Interest Only Mortgages

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FredBloggs

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My sister in law was alarmed by the above story which appeared in the Business Post last Sunday. She has an interest only mortgage taken out in 2006 and basically she is hard pressed to meet it. She is very worried that the bank will ask her to start repaying capital and she will not be able to afford the repayments.
I told her my understanding of interest only mortgages was that the interest only period was for a few years at the beginning of the mortgage after which you'd have to start repaying the capital. This alarmed her even more. I suggested she contact her building society to see what the terms of her mortgage are but she is reluctant to do so in case she brings trouble on herself (which is pretty stupid I know).
Is my understanding of interest only mortgages correct? what is the normal interest only period? At review could she be kept at interest only if she looked for it? And why did the lending institutions give interest only mortgages to people like her who patently couldn't afford the capital element?
 
"And why did the lending institutions give interest only mortgages to people like her who patently couldn't afford the capital element?"

On the assumption that prices/values of property could only go up.

And remember she did apply to borrow this money - the bank did not come to her thrusting it on her.

mf
 
I know she borrowed the money but I can't understand why the bank wouldn't have stress tested her ability to pay (and I know it was 100% her decision to proceed with it no one forced her into it etc etc)

Anyway that query about why she was allowed borrow was only incidental to my main query re interest only mortgages - what period the interest only repayments are for and on review whats the chances she can continue as interest only
 
Of the three I've done in the last 6 months:

1. 2 year interest only - thereafter to variable.
2. 5 year interest only - thereafter to variable.
3. 20 year interest only. This one is quite shocking but I suspect only got it 'cos family member works in Bank and went Guarantor.

mf
 
Thanks mf1. I assume hers is 5 years but could be wrong. Presumably the 20 yr one was a buy to let. I don't think hers is indefinitely interest only but the realisation that it mightn't be seems to have come as a bit of a shock. The facts were probably all pointed out to her when she signed up but it obviously went over her head. I'll get after her to contact the build soc and find out exactly what her terms are. Do they roll over interest only for another 5 years in general if requested?
 
Following on from teh original post, what happens if someone simply does not have the money to begin paying off the capital but the rent does pay off the interest part of it?

That's a situation I may find myself in next year.

It is a but-to-let property.

WHat can/could the bank do?

WHat course of action would be in the banks best interests?
 
That's a situation I may find myself in next year.
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Can you cover the remainder from your non-rental income? Do you have savings? Do you have a ppr? Could you take in rent a roomers? Reduce outgoings etc?
 
rmelly said:
Can you cover the remainder from your non-rental income? Do you have savings? Do you have a ppr? Could you take in rent a roomers? Reduce outgoings etc?
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No.

Basically I will be left in a situation whereby unless I lived complete hand to mouth, I will not have it.

So - if i say this to the bank, what is the nest step?

At the moment I'm hoping they will just extend the interest only period - or else try to find another bank that will take it on for an interest only period.

But lets assume that doesn't happen.

What are the banks options then?
 
ClubMan said:
Well presumably starting repossession proceedings could be one option?
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Is that something that would benefit them though?

This particular property has been rented out for the last 4 years with zero gaps.

The bank would still be getting a secure monthly interest payment.

I suppose my question is, what is the most likely course of action by teh bank ?
If they repossess it, they may nit be able to sell it themsleves for enough to cover the outstanding mortgage (as it has been remortgaged already and as a result as a pretty high LTV)
 
qwertyuiop said:
Is that something that would benefit them though?
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Depends on how much it would go for and how much is outstanding on the mortgage I suppose? Worst case they could decide that you cannot service the loan and to cut their losses. I have no idea of the odds on this happening versus other possible outcomes.
I suppose my question is, what is the most likely course of action by teh bank ?
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No idea. But if you are in danger of falling behind on the repayments or being unable to meet capital plus interest annuity repayments then you should talk to them sooner rather than later.
 
"I suppose my question is, what is the most likely course of action by teh bank ?
If they repossess it, they may nit be able to sell it themsleves for enough to cover the outstanding mortgage (as it has been remortgaged already and as a result as a pretty high LTV)"

You need to stand back here for a moment. You owe the money. The property is security. Loan/debt does not equal property - end of story. Loan/debt is secured by property

You owe the money. If you cannot pay the money, the bank can sue you for (a) the money and (b) recovery of the property.

