# Interest only mortgages in a falling market?



## Brendan Burgess (31 Mar 2008)

Howitzer asked in this thread



> Brendan, you used to advise young people to go interest only in the early years of their mortgage and increase their payments later on when their incomes had increased. Are you rowing back from that position given that it only made sense in a rising market ....


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## Brendan Burgess (31 Mar 2008)

Let's forget the "falling market" bit for the moment and discuss the pros and cons of interest only mortgages. 

People buying their first home have very big expenses in the first few years. I recommend that they start with an interest-only mortgage. 

A repayment mortgage is a form of saving and people should suspend saving during periods where they have abnormal expenditure e.g. just after buying a house or during maternity leave or unemployment. 

I also recommend that the overall strategy should be to get your mortgage down to a comfortable level. In particular, you should do this before you start a pension. 

If someone assumes further short term falls in Irish house prices, does the strategy change? Well if you make this assumption, then you should defer buying a house! 

If you have bought a house and the price of it has fallen, then getting the mortgage down to a lower Loan to Value is a higher priority than it would otherwise have been. 

Brendan


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## cancan (31 Mar 2008)

I'd be more of the thought that if you can only afford interest payments on a house, you probably can't afford it. 

Given that your expenses rise as your wages do (childcare etc), it makes more sense to get to a level you are comfortable with, rather than paying no principal back on a residence, and hoping for better down the line. People always overestimate their future earnings and available cash, and this is what gets people into serious trouble later in life.

No point fooling yourself now into buying a house, hoping that something will happen in the future to make you able to afford payments you are not able to pay anyway.
Credit is not an area one should take chances with.
Also, telling people to hold off pension until father down the line is also not telling the whole story.
Here’s a nice little compounder to illustrate the point.

_Person A starts saving at the age of 25. They start out with a zero balance and contribute $200 monthly until retirement (65). Assuming an average annual rate of return of 12%, Person A can retire with $2,061,941.74. Wow! Millionaire status achieved, two-fold. _

_Person B starts saving at the age of 40. Because person B is further in life, we’ll assume this person started with an initial investment of $10,000 and contributes twice as much, $400 per month, with the same 12% average annual rate of return. Person B will retire at the same age (65) with $886,803.53. Hey, that’s not fair! No, that’s compound interest at it’s finest. J_

Interest only mortgages are in general, tools that allow people to think they can afford something they can't.


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## Brendan Burgess (31 Mar 2008)

The pension point is frequently made but is invalid. Of course, you have more if you start a pension early if you compare starting a pension with wasting the money. If you redo your figures to show someone who saves through buying a house instead of saving through a pension scheme, you will in many cases show the house buyer better off.


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## cancan (31 Mar 2008)

So you would advocate someone to enter a financial agreement where they buy something that they don't/can't actually pay for, but service the loan just to get their foot in the door.

Then, if necessary, ignore pension contributions while doing so if necessary?

Sounds like a recipe for financial disaster to me. 

And ruling it "invalid" without showing how doesn't strike me as good advice.

What if that person instead of getting in over their heads at such a young age, ask themselves what house they can realistically afford payments on, along side contributing to their pension.

That would be what a responsible person would do. You don't put all your eggs in one basket, and people should realise that their financial future encompasses more than just a mortgage.

I can think of no financial advisor anywhere who would advocate ignoring the real issue of retirement savings for the sake of getting on board with an interest only mortgage.

A person who finds themselves in this situation should take a good hard look at their financial goals in life.



> Of course, you have more if you start a pension early if you compare starting a pension with wasting the money.


 
When did wasting money come into the arguement here? An interst only mortgage could be considered by many to be "wasting money", since you are gaining nothing from money you are spending. Responsible financial planning requires broader goals than just getting a roof over your head at any cost.


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## Brendan Burgess (31 Mar 2008)

cancan

I was simply showing how that "you should start a pension early" point was invalid.  You should start saving early. But saving through a pension scheme is not a good idea until someone has bought their house. Pension salesmen make the same invalid comparison, time after time. 

As it's very expensive to trade up after a few years, it makes huge financial sense to put all your money into buying a house and deferring a pension. You get more of a house earlier and you may save yourself one rung of the ladder.



> An interst only mortgage could be considered by many to be "wasting money", since you are gaining nothing from money you are spending.



This argument comes from the "rent is dead money" school of thought.  Interest is the cost of renting money. You are getting the use of money to buy your house. You can live in the house. So, in effect, the interest is the cost of getting to live in a house.

Brendan


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## hmmm (31 Mar 2008)

Brendan said:


> So, in effect, the interest is the cost of getting to live in a house.


Why would someone pay more to rent from the bank rather than renting from a landlord? Particularly with the stamp duty changes which means that FTBs would be well advised to avoid purchasing on the "first rung" as you call it.


