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?

A few people I know get interest only mortgages as that’s all they can afford and they want to buy a property. The lenders lend it to them and they don’t look to the future. Slightly different if you got an endowment policy which matures to make enough to pay off the mortgage when it matures.

One hugely expensive house in my parents street is being sold because apparently they can’t keep up mortgage payments and CoL increases.

Smart people are also NDNs etc who buy cheaper, extend when they have the money if needed but don’t stretch themselves or factor in a plan B if need be.

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.

...And smaller houses aren't much cheaper - and in many cases are more expensive - than larger ones: this is one of the reasons why there are so many widows living alone in 3-bedroomed houses. The only way you can cash in on the value of a house is to move to an area where prices are lower, which usually means moving away from family & friends.

Do mortgages not insist you have insurance to pay out the mortgage in the case of one of the people dying?

No, they know they'll be repaid from the sale of the house. They do usually advise people to take insurance but it's the borrower's risk if they don't.

They used to insist that you took their life insurance but they're not allowed to do that any more.

Most mortgages only allow you to overpay by 10% per year yeah.

Maybe some allow more?
We’ve only ever been allowed to overpay maximum 10% of the mortgage a year without incurring any financial penalties

This could work out good int he long run for first time buyers and stop making homes so affordable. Cheaper prices for all maybe? House prices should fall as people realise over stretching theirselves to borrow is a bit silly.

This has partly been caused by the government bailing people out. People need to take responsibility themselves. I would be so pissed off if my taxes went to people who have yet again been utterly foolish.

But it’s still better to pay IO mortgage than renting!!
To start with, I wouldn’t be surprised if their payments were lower than the rent!
And they would have a stability you don’t have with renting.

I totally understand that, and very much feel for anyone in that position. I was commenting on the specific case of the bloke quoted in the OP though, who would have taken out his original mortgage in times of relatively low cost housing but high interest payments. He’s got no excuse!

And the potential to build up equity.

These people aren’t the norm and I don’t have a huge amount of sympathy. But it was reasonable to stress test your affordability to current rates + 3% a few years ago not 6% + 3% + rocketing food and energy and transport and childcare prices, especially when the BOE themselves were forecasting rates would remain low for the long term. These are the people I feel for.

Fixed rate mortgages tend to be 10% over payments without penalty. Our tracker (from 2007) has no restrictions at all.

You might well have been able to afford increase in interest rates when considering affordability but everything has gone up meaning you have less contingency.

I think many people have been incredibly short sighted in the mortgages they have taken out, but I'm also shocked that lenders have allowed people to take out interest only mortgages without a means of paying them off at the end of the term.

When we took out our last mortgage in the 1980s, the mortgage rate rose quickly while we were in the process of selling our flat and buying the house, and had risen to 16% when we exchanged contracts; the mortgage rate then increased briefly to 18% before we completed. It was a struggle to afford the repayments initially, and we were spending around 65% of our net income each month on the mortgage. But we went into it with our eyes open and being aware that interest rates could go up even more, and we agreed that it was worth being really short of money to get the house we wanted. .

Surely people who have taken out huge interest only mortgages at such low interest rates, and without any sort of insurance policy to repay the capital, realised the impact of an increase of 4 or 5 % on their repayments?

Before I got a significant inheritance at 25 I was approved for and got loans with PPI up to that time. I had no idea about interest rates really and luckily got a huge lump sum back from the bank for PPI but the bank were incredibly quick to pay this into my bank account giving me no time to query it.

Money management, interest on financial products should be taught in maths at school.

I was talking to my DH about this exact thing this morning. I read a BBC article about a load of people moaning they were coming to the end of interest only mortgages and were going to be paying hundreds more per month. It's scaremongering as lots of people won't understand what interest only mortgages are and that this is not representative of the vast majority of people with a mortgage. One family were saying their mortgage is going up by £1400 per month - presumably to pay off the thing! Bad journalism.

It’s not going to help FTB that much though because if house prices are falling because people can’t afford to pay for large mortgages, chances are those FTBs also won’t be able to afford those mortgages either.

We’ve had variable rates in the past that still only allowed 10% overpayment each year but I guess it depends on the provider

I think it's a bit disingenuous to imply that all people who are now struggling with their mortgage have made seemingly daft decisions like this.

I'm lucky at the moment this isn't effecting me because we bought in August last year. But there's loads of people who because of the huge cost of housing havw to rely on their low interest rates to be able to afford the to buy.

There will be people like you referenced who made poor decisions. But honestly given the government and financial industry approach to house buying and the sate they have put the economy in. I think you sound like you have been reading right wing rags and are blaming the wrong people here. Which is quite embarrassing for you.

We aren't on an IO mortgage, but still going to feel this massively. We didn't stretch ourselves and had a healthy deposit. But the extra £550 a month on our mortgage is going to put us in the red every month as we cannot afford that along with the rising costs of everything else; e.g. nursery fees have jumped from £55 to £79 in 6 months.

My parents keeps telling me not to worry until it happens (which is only 3 months away!) As they tell convinced it will all get sorted by then!?! How!?!

I've paid mine off now but when I last bought with a mortgage the mortgage advisor tried to tell us we could afford to borrow £300k I told him to put 6% interest (the rate I paid on my first flat) into his calculator and no we couldn't afford the repayments. We borrowed a sensible £130k (had equity). Back in 2008 they were trying to get you to borrow more

We’re you around in the late 90s/early noughties OP?

we got a mortgage in 1999, and we were given the hard sell for an interest only mortgage everywhere.

EVERYONE was doing interest rate only mortgages .

we had to be very determined, and accept being called fools and losers by mortgage advisors and estate agents (not kidding), to get a mortgage where you actually pay off the house, not just the interest.

honestly, everyone thought we were mad and lacking in financial savvy

that’s how it was.

Why such a small decrease, surely £50,000 in savings would either pay the £803 repayments for years or decrease the overall loan.
Compound interest.

Brokers were (are) on commission. They earn more the larger the mortgage they sell you.

Unfortunately too many people believed those who told them that house prices would only ever increase and that interest rates would always stay at relatively low levels. I know people who borrowed the maximum they could on an interest only basis, with relatively small deposits, with the intention that they will downsize on retirement, taking out the equity which they were convinced would have been built up with ever increasing house prices. They believed that the more you borrowed, the more equity you would accrue.

For some who bought their house pre 2008, rather than using the monthly savings made with falling interest rates to make overpayments, or to decrease their mortgage term, they saw it as an opportunity to borrow even more money.

I do feel sorry for some people who have been careful and are now struggling with increasing interest rates and increasing costs of living. I have no sympathy with those who were greedy and just kept borrowing more and more, pretty much laughing at those who took a more cautious approach.