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Original poster

Interest only mortgages - are you concerned?

28 replies

CookieDoughKid · 21/02/2014 19:03

Took out a huge mortgage (mortgage which is a staggering x5 single wage earnings on interest-free mortgage loan!!) 5 years ago to buy my family home. And during that time, was happy that interest rates remained low. During that time, I always intended to overpay or set aside some money but never got round to doing that. Instead, I used any spare money to renovate the home. It meant that during those 5 years, I only ever paid the interest and not the capitol off. I now know that I'll never be in a position to pay off the capital with such a high mortgage.

I feel that it is a matter of time interest rates will go up. Even just a 0.25 rise will mean hundreds of pounds increase in monthly payments and I'm worried about affordability. I am cashing in from the renovations I made to the house and downsizing to a more affordable house (on repayment only - yay!!). However, I could continue 'coasting' along and being blaise about my state of affairs.

Is anyone else out there in a similar position? What are you intending to do about it and are you worried?

OP posts:
TalkinPeace · 21/02/2014 19:46

that is why I wrote my spreadsheet (thread on money matters) to highlight the problem to people

Original poster
CookieDoughKid · 21/02/2014 19:58

Thanks Peace. I'll take a look over now.

OP posts:
Flossiechops · 21/02/2014 20:06

Crikey are you me???! We have done the exact same. Over stretched 5 yrs ago to buy a house, the interest rate has just gone up as we have finished the 5 yr deal and it's a stretch. We sold 3 wks ago and are planning to buy a house at least 100k less than we have sold for. We have been very fortunate as it's gone up in value quite considerably - 100k and we aren't in London. We intend to reduce our mortgage term too to make up for the wasted 5 yrs of no capital repayment.

Flossiechops · 21/02/2014 20:09

Funnily enough we took on 130k more than our previous mortgage to buy this house. The Bank didn't even ask for proof of income despite this, nor did they ask for proof of investments to cover the loan. Very scary and in just so relieved we've come out unscathed.

Bowlersarm · 21/02/2014 20:14

At least you've realised now, and can do something about it. Interest rates aren't going anywhere until next Spring.

We took out our massive io mortgage 6 years ago. At an amazing rate. We have been overpaying by £1300 every month, and knocked £00000's off it.

We don't have a repayment vehicle in place. If we havent paid it off and need to sell, we'll be able to buy a smaller property outright.

cooper44 · 21/02/2014 20:18

Cookie I did a very similar thing - huge mortgage, only my income and I have just downsized - or at least I am in the process of doing it - because the mortgage size was just a constant concern. And yes small interest rises will make a massive difference. I was in London so could sell up and downsize out of London pretty easily. My mortgage was actually a lot more than x5, masses more, but I knew that I was really just going to do it up and it certainly was never a forever house etc. I would never have an interest only mortgage again - it was just a means to an end.

WhatWillSantaBring · 21/02/2014 20:28

We did an io mortgage last year, in full knowledge of the risks. However, we haven't massivley overstretched - instead, it was a deliberate 5 year strategy to cope with DH leaving his job and changing careers, me going on maternity leave and two sets of childcare costs. The plan is that in five years, when DC2 starts school, the extra £800 month that we don't have to pay in childcare will cover the difference between io and repayment.

And hopefully DH will have been promoted in that time too. And I'll be back at work.

Failing that, who knows....!! It worries me but it has been such a relief in the past year as we have had so much uncertainty with jobs and babies, that the short term security has been worth it.

MyCatIsFat · 21/02/2014 20:36

So do you think that the ability to obtain a very large interest only mortgages probably significantly contributed to the current over-heating of the property market?

It's not something i had seriously thought about before, but as the rules on IO are being tightened up from April, can we expect that to have some effect on property prices?

TalkinPeace · 21/02/2014 21:37

mycatisfat
Of course it did

when I bought my first house, endowment mortgages had just been invented and it was strictly still 3 plus 1 income multiples

when I bought my 2nd house we were sold another "low cost endowment" ( what an effing nightmare they have turned out to be )

when we bought this house we had one of the very very first BTL mortgages
and I was allowed to sign off my own income

when I realised in 2004 that the eejit Broon had relaxed the rules so that people could take out interest only mortgages without a capital repayment vehicle I knew we were in a bubble and started to retrench

hence why my mortgage wil be fully paid off later this year

moron Gideon Wallpaper's attempts to "support the housing market" are just reinflating the bubble and should be stopped.

We need a major shakeout of the housing market to drop prices back to affordability (and yes, I'll suffer but still think its right)

Bowlersarm · 21/02/2014 21:38

I can't see any major shake up any time soon. Not in the south east, anyway.

MyCatIsFat · 21/02/2014 22:11

I must be naive because it never occurred to me that people would take out massive IO mortgages with no plan to pay back any of the capital Blush, probably because I got my first few mortgages back in the Dark Ages under the strict 3 x salary and 'how many years have you been saving with us' rules.

I suppose this mad dash to buy in the next few weeks before the IO rules are tightened in April is similar to the end of the double tax relief - which also led to a house price boom - followed by a crash.

Are we likely to see a crash in May 14 or when interst rates go up in spring 15?

HaveToWearHeels · 21/02/2014 22:17

Me neither *Bowlersarm" and I can't see interests rates going up until next spring looking as the minutes from the Monetary Policy Committee as you have also stated above.