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## cancan (31 Mar 2008)

Brendan said:


> cancan
> 
> I was simply showing how that "you should start a pension early" point was invalid. You should start saving early. But saving through a pension scheme is not a good idea until someone has bought their house. Pension salesmen make the same invalid comparison, time after time.


 

I still don't see why the goal should not be to have savings, pension, and housing as three distinct strands of the financial goals of anyone starting out in the world these days. They are three seperate entities to solve three very distinct problems, and one should not be used as a substitute for another. 
Putting all your eggs in the housing basket is both irresponsible and naive for a young person to do - In a worst case senario, loosing your house would mean you loose everything, whereas any money contributed towards a pension, or other investment vehicle, is locked away, allowing a more secure future.



> As it's very expensive to trade up after a few years, it makes huge financial sense to put all your money into buying a house and deferring a pension. You get more of a house earlier and you may save yourself one rung of the ladder.


 
With the current stamp duty rates and the expense of furnishing etc a house, why bother getting on the "ladder" in the first place, if your goal is to trade up down the line. Saving until you have enough wages or savings to mach your home purchasing goals would make a lot more sence.



> This argument comes from the "rent is dead money" school of thought. Interest is the cost of renting money. You are getting the use of money to buy your house. You can live in the house. So, in effect, the interest is the cost of getting to live in a house.


 
What does one actually get out of an interest only mortgage, that one would not get renting the same property? 
I have no problem with people getting a mortgage and paying back for the house they want, but this interest only renting from the bank lark is a stupid way for someone to put themselves into a home.

Again, if you can't afford to make proper repayments on your current wages, you probably should be lowing your expectations, and not your chances of a decent retirement and proper financial future.


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## Brendan Burgess (31 Mar 2008)

> Savings, pensions and a mortgage are three seperate entities to solve three very distinct problems, and one should not be used as a substitute for another.



Absolutely disagree with you on this. You must take an overall approach to your finances. They are all part of the same long term plan. They are all forms of savings with different characteristics. The big downside of pensions is that they cannot be accessed for 40 years. That is no good to someone who is having a problem paying their mortgage. 



> Putting all your eggs in the housing basket is both irresponsible and naive for a young person to do



Again this is a false argument.  Most of us would agree that buying a house is a good long term financial plan. Even if you expect house prices to fall, you should be saving with a view to getting into the market when it is fairly priced.  You have no choice but to buy one house. You can't buy a share in 5 different houses. It's a false metaphor. 



> With the current stamp duty rates and the expense of furnishing etc a house, why bother getting on the "ladder" in the first place, if your goal is to trade up down the line. Saving until you have enough wages or savings to mach your home purchasing goals would make a lot more sence.



There is some sense in this point. Most people trade up a few times. The FTB's exemption does encourage people to hold off as long as possible with a view to buying on the second rung of the ladder so to speak. 

However, if a couple is committed to buying a home, then they should try to buy as big a home as possible to avoid the cost of having to trade up too soon. This does come at the risk of overborrowing, but it's probably worth that risk. That is a decision that they have to make for themselves. 

It's important to note that buying a home gives more than financial benefits.


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## Howitzer (31 Mar 2008)

When you're sensible in money and life it's easy to assume everyone else is. This is rarely the case. The number 1 criteria for the majority of FTBs when geting a mortgage from a broker isn't lowest interest rate or customer service (these are sensible things), it's who will give me the most money. 

First time buyers like payment holidays, discounted interest rates, 100% mortgages, if they didn't these products wouldn't exist. In reality these products allow you to buy a property sooner with less savings for a higher amount.

The only advantage to going interest only when getting a mortgage is if property prices are rising, the extra risk you have taken is then rewarded by buying sooner rather than waiting till you have enough savings, high enough wages, a stable relationship - sensible things - by which time prices have risen and "you'll never be able to afford to buy". 

However many people will use these products out of desperation, greed or poor judgement.


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## Brendan Burgess (31 Mar 2008)

> The only advantage to going interest only when getting a mortgage is if property prices are rising,



Not at all. I don't think that the two issues are connected very much at all. 

When you buy a house, you do not know if house prices are going to rise or fall in the short term.  

Paying interest only, means that you have more money with which to adjust to the life of home ownership. If you are in the housing market for the long term, which most people are, then what happens in the short-term to prices is not very relevant. 

Brendan


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## Howitzer (31 Mar 2008)

Brendan said:


> Paying interest only, means that you have more money with which to adjust to the life of home ownership.


For you maybe. But many people use IO inappropriately. When thery're giving IO mortgages there isn't a guy on the door going "ok, you're a smart sensible chap here's an IO mortgage. Oh sorry love you're a bit of a dullard LTV of 80% for you". 

