Mad mortgage sob stories – what am I missing?

[amluuui]

I've seen a couple of slightly mad stories in the paper in the last few days, of people who have owned their homes for decades, yet have been on interest-only details. And now they're suddenly panicking about interest rates.

Like this bloke, who seems to have owned his house for over 20 years, remortgaged to pay for improvements and still has nearly half a million left to pay off.

He says: "We’ve geared our lives around the low interest rates of the past 13 years. I am the only earner in the family. If interest rates hit 6%, I’ll have to find an extra £1,480 per month – well over double what we pay now. That is totally catastrophic for our family, absolutely terrifying.”

Can anyone explain why on earth he thought this was a good idea? What would his rationale have been for doing this? (As a renter who is trying to save to buy, hell no I don't want to bail him out.)

Another woman here, who's owned her home for several decades and is on an interest-only mortgage. Why? It does seem she's had health problems, which is rubbish for her, but how was she planning to eventually pay off the mortgage?

Am still getting my head around mortgages and genuinely want to understand this, if anyone can help. I thought only landlords got interest-only deals?

In the past, for interest only mortgages, you had to have a mechanism to pay it off, eg endowment plans (which were successful for my parents who did this in the 70s, but disastrous for me in the 90s).

I guess people think that they’ll sell the property and downsize at the end of the IO mortgage term. However, 25 years passes quickly.

I agree @amluuui these people were slightly mad (or maybe not very intelligent) to bury their heads in the sand so much re paying off the capital.

Foolishness. Foolish to borrow indefinitely on interest only and foolish to assume rock bottom interest rates would last forever.

Bloody hell, maybe I'm naive, but one of the people in the first article you linked had a £950 000 mortgage. I understand that that is possible if you are very high income but wow it's a lot

Another woman here, who's owned her home for several decades and is on an interest-only mortgage. Why? It does seem she's had health problems, which is rubbish for her, but how was she planning to eventually pay off the mortgage?
If she developed health problems maybe she was making the best of a bad situation and essentially paying the bank rent to stay in her home. Then sell it later down the line.

Interest only mortgages seemed to be all the rage in the early 00s; financial advisors all seemed to promote them and loads of my friends had them (maybe they still do). They always scared me so i had a smaller house, a less lavish lifestyle, and a repayment mortgage which is now paid off. But I could v easily have been sucked in to IO.

I've noticed quite a few houses have come on the market in my village over the past week all of which were purchased pre-2008. I reckon they're all on interest only

These are extreme stories but there will be loads of people who've built what they can afford around repayments at low rates and have got used to used to them being stable for so long.

We never have stretched ourselves because I remember the time when rates went to 13 & 15% and people were literally handing their keys in at the bank. Real people I knew were losing their homes seemingly weekly, so I've always insisted on considerable slack in the budget and explained to anyone who'd listen over the last 15 years that the difference between 1 % and 2% is double!

As a result some of those who took more risk now have a lot more equity than we do, of course.

Unfortunately I think we have to see a house price crash. People will lose their homes, will go into negatuve equity, people won't be able to borrow enough to buy so prices will have to fall.

There will be strong calls for government to intervene and help mortgage payers, IMO to do so would be a disaster in artificially inflating house prices and also incredibly unfair. You'd have renter's taxes paying for owners investments.

I think if you go into an interest only deal with your eyes open and plan to sell at the end of the term (eg you downsize after kids left home) then it makes sense. But otherwise, no.

I’ve had an interest only mortgage for 20 years and I could earn more by investing the extra money. I have a lot of equity in my house and the idea was always to downsize to a smaller one which I am now doing though I will have a small repayment mortgage (15 years at 3.5% which is fine especially as I’ll pay it off before then).

I don’t have kids so it’s never been a problem - there’s no one to inherit a house.

They lived/are living a life above their means.

Now they are hoping the government will force everyone else to bail them out.

They may yet be right.

Yep, I know someone who did an interest only on a self-cert mortgage, massively overstated his income so he got a huge house and looked down his nose at my small house. Yeah, its small but its 100% mine. Dickhead.

They have three people on the breakfast news.
One looked not young. Her husband had died last year.
Do mortgages not insist you have insurance to pay out the mortgage in the case of one of the people dying?

One was a bloke with kids.

One was a woman with kids who said she'd have to find another part time job to pay the mortgage.

All terrible stories.

The example mortgage they gave was 250,000 over 25 years. And how much that'd go up.

There are no cheap houses anywhere - so much pressure on the housing system that it's completely broken.
So what's average UK wage?

The median salary for men between 22 and 29 was £26,856 in 2021, and for women £25,115.

So 10X median wage thereabouts. For a house.

In February to April 2023, 24.64 million people were employed on a full-time basis while 8.45 million were employed on a part-time basis.

