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.

I think the problem Starlight is that it's another way the banks have duped society into accepting a way of living that is risky for clients but beneficial to the banks.

I remember wanting to buy a car with cash but the saleswoman kept trying to make me borrow money. She said 'it's cheaper'. I said no it isn't as I would be paying interest. It was absurd. She thought I would believe that buying it on a loan was going to save me money.

But somewhere along the line a lot of people started to believe the bullshit sales talk and everyone became an investor instead of a customer.

Also Starlight it worries a lot of us that the government who is actually scared of bankers will more than likely bail out the victims of the bankers vile greed because the poor bankers can't afford to do it themselves.

I think that some people have selective memories, or - as I know happens in other areas of life - have selective hearing and only hear bits of a conversation that they want to.
When I took out my first mortgage in 1990, I'd had meetings with all sorts of lenders and financial advisors. Yes, all of them were selling endowments as being the best option, but all of them - without fail - told me that the amount of money the endowment would relinquish when it matured, was reliant on the interest from investments that it earned. No-one could fail to notice that interest rates then started to come down, and down, and down, as all of our mortgage payments came down and down and down. Therefore, it should have been obvious to all mortgage holders that the interest earned by the endowment was coming down and down and down. However, that shouldn't have been a problem, as everyone had the extra cash from the fact their monthly payments were coming down, to either overpay each month, or save to pay off a lump sum later. Now, even if one person you spoke to was..er, shall we say economical with the truth, surely nobody would commit to 25years of debt mounting to several times their annual salary, without speaking to lots of people before signing up to anything?
Even if anyone was daft enough to take out a mortgage after only asking one single dodgy FA for information, then they must still have had 15 yrs of letters from their lender, as well as all there's been in the press, TV, radio, and internet, to remind them they need to do something.

We had one and tbh I just considered it to be the same as renting but without the inspections and without having to move all the time.
The £30,000 deposit would have been eaten up in removals at £1,000 a time, the bonds that we never seemed to get back no matter what and was worth it to a degree for the stability.

What will that bail out look like?

I can't see it.

Are you suggesting that people with interest only mortgage are then given free houses?

It won't happen. They'll have to sell their house as we would expect to.

We have an IO mortgage at the moment. Only way we could get on the property ladder and afford 2 x mat leaves and childcare. I return to FT work next week, before the fixed term of the mortgage ends we will have paid off other debts and our childcare bill will be significantly reduced, and then we will switch to repayment. We'll still be under 35 at that point, will hopefully have a slightly higher LTV %as well. Yes IO isn't always ideal, but can give you options. Agree that you have to understand the consequences, but not everyone on IO doesn't understand what they are doing.

I had never looked on them as an alternative to renting but i see that as a valid reason to get an IO mortgage - as long as you know you won't be in negative equity.

For the banks it's win-win - if property prices go down you still have to pay them back the shortfall. I think that's the part that so many people didn't want to hear.

Another one here who views it as cheap rent. The house won't suit me when the mortgage ends. So with the money I have saved by not paying capital I have bought a smaller house with cash that I will eventually live in. I'll sell the existing house and there is bound to be a surplus (30 year mortgage), so that will be a bonus. Not all people with IO mortgages are fools.

Negative equity doesn't just effect IO people though.

Will the market be flooded with 3 bedroom houses in a few years when people have to sell up because of shortfalls in their investments at the end of their IO mortgages?

(not a rhetorical question btw - I'm just wondering)

I use the phrase 'free money' a lot since the recession started. People seem to think you get something for nothing i.e. free money. When you spend on card not cash: that's free money. Interest only mortgages where you pay less than rent and 'own' (note the inverted commas) your own home: that's free money. TV on credit agreement, car on HP? It's all free money. When do these people think they're going to have to pay for the thing sat in front of them/they're wearing/driving/living in? WHO do they think is going to pay for it? I missed out on getting on the ladder early because I insisted on saving a 10% deposit and getting a repayment mortgage. Reading this thread there are certainly people who made the correct and considered decision to go interest only given their circumstances. However, in my experience this isn't true of everyone.

The 'free money' market has meant that the cost of living is based on it.