You don't have to go very far to find stories of people getting way over their heads with debt, the site is full of them - many simply from the pain of having to adjust from a discounted mortgage rate to a full one. The main criteria for a bank in determining whether to give a mortgage is the part of the form that lists your wage, and when you've full employment in a state you can be sure that there are a lot of financially naive people earning good wages. The human element just isn't there. When you have accumulated savings over a prolonged period of time you demonstrate an ability to make financial commitments. A sensible person may indeed use an IO mortgage to adjust, a very sensible person would have saved for a number of years at the same rate of a full mortgage to demonstrate their ability to repay the loan and reduce the amount eventualy borrowed. 

But in a rapidly rising market saving is a luxury those desperate to get on the ladder cannot afford. Interest only mortgages have been used by brokers in the last few years as a mechanism to keep an applicants repayments below 40/45% of their take home pay. I wouldn't be financially naive enough to go down that route, you probably wouldn't be either but that's not to say many others aren't. If you don't understand a financial product the given advice is to not invest in it. I've seen enough threads with "I've a mortgage of X paying Y a month, if I go interest only what will my repayments be?" in them to see that many people don't understand even relatively simple products like this but are fully prepared to use them as a means to an end - buying the most expensive property they can today.


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## cancan (1 Apr 2008)

Forget rising or falling markets with regard to IO mortgages.
They are a bad idea full stop, regardless of what the market is doing.
You are taking money off someone, which you are not paying back, and are paying for the privilege of having it. I can think of few instances where doing this is a good idea, no matter what the market is doing.
You're average borrower has no idea if prices will be up or down two years from now, so it should not even be a consideration, or reasoning for taking one out, or used in the logic for justifying it or not.
And what happens when your payments reset after your allotted time period and you're finances are not in as good shape as you hoped they would be (Again, people always assume they'll be on more that the are in reality.)
There are very sound principals to borrowing money which have been established for a long time, and people should heed them. 
You don't get something for nothing, and people should exercise some more prudency when it comes to matching their aspirations with their reality.
Granted you'll no doubt hear of cases were people fluked market timing, just as you'll hear stories of people who got hurt with IO mortgages. Are you willing to bet your financial future on a 50/50 shot?


> Most of us would agree that buying a house is a good long term financial plan


Putting everything you have into one asset on an interest only basis is not a financial plan. It's a high risk undiversified bet, and people should look at the whole picture before running down the garden path.
Again, if you can't afford to pay it back properly, you can't afford it full stop


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## extopia (1 Apr 2008)

It's simple. If you're not paying back even a small amount of the capital, you're just rolling over the loan (same as renting, except sometimes more expensive). Why would you bother? Just wait till you can afford to buy, surely? Or just rent. There's no proven economic "fact" that buying is better than renting anyway, despite what many of us think. The psychological value of owning versus renting is very difficult to quantify in monetary terms.


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## Brendan Burgess (1 Apr 2008)

Howitzer and CanCan

Your objections to interest-only seem to be on the grounds of over-borrowing? Howitzer, you seem to be confusing interest-only with 100% mortgages in the same sentence?

And Howitzer, you make a valid point about sound financial common-sense might apply to you and to me, but not to others. 

And I have been shocked by some stories on Askaboutmoney from people who have clearly overborrowed. But I guess that 90% of borrowers are well able to meet their repayments. For those, interest-only in the first few years of their mortgage makes sense. They don't have to blow the repayments saved on new cars and drink. They can use it to improve their home. They can even save it elsewhere to rebuild a savings fund. 

Cancan said 


> Forget rising or falling markets with regard to IO mortgages.
> They are a bad idea full stop, regardless of what the market is doing.
> ... I can think of few instances where doing this is a good idea, no matter what the market is doing.



I can think of quite a few...

If you are buying an investment property, you should have an interest-only mortgage. 
If you have suffered a sudden reduction in income due to unemployment, illness or starting a business, you should have an interest-only mortgage.
If you have a mortgage at a very comfortable level in relation to your income and the value of your home, you should consider switching to interest-only and use the repayments saved to invest in your pension. 
If you are elderly and own your own home but have a limited income, then you can take out a life-loan which is an extreme version of an interest-only loan. 

There is an old-fashioned idea that mortgages should be paid over 20 years and people should start contributing to a pension at age 21. These ideas need to be challenged and reviewed from time to time. 

Brendan


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## LDFerguson (1 Apr 2008)

In an ideal world, everyone should start contributions towards a pension AND regular savings once they get their very first pay-cheque.  But only a minority are so prudent, in my experience.  So if you're not one of that minority and can only afford to do one or the other, I'd concentrate on saving towards a house before starting a pension, as you will need a house long before you will need a pension.  

Howitzer made a very good point above: 


> First time buyers like payment holidays, discounted interest rates, 100% mortgages, if they didn't these products wouldn't exist.


 
Interest-only for First Time Buyers falls into the same category.  Again, if everyone was prudent there would be no demand for these facilities.  No First Time Buyer would buy a house until they had saved a 10% deposit plus expenses plus enough money to buy furniture, cleared off any other loans and would qualify for an annuity mortgage that would cost them less than 30% of take-home pay, even after stress-testing by increasing interest rates by a percent or two.  

