# Interest Only Mortgages



## FredBloggs (8 Jul 2008)

[broken link removed]

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?


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## mf1 (8 Jul 2008)

"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


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## FredBloggs (8 Jul 2008)

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


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## mf1 (8 Jul 2008)

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


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## FredBloggs (8 Jul 2008)

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?


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## z106 (8 Jul 2008)

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?


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## rmelly (8 Jul 2008)

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


 
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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## z106 (8 Jul 2008)

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?


 
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?


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## ClubMan (8 Jul 2008)

qwertyuiop said:


> What are the banks options then?


Well presumably starting repossession proceedings could be one option?


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## z106 (8 Jul 2008)

ClubMan said:


> Well presumably starting repossession proceedings could be one option?


 
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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## ClubMan (8 Jul 2008)

qwertyuiop said:


> Is that something that would benefit them though?


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 ?


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.


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## mf1 (9 Jul 2008)

"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


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## shanegl (9 Jul 2008)

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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## Kemo_Sabe (9 Jul 2008)

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.
> 
> ...


 
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.


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## grackal (9 Jul 2008)

shanegl said:


> Can we safely say then that this theory has more risk then originally thought?
> 
> http://www.askaboutmoney.com/showthread.php?t=59038



Good read.



> SO basically I'm borrowed up to the gills.
> 
> And I'm assuming that they wll always be rented so over the long term should rise. That's teh hope !!
> It's a gamble I'm prepared to take on.
> ...



11 months and 27 days to be exact.


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## Brendan Burgess (9 Jul 2008)

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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## ClubMan (9 Jul 2008)

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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## Mr DT (10 Jul 2008)

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.
> 
> ...


 
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!!


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## z106 (10 Jul 2008)

shanegl said:


> Can we safely say then that this theory has more risk then originally thought?
> 
> http://www.askaboutmoney.com/showthread.php?t=59038


 
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


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## landlord (10 Jul 2008)

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?


 

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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## ClubMan (10 Jul 2008)

Great - but that has nothing to do with my point above!


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## z106 (10 Jul 2008)

landlord said:


> 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??


 
My interest only mortgages are 5 years only.

One is up next year.

To be honest - i'm only sussing out teh vibe here.
The int only period is not up until next march.

As it is I've a very good relationship with my bank manager (My sister works in the branch).
I'd be very surprised if they made me go to repayment when I simply can't afford it.
Particularly given that the property is not in a negative equity situation albeit given todays values it has a high LTV (approx. 90%).

The reality is I don't see any reason why they would make a good customer go to repayment if they can't afford it.
(I also have a couple of other properties with them)

It doesn't beneift either party.


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## Kemo_Sabe (10 Jul 2008)

qwertyuiop said:


> 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


 
*If* you fund your property investment prudently and do appropriate stress testing\scenario analysis etc, I'm sure that is the case

You, on the other hand, borrowed interest-only on overpriced assets which are depreciating by the minute while the costs of funding are increasing and rental yields are falling. A perfect storm if you will.

This was not prudent but reckless.

It all comes down to your appetite for risk I suppose...good luck with your negotiations with your Bank Manager


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## z106 (10 Jul 2008)

Kemo_Sabe said:


> *If* you fund your property investment prudently and do appropriate stress testing\scenario analysis etc, I'm sure that is the case
> 
> You, on the other hand, borrowed interest-only on overpriced assets which are depreciating by the minute while the costs of funding are increasing and rental yields are falling. A perfect storm if you will.
> 
> ...


 
I would disagree that I was wreckless.
Teh current LTV of my irish portfolio I woudl estimate is around 85%-90%.

The rent comfortably pays off the interest for teh portfolio.

The properties are always renetd as they are all situated in Dublin 2.

If you are in it for the long haul then price dips mean little.
i.e. It's all cyclical.
That's teh nature of teh beast.

One assumption i did make is that i woudl continue being able to make interest-only paymenst.

Only time will tell - but i reckon/hope that should be fine.

If that is not allowed then yes...I may be in trouble.
If it is allowed - then i see no danger.


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## Kemo_Sabe (10 Jul 2008)

qwertyuiop said:


> One assumption i did make is that i woudl continue being able to make interest-only paymenst.
> 
> Only time will tell - but i reckon/hope that should be fine.
> 
> If that is not allowed then yes...I may be in trouble.


 
if your mortgage agreements are to hand, would you mind digging them out and seeing what they say about the reversion to a capital and interest schedule from interest-only? When is this scheduled to happen and is there any mention of negotiating a special deal as you appear to have placed a lot of hope in?

I would be genuinely interested to know and it will help people trying to advise you too.

Also, where do you get your number of 85-90% LTV - is that based on current asking prices in the area(s) for your properties?