The availability has pushed up prices so much that people can only afford essentials by borrowing. Irresponsibility doesn't come into it.

And this mindset is encouraged from the minute the child reaches adulthood with university fees etc.

For us it isn't an investment choice. It's a no choice.

There are various situations:-

1. People who have a straight interest only mortgage. Most of those know full well it means what it says on the tin - interest only and you are not paying any capital back. They also know in the 90s there was negative equity and the 70s in various market crashes and property goes down as well as up. If they expect to own for 40 years however they probably can reasonably assume in 30 or 40 years time even with fairly low inflation they will have a bit of equity,.

1. People who took out endowment policies - I have spent 30 years recommending people do NOT take them out as they come with an element of risk. Simple products without commission are always best. We knew that 30 years ago and people had a choice and could ignore salesmen.

1. People missold in either category 1 or 2 above who can prove they were told by a salesman that interest only means you pay back capital (very hard to prove I would imagine) or that the salesman said endowments always do better than capital repayment mortgages - genuine mis-selling there.

Some people will take out interest only as the only choice but they know the risks. They expect salaries will improve, children get off their hands, inheritance come in or they can simply move in 10 years or rent it out and move in with mother if times get too dire.

IO would have made sense for me years ago when the payments would have been lower than the rent - if in 1992 I'd bought the Grade II listed cottage near Bath I was renting for the £50k my landlord sold it for, I'd have been quids in even if I'd not put a penny in an endowment or savings or whatnot.

I think

I couldn't have raised the £5k deposit you needed then though.

I just checked - my old house sold for £180k in 2008!

I am getting quite irriated by people who have brought interest only mortgages at vastly reduced costs to repayment mortages now complaining they didnt understand or its not fair.

Why isnt it fair?

I blooming well hope that the 'government' doesnt the bail them out! I brought some shares a few years ago and they didnt do well. Can I have a handout too...

How would the government bail them out?

Bail them out of what exactly?

This is nonsense.

The FCA will not bail them out. A few individuals who bought endowments and were told the wrong things by salesmen if they can prove it may have a valid misselling claim.

However for political reasons this and the last Government are bailing out home owners all the time. They have kept base rate at 0.5%. None of the free market 12% interest rates some of us have paid in our home owning lives these days.
Secondly they decided in the last budget to prop up house prices with new schemes to support the market which will make it less likely prices will drop. In the past Government have often let rates double and prices drop by large amounts.

It would certainly be wise for interest only people as soon as they can afford it to stop holidays and meals out and instead save even a little bit towards repayment and try to pay something off once a year particularly whilst interest rates are low.

LifeofPo that made me laugh out loud. I think that is all this is. No-one's getting bailed out, nothing has changed. We're just all supposed to judge each other a bit harder and feel superior.

The interest rates are very low at present. People should stop sticking their heads in the sand. They had a huge advantage and got on the housing ladder earlier than someone who was planning to take a repayment mortgage. If they brought in London they could be sitting a a fair amount of equity.

I agree with Xenia. My Dh had a endownment mortgage with a policy which was coming in at a shortfall that he brought many years ago. We changed that shortfall to the repayment element a number of years ago and now it is maturing at the end of the year we will be fine but but it hasnt just happened. We needed to take a active decision and put our hands in our pockets.

It doesnt just happen.....

yes I agree Handcream. Our endowments mature in 3 years'. we kept them going and overpaid the mortgage every month by about £300. It has left things tight but as we have an offset which I would recommend, at least we could take some back out if needed. we did take a little once to go on holiday.

what i like about the offset is it makes use of any money sitting around in other accounts linked to it.

If anything an interest only works well if you're in negative equity, long story short our house will be repossessed as I'm getting divorced and neither of us is prepared to save the investment so I feel a bit better about the fact that the banks won't win either when it all goes tits up.

I think it depends where you bought too. London prices are still going up. Within two years of buying I had enough equity in my flat to buy a flat elsewhere in the country.

I know people who were forced to sell with negative equity in the 90's. An awful situation. But even having seen that it never seemed dangerous to me to borrow 290k. My flat was large enough to have brought in 2 flatmates even if interest rates had soared, I would never have been forced to sell.