But this isn't your average First Time Buyer, as everyone knows.  So what should lenders do?  Withdraw all products that allow an "easy start" in one form or another?


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## Blinder (1 Apr 2008)

cancan said:


> _Person A starts saving at the age of 25. They start out with a zero balance and contribute $200 monthly until retirement (65). Assuming an average annual rate of return of 12%, Person A can retire with $2,061,941.74. Wow! Millionaire status achieved, two-fold. _
> 
> _Person B starts saving at the age of 40. Because person B is further in life, we’ll assume this person started with an initial investment of $10,000 and contributes twice as much, $400 per month, with the same 12% average annual rate of return. Person B will retire at the same age (65) with $886,803.53. Hey, that’s not fair! No, that’s compound interest at it’s finest. J_


 
Compund interest is all well and good but you also have to consider the rate of inflation over the term of the pension fund.
Take inflation at 4% p.a.
the 2m the the 25y.o. has built up in a fund will only be worth about 632K in real money terms when taken into account from the time they start saving

The 886K that the   45 y.o. has build up in a fund would be worth about 425K in real money terms when taken into account from the time they start saving.

Not such a big difference in the fund value as your example.



			
				cancan said:
			
		

> Putting all your eggs in the housing basket is both irresponsible and naive for a young person to do - In a worst case senario, loosing your house would mean you loose everything, whereas any money contributed towards a pension, or other investment vehicle, is locked away, allowing a more secure future.


 
Maybe I'm being short sighted, but it's all very well having a secure future, but it shouldn't be at the expense at a secure present. You can have both, it's a case of priorizing those needs.

I did buy a house before I started paying into a pension fund. I bought a house in my late 20s, started a pension fund in my early thirties.


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## Brendan Burgess (1 Apr 2008)

Blinder



> ...it's all very well having a secure future, but it shouldn't be at the expense of a secure present.



That's a great quote. I hope you don't mind me plagiarizing it? 

Brendan


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## Howitzer (1 Apr 2008)

Brendan said:


> Your objections to interest-only seem to be on the grounds of over-borrowing? Howitzer, you seem to be confusing interest-only with 100% mortgages in the same sentence?


I knew that's how it sounded even as I typed. But yes you're right, my fundamental objection is based on overborrowing. IO has been used as a mechanism to allow FTBs to borrow more than they would have on a conventional mortgage. 

Whilst it's up to the individual to make their own decisions in life Financial Regulators are there for a reason, in the case of the Mortgage market it's to prevent products and practices that are overtly risky. But as soon as the Regulator moves in one direction Brokers and Banks find ways to keep their income as high as possible by giving the biggest possible mortgages (why wouldn't they, it's their business). 

I've said it before but to me your advocation of IO seems more a case of youth is wasted on the young and ignores the reality of the last 4 years or so when many many people have overextended themselves.

There is a subtle difference between someone getting an IO mortgage to buy a property and someone making their mortgage IO for a short period of time.


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## DerUnkle (1 Apr 2008)

Sorry to be a bit simplistic here compared to some of the great detailed replies above but isn't it a case that a major cause of the sub-prime defaults in the US (and here) were caused by lenders lending too much money to people who couldn't afford to repay. 

These effectively were/are interest only mortgages (with a high rate) and the pain caused to borrowers hit home when the interest only term lapsed and the mortgage reverted to  "regular" payments. 

What is suggested in other posts sounds strikingly similar, although and to be fair the banks here so not have the same rates and are not as preditiory but however the same system is at work. How could this be prudent for a FTB to use IO based on future earnings and hope that in 3/5 years their wage has matched their expectations (in a recession...?) and they can afford to start paying off the principle. 

 Again, if you can't afford to pay it back properly, you can't afford it full stop

This is the way banks and borrowers should be looking at a mortgage, not how much can i possibly wedge out fo the Bank in the short term and hope/bet that everything else falls into place.....


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## LDFerguson (1 Apr 2008)

There seems to be some confusion in this thread.  Any lender who offers an Interest Only facility assesses the application as if it was a repayment/annuity loan.  So the lender assesses if the applicant(s) can afford the repayments according to their criteria on a repayment mortgage _and then_ offers an interest-only facility if requested. 

Nobody gets a larger loan because they choose Interest Only.


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## barryl (1 Apr 2008)

Brendan said:


> Let's forget the "falling market" bit for the moment and discuss the pros and cons of interest only mortgages.
> 
> People buying their first home have very big expenses in the first few years. I recommend that they start with an interest-only mortgage.
> 
> ...