If they have to do this and sell the property, and it sells for less than the mortgage , you still owe them the balance.

You will still owe the balance of money plus accruing interest for 12 years - in that time, it is possible that your circumstances may improve. The debt is secured on the property but the bank can look to any of your other assets to pay off the debt.

No-one knows what will happen but it far more likely that banks will seek to secure debts as much as possible.

The advice always is : if in trouble, go and talk to them and try and structure repayments. Be sure of your rights in advance. In this case, you are not in a strong position to dictate terms. But you are entitled to try and reach a compromise that works.

mf
 
qwertyuiop said:
Is that something that would benefit them though?

This particular property has been rented out for the last 4 years with zero gaps.

The bank would still be getting a secure monthly interest payment.

I suppose my question is, what is the most likely course of action by teh bank ?
If they repossess it, they may nit be able to sell it themsleves for enough to cover the outstanding mortgage (as it has been remortgaged already and as a result as a pretty high LTV)
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if you're a delinquent customer (as you would be under this scenario), they are quite likely to begin repossesion proceedings against you.

They will then sell the property on the open market and pursue you for any arrears over and above the sum that they realise. They can go after any other assets that you own to recoup these arrears. Please do not 'hope' that the bank will undertake the course of action that is most favourable to you; they don't care about you, they care about getting their money back.
 
Hi Qwerty

The banks will take a very practical approach to your situation. As it is an investment property, you should keep it interest only as long as you are allowed. If you are up to date with your payments, the banks is not going to force you into a repayment mortgage.

Do you have a mortgage on your home? What is the equity on it? It makes good financial sense to pay off your home loan first because the tax reliefs are not as generous.

If the banks insist on repayments, continue to pay the interest only if that is all you can afford. The banks would not get a repossession order as the judge will recognize that you are doing your best.

Brendan
 
I would have generally expected pragmatic leniency from lenders and courts (if it gets that far) in the case of owner occupiers in difficulties with their mortgages but not necessarily the same leniency in the case of an investor in a similar position?
 
Brendan said:
Hi Qwerty

The banks will take a very practical approach to your situation. As it is an investment property, you should keep it interest only as long as you are allowed. If you are up to date with your payments, the banks is not going to force you into a repayment mortgage.

Do you have a mortgage on your home? What is the equity on it? It makes good financial sense to pay off your home loan first because the tax reliefs are not as generous.

If the banks insist on repayments, continue to pay the interest only if that is all you can afford. The banks would not get a repossession order as the judge will recognize that you are doing your best.

Brendan
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OK so if this is how the banks are approaching this situation no wonder their share price is taking a dive.

Let me get this right, the customer is paying interest only on a loan secured against a property that is probably worth less in value than 1 year ago (according to facts- Not speculation) and the customer has no way of repaying the capital!!!!

Times that by thousands of mortgages and hey presto the emperor has no clothes!!
 
shanegl said:
Can we safely say then that this theory has more risk then originally thought?

http://www.askaboutmoney.com/showthread.php?t=59038
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Definitely not.
I still stand by all I said in that thread by teh way.
If you re-read that thread teh words that are continually used by me are 'average' and 'long term'.

If I could aford to , i would continue to buy property now - assuming it is a city centre property that could always be rented out.

The whole crux of that argument basically was, generally speaking,in nominal terms,does property rise in teh long term?
The answer is a resounding yes.
It always has and always will.

Obvioously you need to know your financial limitations to play teh game in the first place. Obviously you can overstretch yourself if you are not financially sound.
However - that does not in any way negate the argument that property rises over the long term.

During that long term you will have eperiods where growth is exponential - and you will also have periods where there is negative growth.
We've seen both here in ireland in teh last decade.

When it's all ironed out over the long term, then you will find that the average property rises in value
As demonstrated on another thread by Brendan, Since 1970 up until 2004 in Ireland, the average property rose nearly something like 8% a year.

Again - to reiterate - my own financial situiation does not on any way negate the general argument that was had about property being bought as a long term investm.ent
 
ClubMan said:
I would have generally expected pragmatic leniency from lenders and courts (if it gets that far) in the case of owner occupiers in difficulties with their mortgages but not necessarily the same leniency in the case of an investor in a similar position?
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I have several investment property interest only loans and I just phoned my NIB bank manager and was told that all of them have a 25 year interest only period. From the conversation I had, this seemed to be the norm??
 
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