The banks have said they have really stress tested every bit of lending so everyone should be fine.
But electricity and food etc are all dearer, but no one perhaps included that in the stress testing for lending.

Due to the mega-low (insanely) interest rates for such a long time we have got used to borrowing money like water. Government included.

The system needs sorting out which will hurt.

Endowment mortgages were all the rage @Coffeeandcards and they were interest only. But then there was a lot of publicity about how they shouldn’t have been so widely sold ( Endowment Mortgage Scandal).

At the end of the day it’s buyer beware with house buying isn’t it? If you take on an interest only mortgage you have to think about how you will eventually pay it off. If you don’t, who is to blame but yourself?

As PP have already said: poor advice, poor decisions, head in the sand etc etc.

I have spoken to a couple of people over the years who are like this or have no pension (another thread) and their answer has always been that equity in the house will cover it. Seems daft to me as what happens if there is no equity, where will you live when you sell etc?

With regards to interest only mortgages and endowment policies, I was sold one of those in the 80's.
Sounded great (too good to be true in fact) that at the end of the term your mortgage would be paid off and you would also be left with a huge lump sum.
Of course it soon went sour and by the early 90's we all knew it had gone wrong.
I moved house at the same time but seeing what was happening, I took out a new (repayment) mortgage and ignored the (badly performing) endowment policy. By making overpayments I got on top of the mortgage and as a result of the missselling scandal I received a decent payout for the endowment. Together this meant my mortgage was paid off very early but contemporaries in the same situation took no action and were paying off their mortgage for years after the initial 25yr term (one never did it, kept adding to the mortgage and eventually walked away a couple of years ago with nothing to their name).

I hate it when the media use stories like this because it distorts the issue

For every person who has made very poor financial decisions or based their life on exceptionally low interest rates so lived beyond their means, their are half a dozen others who have done all the 'right' things but still struggle

They've had their cake, and eaten it really - we had an interest-only mortgage but also had repayment vehicles. when we did improvements we did them with a capital and interest mortgage. and as we could see interest rates weren't going to stay at the low level forever, last time we fixed it for 5 years and have been paying it as 5% any way to try and clear it sooner? but also knowing rates we very likely to be higher, as felt Brexit would crash the economy. but we also only borrowed 1/2 of what we could as wanted a life as well. We've just under two years on a fix left and hopefully by then we can reduce further.

But so many people maxed out what they could have and then to have interest only with no repayment vehicle is pure madness

Yes, my first house was on an interest only mortgage (at 9%!) with an endowment policy.

We knew very early on that the endowment wasn't going to repay the mortgage and received very regular letters from the comlany to that effect (often printed in red!).

We started making payments to capital as well as interest. The policies didn't perform as well as forecast when they were sold (because interest rates/return on investments fell) but they were still decent investments in the market of the time and it made a nice payout when it matured.

I knew someone in this situation. Her husband buggered off with another woman leaving her with no option but to go interest only in order to keep the roof of a small house over the heads of herself and her three school aged children. She had to work all hours to even manage this until the children left home. She was able to downsize to a smaller place in a cheaper area as luckily equity had built up in the house. If this situation happened now she would be in trouble.
It's easy to judge, but people can end up in precarious situations and do what they can to survive- none of us can predict the future in terms of our health etc.

It’s entitled people who are upset that they are not getting their own way. I own my home and have a mortgage but I was smart enough to understand that the cost of living can rise so I budgeted accordingly.

These people wanted to stretch themselves to a point where it wasn’t sustainable. They have been living on borrowed time and the time is up. It’s a hard lesson to learn but at least they know it now.

I agree op - typical guardian article which is entirely out of touch with how most people live. Someone in the article seems to have taken out a £950,000 variable rate mortgage and didn’t plan for interest rates to go up. Baffling.

We bought in 2008/2009? The stories at the time were interest rates couldn't possibly stay that low, and we took note of the mortgage calculators that said, your repayments will be X but remember if interest rates go up to 6/7% they will be Y, and we set our budget accordingly.

At the point I bought my house, interest only mortgages were being handed out ten a penny and it was an easy way to get on the ladder.

I, like many, had no actual back up plan to pay the mortgage off, but didn't expect to end up in the position to need to.

As it happened, when I sold 3 years ago I got out with a fantastic return on 17 odd years interest only payments.

But these people knew they faced this (just like I was very aware!), and they've been ignoring it.

After the scandals of endowments in the 90s, I am amazed anyone has interest only mortgages

Of course there are extremes of people who have made bad decisions based on the rates being low, but I suspect the majority who will struggle didn't see them rising as quickly and as fast as they have. When we got ours the mortgage advisor said to stress test up to 5 and choose something affordable within that, we thankfully made a lot of concessions to get as cheap a property as we could, but it'll still be a challenge in conjunction with the rising cost of everything else and stagnation and relative fall of public sector wages.