 
I don't agree with this at all.Firstly it gives the majority of ftbs a false sense of security in their first say 5 years of their mortgage,the chances of them taking on further debt during this period of  repayments is higher, (CAR LOANS ETC)and then they have a doubling up effect on their mortgage on year 6 just as they start a family.interest rates could be high at this point in time.imo the government must restrict banks from lending 100% loans,high ratio loans,interest only loans to ftbs.on till this is done house prices will inflate exponentially  like they have in the past and cause boom bust  scenarios in the future.Prices in Dublin are still to high and need to fall more before ftbs should buy,this correction is needed so ftbs dint have to take the above advise which imo would all end in tears like sub prime


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## slinky (1 Apr 2008)

You can have all the discussion you like but it comes down to naviety around money and pure hubris.
Twenty years ago you had to save to get a deposit and you had to show the bank you had the income to handle the payments. These days you get an interest only mortgage, a new car loan, a couple of kids and 2 vacations a year. If you owe 400k what does a 50k more matter???!!

The government is not here to nanny people it is down to each person to regulate their own finances.

Anyone in secondary school understand that if they borrow more than they can pay they will be screwed, so why are so many people driven to borrow beyond their means?

If people resisted borrowing excessively they could have a nice governement affordable property and live easily.

I do know that that 08 x 2 BMW Family next door pay the same mortgage as me on a 900k house, have 2 kids and plenty of vacations and the sound we hear on a regular basis is the arguments about having no money for kids shoes.

It may not end in tears any time soon but perhaps it should so we can get back to normality.


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## Sunny (1 Apr 2008)

slinky said:


> I do know that that 08 x 2 BMW Family next door pay the same mortgage as me on a 900k house, have 2 kids and plenty of vacations and the sound we hear on a regular basis is the arguments about having no money for kids shoes.


 
I think that says more about the building quality of a €900k house than the rights/wrongs of overstretching the finances!!


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## Brendan Burgess (1 Apr 2008)

Liam makes a very good point, that the amount lent has no relationship to whether you are going interest only or not. 

It is important to stress that the vast majority of people are able to service their mortgages. Access to finance for the majority should not be restricted because a small minority can't meet their repayments. 

Slinky's neighbours are going to get into trouble, no matter what size or type their mortage is. But Slinky should not be prevented from getting a remortgage to sound proof his house, because of their lack of financial wisdom.

Brendan


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## cancan (1 Apr 2008)

> Compund interest is all well and good but you also have to consider the rate of inflation over the term of the pension fund.
> Take inflation at 4% p.a.
> the 2m the the 25y.o. has built up in a fund will only be worth about 632K in real money terms when taken into account from the time they start saving
> 
> The 886K that the 45 y.o. has build up in a fund would be worth about 425K in real money terms when taken into account from the time they start saving.


 
Simple fact that if someone starts at 25, they would at 65, have over 2 million, versus someone who starts at 40 with double the money, who would have ~800k.

Real money or whatever you want to call it is the difference between having 2 million in the bank at 65, v’s having 800k.
Most people don’t understand that, or are too busying funding debt to realize the opportunity cost of their addiction to debt.

The simple fact that if you required to get an interest only mortgage for a place, either the place is over priced, or you don’t have enough money for it in the first place.

If in a market, the average wage earner needs to get an interest only mortgage to afford payments on an average house, that is a sure sign house prices too high.

As prices rose, banks came up with ever more exotic mortgage types to allow people to get an appreciating house at the same initial payment cost.

What they failed to see, was that 40 year mortgages, interest only mortgages etc, backfired on them in a big way, and this is reflected in their share prices now, and the housing bust we are seeing on a global scale at present.



> There is an old-fashioned idea that mortgages should be paid over 20 years and people should start contributing to a pension at age 21. These ideas need to be challenged and reviewed from time to time.


 
And why should these be challenged – do people suddenly not need money for retirement anymore?
Are people suddenly so flush with cash that they would rather have their mortgage be double the percentage of their income than it should be historically?





> Interest-only for First Time Buyers falls into the same category. Again, if everyone was prudent there would be no demand for these facilities. No First Time Buyer would buy a house until they had saved a 10% deposit plus expenses plus enough money to buy furniture, cleared off any other loans and would qualify for an annuity mortgage that would cost them less than 30% of take-home pay, even after stress-testing by increasing interest rates by a percent or two.


 
Just think for a minute if you’re average homeowner was still held to these standards. Have a wild guess as to whether your average home owner would be better off under this system, or the one we have recently been accustomed to.

The logic here baffles me - despite what people have seen in the irish market and others over the past few years, to still believe this is the way to go is really plucking ones head into the sand.


An interest only mortgage participant, at the end of the day is performing the equivalent of making minimum payments on a credit card. Just because the banks make the facility available, does not mean that it makes good financial sense.

Let’s see how all these IO mortgages people get on once their rates reset in a recession environment.

You should hope for the best, but plan for the worst, and IO mortgages do the opposite.
They amplify future hopes, in order to make the present more attainable, and that is a recipe for disaster.


