ADP

Hi all

Does anyone have one? Is it a bad idea - or a good way to at least get on the ladder? I would have more money in my pocket if I went for one and may allow me to buy the flat I really want.............any thoughts???

Tiggs

yes, massive one.

Its known as the "hope the folks are dead before 25 years are up" plan...otherwise i'm going to need that inheritance before they pop off!

Flatcapdriver

It depends on your circumstances but they can be useful in the short term to get you on to the property ladder but you'll have to factor in repaying the capital element (as part of your mortgage) within a few years, otherwise you'll be pushing water uphill for the rest of the mortgage term and don't get sucked in to a long term deal with escalating interest rates as you'll probably suffer.

It will make your mortgage more affordable but it won't neccessarily mean that lenders will increase the size of your mortgage because you can afford it with the lower repayment figures.

davegtt

As Tiggs says I gather its more of a hope I'll have a cash windfall within 25years...

I worked out basically what you pay every month on the interest only morgage you have to save the same amount ever single month just to be able to pay for the house in 25 years time.

fast bloke

It isn't always entirely wrong, but you should be planning to be in a position wo change to repayment within the first 2-3 years. If you income isn't likely to increase by enough to go repayment then you would be better to take a smaller repayment mortgage now. (Unless you are buying a mahoosive house and plan to downsize when you retire)

warrenm2

actually you all miss the point on IOM. It is in fact a bet on the rate of earnings increase vs interest rates. If you "predict" interest rates will rise quicker than earnings then go for capital repayment, if you predict earnings will outstrip interest rates then you are financially better off by going IOM. This assumes that come the end of the mortgage you can pay it off. However I predict that you could pay off your mortgage with a credit card in 25 years time, the earnings will outstrip interest rates, and so the average annual salary will be approximately the amount of the mortgage. Of course other people will predict different things and so disagree with me!

DBY

Its best to have no equity in the property at the end of the term, you will then get a free pension, free long term care and have no Inheritance tax worries !!! you know it makes sense LOL

Petem95

In a rising market and an economy with high inflation they can make sense because at the end of the period what seemed like a large amount of money is now a fairly small amount.

In a falling market like we have at the moment they dont make so much sense IMO - near record levels for house prices - you risk getting your fingers burnt. Also inflation (at least government fiddled inflation figures) are very low, so the borrowed sum is not being erroded by inflation much.

ScoobyDoo555

I started off on an interest-only for 12 months, just to see if I could afford it.

However, you only really use this type of thing to get on to the property ladder - then change to repayment ASAP.

Worked well for me - 14yrs down the line, moved several times, got a much bigger house and a low mortgage (re)payment

Dan

EddScott

I wouldn't say its a complete no no.

I did something similar to ScoobyDoo555. We needed a house ASAP, there were some ex- MOD houses that had just been renovated for sale and we were strapped for cash.

The houses were going for 53K for a 3 bed and they paid for the first 5% etc so all we needed to do was get a 95% (48K) mortgage. Took out interest only and then after the special period changed to repayment. At the start we were paying less per month than other people in similar houses who were just paying rent. Now we still pay a little less than those renting yet we own the house.

Served its purpose perfectly IMO. Although I agree it should not be used for the full term.

One thing that is alarming is that its quite easy to lie to a lender about what investment vehicle you will be using to pay off the mortgage at the end of the term. I said yes I'll be using an ISA or some such and they just said fine without any checks.

Mark Miwurdz

Interesting thread.

I've been on an interest only mortgage since endowments proved themselves to be utterly worthless as a vehicle for repaying the capital element of the loan. So I now have 2 policies projected to pay £54K against a present debt of £275K on a house that's worth £550K.

The only house I want to own outright is the one I'm going to die in so whilst my house is increasing in value, my lump of capital is getting bigger and that lump will allow me to buy the final (or penultimate) abode with the proceeds. This will no doubt be more modest accommodation which'll be fine because the the saucepans will have flown the nest (or at the very least, booted out).

I'll take a flexible view but it's working for me at present. All IMHO, naturally.

Cheers
Kav

Mark Miwurdz

They're not bothered because providing their exposure is covered by the residual value in the property they've lent money on, they will get their cash back.

Cheers
Kav

paul-s

is anyone on part + part ??

Suresh

Agreed.
We have a 75% IoM precisely for the above reason. Effectively we pay the loan inflation in the monthly interest repayments and take the house price inflation gain at the end. That coupled with salary rises, means that the original debt will be trifling in 2031.
Actually have enough cash to buy the house outright, but then we would get no tax relief by doing that.

Suresh

The Rani

No, no, no, no, no, no, no !

Seemed fine in the first instance. Like everyone says, it's a way of getting on the property ladder. Then my ex and I split.

He was giving me half the mortgage payment and half the endowment policy premiums each month. So far so good. Then he accused me of not paying the endowment premiums and said he would take over the payments and adjust the amount he paid me accordingly. Then, too late as usual, I discovered the sly b*st*rd had managed somehow to cancel the endowment policy, even though it was a joint policy and linked to the mortgage. The building society didn't give a toss so long as their money was paid back and the insurance company wouldn't let me carry on paying it. I couldn't afford to start a new policy and I didn't earn enough to convert to a repayment mortgage even if I could have afforded it.

However, my circumstances have changed. The house is now mine and luckily I do now earn enough for a mortgage of my own. But I could be working till I'm 70 before it's paid back! I've actually taken out an offset mortgage through my normal high street bank and the payments are a lot cheaper than anything the building societies had to offer for either a normal repayment mortgage or interest only mortgage.

This may be a "worst case" scenario - I don't know how it compares with anyone else's experiences - but, if we could go back to the beginning, I would definitely not get another interest only mortgage.

pslewis

I took one out ..... paid it all off in 6 years - they are great for the DISCIPLINED.

They are not for those who waste their money, or think they have money when they don't!

Pete

Deep Singh

One arguement is that in 25 years the chances are that the £x you owe the bank is a years wages. Its already happened in my working life and I'm only (cough) in my dirty thirties. The money left in your pocket as a result of having a IOM you can invest/use to make more money. Its defo worked over the last 25 years.
Personally though I don't feel comfortable with it other than in the short term.

Tiggs

If my Dad did interest only on his house in 1970 he would have to have found £12,750 to pay it off in 1995 - on a house now worth £500k +

In the same way, my £250k in 20 years will be 6 months salary and the house worth more than it is now......anyone that thinks not - drop me an email in 2026 and i'll buy your house for 2006 money!

Deep Singh

Though in the UK post war experience so far is in line with what you say it does not have to be so. Remember Germany and Japan have had 0 % growth in house prices for a decade.