We currently have a large interest only mortgage, however we also have other properties and shares/investments as a payment vehicle.

noddyholder · 21/02/2014 22:24

I think when rates go up it will be gradual but relentless. Starting softly next spring probably. I do think they are too low and have contributed to this current bubble. I am hoping they rise considerably tbh as the market needs to cool

Original poster
CookieDoughKid · 22/02/2014 07:06

Really interesting thread everyone. Thanks for your responses. I think there are lots of people out there in a similar position to me with huge mortgages and I hope they are aware of the situation and at least have a plan in place.

OP posts:
SaltySeaBird · 22/02/2014 07:20

We have an interest only mortgage as that was the only way we could afford to buy and renovate our house (brought at the peak of the bubble).

Thanks to those renovations we aren't in negative equity and have been saving each month into interest accounts with a higher interest rate than the interest on our mortgage (just). We've now got enough capital to pay off all bar 90k of our mortgage, although as that money is in savings, if we have DC2 we may use a bit so I can be a SAHM for a few years. It's also given us flexibility so if some months we don't save, that fine, we aren't tied to a large monthly payment.

Not everyone who has / took out an interest only mortgage was an idiot which is often the general consensus.

peggyundercrackers · 22/02/2014 07:29

i dont think interest rates will go up next spring. the govt. and consumers have too much debt - they, the govt, and a lot of consumers will not be able to afford to service it if rates go up... the govt has amounted a massive debt of 1,412bn or 90.3% of GDP - i cant imagine what the repyments are for that kind of debt but if interest rates doubled can you imagine how much additional cash the govt. would need to find to service its debt? can the taxpayer afford all this extra cash? i think not...

MoreBeta · 22/02/2014 07:36

Thinking about the last 10 years - many people have managed to maintain a standard of living because their mortgage payments have gone down rather than their real wage going up. We are really at the limit now as rates cannot fall much further.

The more likely reason that interest rates will rise is capital rules for banks are being tightened. That means they will have less money to lend out next year. That means less competition in the mortgage market.

If there was a really serious crunch in bank capital they would raise the interest they charge over the rate they pay the Bank of England. Rates would go up even if the Bank of England kept the rate it lends to banks the same.

Add that to a shock tightening of money market interest rates if say there was a serious emerging markets crisis or a large fall in the stock market stock that dented financial confidence and it could create a sharp rise in interest rates on its own.an surprise.

If you remember what happened just after the financial crisis started there was a shortage of mortgage availability. People were stuck with the SVR rates when they came off their introductory deals and could not remortgage. That could happen again next year and there is nothing Government or Bank of England could do to make banks lend. If people started defaulting on mortgages as a result the banks would become even less willing to lend and we could end up in the same spiral as in the financial crisis.

In the end, the market will set interest rates no matter what the authorities wish for. A shock rise in interest rates is more likely than a planned one and it is shock rises in interest rates that always cause the most pain as no one can plan for them and they happen suddenly before any can react.

VeryStressedMum · 22/02/2014 07:50

I have to say that I wouldn't have taken an io mortgage, we didn't stretch ourselves, what the bank actually were willing to lend us was madness. Looking back I'm glad we didn't take out a bigger mortgage than we did and we've always repaid capital. I come from the school of thought that you don't go io unless you're selling.
That's not to say I disagree with people taking io mortgages, from here it shows there it can be beneficial, I probably only think this way as my father was rubbish with money and had houses repossesed so for me paying the mortgage off is a priority.
The only person I know on io had to switch to it as their mortgage was too large and they couldn't afford it on repayment and now has to sell.

JillJ72 · 22/02/2014 07:55

So, if free-floating on SVR (a good few % points above the BoE base rate), at what point would you suggest piggybacking a formal rate? How to know when to make that move - or is SVR reasonable in the long term when compared to rates going up and down?

We have saved paying "needlessly" over the past few years by being on SVR as opposed to the rates on offer - we bought end 2007 just before the market crashed. Our rate expired in 2009 and at that point we were shy of negative equity. We could get on a rate but the offers were unattractive compared to SVR, so we have stuck with SVR and been overpaying.

The local housing market has gone silly, houses are selling so fast and prices are back to 2007 levels. Is it time to start researching rates to see if there's a deal available that may mitigate the SVR run before interest rates rise....

noddyholder · 22/02/2014 08:39

Martin wheel was on the news this week saying they will rise next spring not they might.

LadyMacmuff · 22/02/2014 08:54

We've just remortgaged and taken a five year fixed alongside our astonishingly low existing VR at a fixed % above base. Depending on your view of where rates will go there are still some good deals to be had. Hedging our bets really, and happy to have some certainty over interest payments - took a view it was worth paying for. Of course - in five years we may need to do it all again but hoping to be able to pay off a chunk by then..

LadyMacmuff · 22/02/2014 08:58

sorry should have said all that is IO, monthly repayment wouldn't suit us

noddyholder · 22/02/2014 08:59

I think it depends on your personal circumstances what you hope will happen. I have savings so rates can't rise fast enough for me but if I had a mortgage I would want them low. I think they will rise next year as te banks do need to hold capital and. QE can't go on forever. Fixing now is a good idea although rates aren't alwys linked to the bank of England but LIBOR It's a waiting game

TalkinPeace · 22/02/2014 12:00

FWIW my mortgage is IO with no official repayment vehicle
BUT
I have the polished versions of my spreadsheets on my PC that tell me my exact balance (to the penny, which always freaks the bank out when I phone them)
and it will be at zero on October 22nd this year.

noddyholder · 22/02/2014 13:48

Being mortgage free is a huge joy Smile

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