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## Jethro Tull (1 Apr 2008)

cancan said:


> Simple fact that if someone starts at 25, they would at 65, have over 2 million, versus someone who starts at 40 with double the money, who would have ~800k.


 
Haven't done calculations but would the fact that pension contributions are tax deductable (up to a certain %, safe to assume that at 200 a month this limit won't bite) not make the earlier option even more attarctive (or have both the examples given include the tax saving?)


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## barryl (1 Apr 2008)

Brendan said:


> Liam makes a very good point, that the amount lent has no relationship to whether you are going interest only or not.
> 
> It is important to stress that the vast majority of people are able to service their mortgages. Access to finance for the majority should not be restricted because a small minority can't meet their repayments.
> 
> ...


 
access to finance is not the problem,downturns in the property market are not caused by lack of access,they are caused by greedy banks offering 100% mortgages,high ratio loans,and  interest only for ftbs,at the later end of a property cycle.recommending io for the majority of ftbs is crazy


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## Howitzer (1 Jun 2009)

Kathleen Barrington looks at the negatives of IO mortages in [broken link removed]



> The interest-only mortgage had the effect of enabling borrowers to buy property they couldn’t really afford. The product was used mainly by investors but also by consumers to fund their primary residence.
> 
> Bankers and brokers didn’t shout stop because they were paid a percentage of the size of the loans they made. The bigger the loans they sold, the higher their commissions.
> 
> ...


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## Brendan Burgess (1 Jun 2009)

Kathleen makes the same mistake as most people on this topic.

She confuses interest only mortgages with over-borrowing. 

People take a big risk with over-borrowing and they should know about this risk. 

If you are over-borrowing, it does not really matter much whether it is an interest-only mortgage or a repayment mortgage.

She seemed to miss the point completely that if you do decide to borrow for a commercial property, you should always go interest-only. 



> In effect, interest-only mortgages enabled investors and consumers to buy property at unaffordable prices which bore no relation to the rent generated by the properties, and no relation to the borrowers’ ability to repay the loans.



Again, she is combining and confusing two things in this paragraph. In fact, an interest-only mortgage should have allowed an investor to see more clearly that the rent did not cover the interest element. That would have suggested that they were overpaying for the property. If you are paying too much for a property, it is wrong. It is still wrong, if you use a repayment mortgage.


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## Brendan Burgess (2 Jun 2009)

I have posted a reply on Kathleen's Blog. It is a moderated blog, so it might take some hours or days for it to appear: 

[broken link removed]


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## Howitzer (3 Jun 2009)

Brendan said:


> She seemed to miss the point completely that if you do decide to borrow for a commercial property, you should always go interest-only.


To be honest I found the article confusing, almost like 2 seperate articles joined together.

On this point however, a taxation expert may have a definative answer, but is this still the accepted best practice?

By Commercial I'm not sure if you're referring solely to genuine Commercial property or Residential Investment properties, but following the changes in the last budget whereby only 75% of mortgage interest can now be offset against rental income on an Investment property maybe this truism needs to be revised?

Admittedly 100% can still be offset against Commercial property but given the recent changes to this element of tax law surely basing investment decisions on a changing taxation policy cannot be best practice?

The other accepted benefit to going IO is that you can use the cash flow elsewhere. However when deposit interest rates are so low does it not make most sense, from a business persective, to derisk the business in the current ewnvironment - to reduce the capital owed?


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## Bronte (3 Jun 2009)

For investment properties for rent, I know there were good reasons for going interest only but I agree with Howtizer, currently what are you going to do with spare cash, returns on deposits are paltry, so it might be better to be chipping away at the capital so one has some leverage if things change such as rents dropping as in the current situation and interest rates rising (the future).  Also any chance one had of an investor purchasing a property for rent currently has diminished with the new 75% interest rule and we don't know how long it will be 75% will they change in next budget to 50%.


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## Howitzer (15 Nov 2009)

[broken link removed] again takes up this issue in this weeks Sunday Business Post and, in my opinion, makes a very good stab at describing the failures of the Regulator, how the Interest Only mortgage was simply the final illogical stage on the over lending.



> When the consumer could no longer afford a property by borrowing the traditional, prudent two-and-a-half times his income, the bankers gradually relaxed the criteria to the point where it was considered normal at the peak of the boom for a borrower to take a mortgage of five or six times his income.
> 
> When the consumer could no longer afford the mortgage repayments spread over the traditional, prudent 20 years, the bankers devised new products to allow the borrowers spread the payments over first 25 years, then 30 years, then 35 years and, in some cases, 40 years.
> 
> ...


The correlation with the Affordable Housing Scheme is neatly described. 