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## z106 (10 Jul 2008)

Kemo_Sabe said:


> if your mortgage agreements are to hand, would you mind digging them out and seeing what they say about the reversion to a capital and interest schedule from interest-only? When is this scheduled to happen and is there any mention of negotiating a special deal as you appear to have placed a lot of hope in?
> 
> I would be genuinely interested to know and it will help people trying to advise you too.
> 
> Also, where do you get your number of 85-90% LTV - is that based on current asking prices in the area(s) for your properties?


 
Mortgage papers are not to hand at all.

One property is due to go to repayment next march.
2 more are to go to repayment in 2.5 years time.

Presumably there s no mention of negotiating another deal.
As in - why would there be?
The contract is one deal. I don't see any reason why it would go into later potential other contracts in this contracts detail.
This contract is an agreement in its own right.

The figure of 85%-90% LTV is a figure I have come up with going by what I know of teh current dublin market.
It's only an estimate obviously.


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## Kemo_Sabe (10 Jul 2008)

qwertyuiop said:


> Mortageg papers are not to hand at all.
> 
> One property is due to go to repayment next march.
> 2 mpre are to go to repayment in 2.5 years time.
> ...


 
OK; more questions! First a recommendation, find those mortgage docs and go through them with a fine toothcomb. Discover what the eact situation is re. coming off the IO period for each property

are you finding that your rents are falling on these properties or are they holding up? Do you have any empty periods between lets?

what would the effect be if another 100bps was put onto your mortgage rates? what about another 200bps? what rate are you paying now?

is your estimate of LTV based on asking prices or achievable selling prices?

what other sources of income have you got?

I know this may all appear a bit nosy but unless people know the facts, they are hardly in a position to advise you


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## z106 (10 Jul 2008)

Kemo_Sabe said:


> are you finding that your rents are falling on these properties or are they holding up? Do you have any empty periods between lets?
> 
> what would the effect be if another 100bps was put onto your mortgage rates? what about another 200bps? what rate are you paying now?
> 
> ...


 
Teh rents are the same/risen slightly from 2 years ago.
Another 100 bps or 200 bps means I would have a shortfall each month for the interest owed when my mortgages go from their current staus of fixed.
(They are all fixed until they go off teh interest only )

I believe my estimate of LTV to be correct.
WOrst case scenario, definitely not in negative equity.

Other sources of income are my job, and I also have a place in poland which i think is doing ok.
Although - that has not yet completed. 
Won't be so for another year. I hope to keep that place.

Ideally I could release money from there at some poin in teh future.

Have a place in London too which i am currently trying to flip and trying to get back my 10% deposit.
Won't be completed for another 3 years.


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## grackal (10 Jul 2008)

qwertyuiop said:


> 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.



Am I wrong in saying that generally speaking, in nominal terms, *everything* rises?

Something increasing by 5% on average in an environment with 6% inflation is losing its value in real terms. In 30 years, a million euro might be the average industrial wage. Woo hoo, gold houses for all!


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## z106 (10 Jul 2008)

grackal said:


> Am I wrong in saying that generally speaking, in nominal terms, *everything* rises?
> 
> Something increasing by 5% on average in an environment with 6% inflation is losing its value in real terms. In 30 years, a million euro might be the average industrial wage. Woo hoo, gold houses for all!


 
You are correct in that in nominal terms pretty much everything rises.

Teh difference is when teh money is borrowed (as it is for most propeties) then inflation doesn't count as much.

E.g. Lets say I took out a 100% mortgage for a property woth 1 million.
Lets say teh property rose 5% in teh year.
Lets also say that inflation was 5%.

Therefore - in real terms the value of the property remains flat.
Lets say you sell the property atthis stage. (Lets forget about tax, atamp duty etc.)

You get 1,050,000 from a buyer.
You pay teh bank bank their 1,000,000.

You still have 50k in your pocket - which due to inflation is only worth about 48k in todays money.

i.e. Bottom line - when buying property with borrowed money,it is nominal values that matter - Not real values.


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## grackal (10 Jul 2008)

qwertyuiop said:


> You are correct in that in nominal terms pretty much everything rises.
> 
> Teh difference is when teh money is borrowed (as it is for most propeties) then inflation doesn't count as much.
> 
> ...



OK, but that does not take into account the cost of borrowing the 1,000,000. You have dismissed this, but the fact is that the whole house of cards fall down if the price of borrowing the money is not covered by the rental values of the properties. The cost of finance over the year for a situation as described above would be 50,000 with a 5% interest rate. You have failed to take into account that interest rates were at their lowest ever rates and were only going up. 

