interest only mortgages

just chatting about the situation i am in to a few people and what i discovered is the number of people on interest only mortgages with no thought about the capital.

Is it me or isn't this a rather risky strategy because someday the bank will want their money? and even if you sell your house you still have to live somewhere?

As per the recent press there are ALOT of people on interest-only mortgages in a way just RENTING their property, you only 'own' a house if you are paying off the debt not servicing it IMO.

There seems to be a school of thought that the house value will rise to the point where you can downsize and pay off the loan at the end of the term. It's bonkers, you end up paying full whack interest on the full loan amount for the entire term then have to sell up. More scarey are the people on interest only who don't understand what that means.

You only own the house if you have paid off the mortgage. Anther way of looking at it is that the interest only payments are a damn site cheaper than rent would be and you have security of tenure.

It works for people in certain circumstances. But I'd not say it was a long-term solution to anything.

Well they're not just RENTING the property though, are they. They are servicing debt, just the interest portion. It's theirs, to do with as they see fit. There's a better argument for saying that the owners of leasehold properties are just renting.
Most 'professional' buy-to-letters are on interest only mortgages. It's all about leveraging debt, isn't it.

Anther way of looking at it is that the interest only payments are a damn site cheaper than rent would be and you have security of tenure.

really? Is an interest only mortgage cheaper than rent?

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Interest only is great for buy to let, or if you have other ways to make money for the future, but its a strange way that we have adopted to live for 25 years. ie work your socks off to pay for a loan on an investment that can lose money. Effectively its like a great big gamble with pretty poor odds

ie work your socks off to pay for a loan on an investment that can lose money. Effectively its like a great big gamble with pretty poor odds

I'd be well impressed if you could show me a house that was today worth less than it was 25 years ago, if it was in similar condition.

really? Is an interest only mortgage cheaper than rent?

Yes, from what I can see in my local area. Interest-only on my house was about 300 pcm less than renting a similar property, and about 150pcm less than repayment.

Really Coffeking?
So how much would a 150k house rent for in your area?
How much would the repayments be on 150k? Of course factor in all the costs with getting that mortgage.

I'm interested on what you think the repayments would cost?

I'd be well impressed if you could show me a house that was today worth less than it was 25 years ago, if it was in similar condition.

What happens though if you need to jump off the housing ladder due to work/longterm health/unemployment/other problems etc?

So how much would a 150k house rent for in your area?

It's in the ball-park figure of what I've just bought for. Around here, renting my house would be in the region of 650-750 a month, if not a tad more going from the 3 other properties in the village that are currently rented. Assuming I had a 25K deposit (I didn't, but that's unimportant), at current rates interest only over 25 years is ~350 a month, repayment is ~600. (on 125K) (just re-run the figures, i was basing the original post on another house I was looking at WRT rental values).

We are interest only at the moment, due to redundancy. Not worried about it, as our mortgage is about 50% of value. Ours though is only 0.83%, so £120 a month.

Once back working, we'll go back to paying off the capital.

coffeeking, what interest rate are you using- those figures are awfully low.

vinnyeh – 3% (total, bbr+2.49%, deal I just used).

If you're comparing interest only to rent then you should look at the non obviously financial advantages/disadvantages of both. There's less financial risk in renting and a greater amount of flexibility. If you are on interest only and need to move you stand to lose out due to no/little equity and fees to pay to move.

interest only way cheaper than renting in my experience.

I have an interest only mortgage, its the only possible way i could afford to own a house.
My repayment vehicle is the value of my dads house which i will inherit half of when he dies. That'll be more than enough to pay off my loan.

I have an interest only mortgage, its the only possible way i could afford to own a house.
My repayment vehicle is the value of my dads house which i will inherit half of when he dies. That'll be more than enough to pay off my loan.

But what if your dad goes into a nursing home? I don't know your situation and you may be fine, I do know people who are relying on just that and forget what may happen. My SO has just watched as her grandfathers estate was eaten up by legal fees in an argument between the families of the first and second wives.

Interest only mortgages suit certain people in certain situations, certainly benefitted me for a time.

Long term it can only be more of a problem than a solution I would have thought.

as I think people can see there's no such thing as one-size fits all.

the same can be said for where you are in the country. Rental yields (the ratio of rent to capital value)in London are usually around 4-7% in benign interest rate periods, where as they can be a a fair bit lower than that in the sticks.

In theory I could analyse any 5 (or 2 or 10) year period over the last 25 years and show that Interest Only mortgage, Amortising mortgage, Endowment mortgage, Self-invested capital repayment mortgage, Renting or living under the arches is a superior economic choice for that period.

The relationships between all the components in the relevant calculations are not constant ratios over time (or location) and vary according to the whims of the various asset markets, inflationary environment and treasury base rates.

Its a pity more people dont get taught/make an effort to learn about such things to help them make better decisions.