> The only thing that prevented the sub-prime mortgage problem becoming a bigger problem in Ireland was not the intervention of the Financial Regulator, but the arrival of the international credit crunch which prevented our bankers from raising the funds that they would otherwise have recklessly lent to borrowers.
> 
> When consumers on average incomes still couldn’t afford houses, when interest rates rose after all those risky products had been unleashed, when even the banks recognised that the limits of what they could lend to consumers had been reached - or more accurately breached - the developers in early 2007 began to see the writing on the wall as consumers balked at the prices for homes and began to walk away from the property market even before the credit crunch hit hard.
> 
> The developers then leaned on the government to fund so-called affordable housing schemes using taxpayers’ money to help prop up prices. But the amount of taxpayers’ money made available was not enough to prevent the dike from bursting and pretty soon the banks found out that the developers couldn’t afford to repay their loans because they couldn’t find buyers for their developments.


There seem to be a lot of kites being flown at the moment with regards to extending mortgages to 50 and 60 year terms, that that somehow would be in the consumers interest. Haven't we learnt anything?


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## haminka1 (16 Nov 2009)

now, without being extremely knowledgeable of the financial stuff, just a question - why not make use of current lower interest rates and take the normal mortgage?
interest only mortgage can be very deceptive for people who are only "common users" of financial products - it can give them the false impression that they can afford a very expensive property ..
even now, with the prices falling i see plenty of people overstretching themselves who only see the current low interest rates and might be very unpleasantly surprised when ecb raises interest rates again
why not have a look at the property market, set yourself a treshold which is lower than what you could actually afford and then go for even lower price property if you want to buy a house? this way, if anything happens /increased interest rates, unemployment, maternity leave/, you can still afford the monthly mortgage payments ...
as for renting - OK, my life now belongs to the bank - but when I was renting, it belonged to the landlord - whether renting or buying, you still need a roof over your head - I consider my house a part of my retirement provision - if I still live in it by the time I retire, I payed it off and don't need to bother looking for a cheap place to rent or I can sell it and have some money for the old age ..


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## Brendan Burgess (16 Nov 2009)

Hi Haminka

The problems were overborrowing and overspending. Interest only mortgages are only a problem, insofar as they facilitate overborrowing. 

The Financial Regulator did stress test the borrowing requirements, but not hard enough. When the EBS did break the guidelines on this, they were brought back into line very quickly. 

So, maybe there should be a return to where we were 10(?) years ago. The maximum loan should be 2.5 times a person's salary. Bring that in as a law. If it's not a law, a lender which adheres to this sensible lending strategy, would be wiped out by the more irresponsible lenders. 

And while we are at it, make the maximum loan 80% of the value of the house.

It would have to be extended to Credit Unions so that they would not help people break the law. 

The downside of this is that with very high stamp duty and legal costs involved in trading up, people are right to "overborrow" to get as high as possible on the housing ladder. It's very hard to get the balance right.

But interest only mortgages in themselves are a very useful tool for consumers. I have an interest only tracker mortgage at 1.6% and have money on deposit at 2.25% ( 3% less DIRT). I don't want to pay off my mortgage.


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## DerKaiser (16 Nov 2009)

Howitzer said:


> [broken link removed] again takes up this issue in this weeks Sunday Business Post and, in my opinion, makes a very good stab at describing the failures of the Regulator, how the Interest Only mortgage was simply the final illogical stage on the over lending.
> 
> 
> The correlation with the Affordable Housing Scheme is neatly described.
> ...


 
The solution is quite easy and would have been the simplest way to avoid the bubble (ok we're too late to save a lot of people but let's learn from our mistakes):

Everyones income is stress tested against the repayments required on an annuity mortgage (the regular non-interest only type) with a term of 20 years and an interest rate 2% above the long-term forecast (not current) rate.

We have stress test rules at the moment but they are neither adequate nor adequately enforced


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## Brendan Burgess (16 Nov 2009)

From Kathleen's article 



> As revealed in The Sunday Business Post last weekend, as many as 53,000 borrowers, many of them buy-to-let investors, took out such interest only mortgages in the last five years of the boom.



If you are buying a buy-to-let property, the correct tax and borrowing strategy is to have an interest only mortgage. 

If you overpay for the property or if you borrow too much to buy the property, then you are in trouble anyway. 

It is crazy for people who have both a home and a RIP to pay off the RIP mortgage. They should clear the home mortgage first and leave the RIP mortgage at interst only.


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## canicemcavoy (16 Nov 2009)

Brendan said:


> If you overpay for the property or if you borrow too much to buy the property, then you are in trouble anyway.


 
Brendan, this sounds a bit like a version of the old NRA slogan "Guns don't kill people, people kill people".

To which most people would respond "Yeah, but the guns don't help matters".


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## haminka1 (16 Nov 2009)

Brendan said:


> Hi Haminka
> 
> But interest only mortgages in themselves are a very useful tool for consumers. I have an interest only tracker mortgage at 1.6% and have money on deposit at 2.25% ( 3% less DIRT). I don't want to pay off my mortgage.



