security that we won't be kicked out with only 2 month's notice.

Worst case scenario is that we don't pay a penny off the capital, and house prices remain exactly as they are now - if that does happen, we will sell the house when we retire and still have enough equity to buy a small house outright. It could be argued that people who rent, never save a penny in pensions or otherwise, then rely on the state for housing benefit when they retire will cost us all a lot more money...

IO mortgages have been around for a long time and they used to work effectively.
My parents took out their £4k mortgage in 1970, a huge amount for them at the time. It was an interest only mortgage backed by an endowment policy.
The endowment policy paid off the mortgage at the end of the term, with bonuses. I remember that, in the last few years of the mortgage term, they could easily have paid it off but they kept it going because otherwise they would have lost out on the final bonuses.

Talkinpeace the buyer was always made aware of that. I took a mortgage, well two in the 2000s and I knew that my loans were repayable by me.

I bought a flat with the intention of selling it, on an IO term. I absolutely understood the terms of the loan and when the lump sum would be repayable, but because it was a short term buy by us we knew that IO was cheaper for us. When we bought our 'forever home' two years later we went for a repayment mortgage.

No repayment vehicle does not mean that they are missold. I would be very surprised to see a missold mortgage post 1987. The banks paid out on those, I expect they tightened their contracts post probably 1987. If anybody has to hand a bank loan agreement I expect it would say that the borrower has to repay the lump sum on the term of the loan in very clear English.

I would be very surprised to see a missold mortgage post 1987. Not true, Good. I bought my first house in 1990 and it wasn't even hinted to me that that my endowment policy wouldn't cover the loan. (In fact, I wasn't even offered a repayment mortgage.) At that point, many people were still making ££££ in profit on their policies. I'm not sure when the misselling scandal came to light, perhaps the mid-nineties?

"It could be argued that people who rent, never save a penny in pensions or otherwise, then rely on the state for housing benefit when they retire will cost us all a lot more money..."

I'm not sure what you mean by this MsVestibule. You're making all renters sound feckless. In fact the opposite may well be true in many cases. My dh and I and 3dc rent our house. We didn't buy when we could have borrowed 5x income with an interest only mortgage as we thought it was highly irresponsible to do so. Dh currently saves £300 a month into a work pension and we are saving £500 a month to add to our house deposit. I'm not sure how renting makes will cost us all a lot more money...........

I know that misselling came to an end in about 2006. It was part of my job to correct the misselling, when my job became redundent I guess that's when Llloyds had finalized their claims. People were not making shit on their policies at that time, if they were they would not have been complaining about them.

Get your papers out and look at them, if you are promised a certain amount of money you might have been missold, if you were missold go back to your FA or lender. But I expect that in your T&A it says that you are responsible for the lump sum when the term is up. If not I will help you to claim for misselling. I would be more than happy to help if that's the case.

We have IO, we were offered a lifetime tracker with an interest rate of .5% above base rates. We'd have been idiots to turn it down.
The amount of interest we pay out is embarrassingly low for our mortgage. We think we are in a very fortunate position.

We are saving to pay back the mortgage and we are on track to do that. However we have over 50% equity and if we didn't pay back a penny more of the capital, we could sell it and buy a smaller house outright.

So I really don't think all people who bought with IO are in awful positions, or were stupid to take them out, or are expecting a bale out.
We certainly aren't, we are in a beautiful house and are in control of how and when we pay back the mortgage. We are in control, not the bank.

I just hope to christ they don't bail people out. It's not rocket science to know that if the repayment mortgage costs xxx but we'll only charge you xx means that someone is taking the xxxx.

My bil did this. Part buy part rent 100% IO mortgage. This enabled a property developer to sell a property at twice its real value and make it palatable to a hard-working but slightly gullible young man.

When he lost his job he simply stopped paying the rent, got about a year living rent free, and gladly gave it back to them. Sadly it was a housing association type partnership so johnny taxpayer and jenny charitable organisation would have lost out somewhere in the process.

How have I made all renters sound feckless? I specifically mentioned people who rent all their lives and never save a penny - you clearly don't come into that category. But even then, I haven't used the word, or implied, that people in those circumstances are feckless, so please don't put words into my mouth.

But if somebody does rent during their working years, then relies on their state pension as their sole source of income (£110 pw, depending on contributions), how are they going to continue to pay their rent? At present, I believe the state pays it through housing benefit, but happy to stand corrected.

I don't understand what the problem is? It's just a choice, and for many a forced choice if they can't afford repayments or rent (i.e. us), despite having a reasonable income.

We're in survival mode, like many others, simply focusing on having enough money at the end of the month one way or another. We can't afford pensions either.

It's all very well saying it is irresponsible, but responsibility is a luxury for many.

goodasgold Given that you dealt with misselling as part of your job, I fully concede you'll know a bit more about it than me! But I know several people who put in a successful claim for an endowment mortgage taken out in the early 90s - I believe they were given a lump sum which put them in a position as though they'd taken out a repayment mortgage. Why did they get this lump sum happen if their IO/endowment mortgage wasn't missold to them?

Good point, I only worked for one bank which had scuppered the practice, so I suppose other banks/advisors had carried on like as in your case, I can only speak for the bank which employed me. If you feel that you have a case for misselling I can tell you what to say to help your case, if you have been missold a mortgage product I'm more than happy to do that. I'm more than happy to help you.

The bank/advisor should put you back in the position you would have been if you had been sold a repayment mortgage.That is the wrong that they should put right.