Brandon, sure - agree if you know how to handle it - I wouldn't and feel better if I play it safe and simply live with the fact that I have a house which will be my own and don't pay too much.


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## Howitzer (16 Nov 2009)

Then.


Brendan said:


> Your objections to interest-only seem to be on the grounds of over-borrowing? Howitzer, you seem to be confusing interest-only with 100% mortgages in the same sentence?





LDFerguson said:


> There seems to be some confusion in this thread. Any lender who offers an Interest Only facility assesses the application as if it was a repayment/annuity loan. So the lender assesses if the applicant(s) can afford the repayments according to their criteria on a repayment mortgage and then offers an interest-only facility if requested.
> 
> Nobody gets a larger loan because they choose Interest Only.


Now.


Brendan said:


> The problems were overborrowing and overspending. Interest only mortgages are only a problem, insofar as they facilitate overborrowing.


Ok everyone can change their opinion as the facts change or become more apparant but what are we going to do now?

We're at a crossroads. People are looking for solutions. If we're now certain that IO mortages were a causal factor in overborrowing then they can't be part of the solution. People flying kites on the lines that 50 and 60 year mortgages are the solution are no better. There are 2 types of solutions on offer, those that help the consumer and those that help the banks.

(Disclosure: I do not own property or any banking shares. I am an Irish tax payer.)


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## DerKaiser (16 Nov 2009)

Howitzer said:


> Then.
> 
> 
> Now.
> ...


 
I think the point still stands that if you have an investment mortgage and a residential mortgage, you pay down the residential mortgage first.

As for interest only contributing to wreckless lending, that would be a flaw in the approvals system. You should not be given a higher mortgage simply based on the fact you choose to pay it off over a longer period.

In terms of genuine solutions on offer, the only ones that make sense to me involve reducing your debts to arrive at a level of repayment your income can reasonably support over your working life.


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## kaplan (16 Nov 2009)

Regulating at the product usage level is at the heart of US recent changes in consumer protection. New laws will make it possible to regulate for standard, simple credit products to counteract lenders ability to manipulate consumer behaviour into using too much credit. The underlying concept is a move towards regulating for safety standards - seems that a lot of dubious mortgage features and practices may be regulated out. 

One of the problems with consumer protection is the belief in the "wise, rational and informed consumer" who acts to protect themselves against misselling. Using a mix of consumer education, producer disclosures and codes of conduct it's believed that rational consumers will act en-masse as a form of meta-regulation. US legislators have realised that this is not possible to achieve - the idea of safety standards in the use of credit and other products by consumers appears to be a strong move towards protecting consumers from themselves and from banks. 

Kaplan


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## Booter (16 Nov 2009)

DerKaiser said:


> I think the point still stands that if you have an investment mortgage and a residential mortgage, you pay down the residential mortgage first.



Other than the security of clearing debt associated with one's family home, why would this be the case? Would it not be wise to clear down the most expensive loan as a priority, whichever loan that may be?


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## DerKaiser (16 Nov 2009)

Indiansign said:


> Other than the security of clearing debt associated with one's family home, why would this be the case? Would it not be wise to clear down the most expensive loan as a priority, whichever loan that may be?


 
75% of the interest paid in any year on investment mortgages as allowed as a cost to offset against rental revenue in calculating taxable profit, so the interest cost of borrowing for an investment property is effectively reduced.

Things might not be so clear cut at the moment (mainly due to current low interest rates) for the following reasons:
The interest rate on investment mortgages might be higher
Mortgage interest relief on residential might not be at its ceiling

Also, if the % of interest allowed as an offset to rent on investment mortgages continues to be reduced, this will change.

And finally it obviously depends on the marginal rate of tax you pay


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## Howitzer (28 Apr 2010)

[broken link removed]


> "We are now calling for a complete end to the issue of any new interest-only mortgages. This repayment option is no longer tenable in this environment. *These mortgages were based on a premise that people’s incomes would continue to rise and so too would property values,*" he said.
> ​


​


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## canicemcavoy (28 Apr 2010)

Howitzer said:


> [broken link removed]
> [/COLOR][/LEFT]


 
These are "professionals"?

Heaven help us. They honestly thought property prices and wages would rise forever.


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## Howitzer (6 May 2010)

[broken link removed]



> Interest-only mortgages depended on a rising market and now many in the small-time landlord sector smell trouble, writes *JACK FAGAN*
> 
> JUST WATCH how the storm clouds gather over the interest-only mortgage market. To the casual observer, this banking option had particular appeal with investors at the height of the property boom. They relied on capital appreciation to keep values rising until it was time to flip on the property. The formula worked like a treat until the housing bubble finally burst and caught many people out.
> 
> ...


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## Max Johnson (21 May 2010)

I've recently asked my mortgage company to switch me from interest-only back to capital plus interest.
Will this effect my tracker status?

Thanks


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