Unfortunately, your plan while good in a vacuum makes assumptions which amount to three fatal flaws:

* low interest rates *forever*
* rising property prices *always*
* rental value covering costs *every month, every year*

So whats your plan if they will not keep the current favorably fixed rate interest only terms going?


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## Flax (10 Jul 2008)

grackal said:


> OK, but that does not take into account the cost of borrowing the 1,000,000. You have dismissed this


 
I think because "the rent covers the interest" he sees the 50k as his profit.


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## kramer2006 (11 Jul 2008)

shanegl said:


> Can we safely say then that this theory has more risk then originally thought?
> 
> http://www.askaboutmoney.com/showthread.php?t=59038



Shanegl, the OP has come here for advice. No need for gloating.


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## Jethro Tull (11 Jul 2008)

kramer2006 said:


> Shanegl, the OP has come here for advice. No need for gloating.


 
But the poster was gloating about how clever he was on the original thread.


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## shanegl (11 Jul 2008)

kramer2006 said:


> Shanegl, the OP has come here for advice. No need for gloating.



I wasn't gloating, I was pointing out that its a risky situation, as evidenced by his worries to be able to finance his mortgage. Its a warning for others.


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## Remix (11 Jul 2008)

> The properties are always renetd as they are all situated in Dublin 2.
> 
> If you are in it for the long haul then price dips mean little.
> i.e. It's all cyclical.
> That's teh nature of teh beast.


 
A chart of Dublin house prices doesn't have what I would think a cyclical appearance.

The charts most dominant feature appears to be the single massive parabolic move upwards in the years prior the current financial crisis.


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## ClubMan (11 Jul 2008)

Over what period of time?


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## cromulent (11 Jul 2008)

qwertyuiop said:


> E.g. Lets say I took out a 100% mortgage for a property worth 1 million.
> Lets say the property rose 5% in the year.
> Lets also say that inflation was 5%.


 
Sorry, what's the interest rate on that 100% mortgage?

Or is this one of those 1 million euro interest free mortgages that you hear so much about.


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## Howitzer (11 Jul 2008)

qwertyuiop said:


> You are correct in that in nominal terms pretty much everything rises.
> 
> Teh difference is when teh money is borrowed (as it is for most propeties) then inflation doesn't count as much.
> 
> ...


 
Qwertyuiop, this is getting embarressing. You've not included the cost of the mortgage - which at a rate of 5.25% (todays rate) would mean even though the property increased in value over the period you've paid more for the mortgage than the property has risen in value - in any terms - real/nominal/whatever.

I appreciate you may have tenants paying this via rent but you got to include all figures rather than just playing around with magic numbers.


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## VOR (11 Jul 2008)

It is my opinion that bank managers have very little say in the credit decisions in the banks. A general point but one considering when discussing local branch managers and their ability to extend interest only terms.

Sure, they can do up a lovely note recommending a course of action but head ofice and a "credit committee" will ultimately make the decision. If there is any one working in a bank who disagrees and holds a local lending discretion, please let me know.

Your friendly bank manager is a sales man who pitches proposals. No more than that. Most don't have the authority to sign off on an unsecured €25K loan nevermind a property investment portfolio.

If your interest only period is up, they may fight your corner but the bank criteria will decide the outcome.

Sit down and discuss your request locally & let head/regional office make the decision or refinance to another bank offering a longer interest only term. Both options should be done as soon as possible.


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## z106 (13 Jul 2008)

Howitzer said:


> Qwertyuiop, this is getting embarressing. You've not included the cost of the mortgage - which at a rate of 5.25% (todays rate) would mean even though the property increased in value over the period you've paid more for the mortgage than the property has risen in value - in any terms - real/nominal/whatever.
> 
> I appreciate you may have tenants paying this via rent but you got to include all figures rather than just playing around with magic numbers.


 

The whole point of my earlier post using the example of 1million was for illustration purposes only.
I actually was purposely picking numbers out of thin air.

I was specifically replying a previous thread where someone was saying it is real terms that matter - not nominal terms.
I used the above illustration to in fact illustrate the opposite.

That was the only point of my post.

People were not supposed to get bogged down in the figures i used.
Perhapos i should have stated that more clearly.

But if were to take those figures, then say with an 80% mortgage it would require a yield of 4.2% based on current interest rates of 5.25%.

That yield is available currently in dublin city centre.


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## z106 (13 Jul 2008)

Jethro Tull said:


> But the poster was gloating about how clever he was on the original thread.


 
The reason I started the previous thread is because many many time on this site people would come on asking whether they shoudl sell a property.
So i figured for once and folr all create a thread dedicated to teh argument.

I always have - and still do - strongly think that someone should NEVER sell (unless they absolutely have to).
If you want to realise some cash then remortgage.

The reason I gave for this logic is all in the other thread.
It's a school of thought which I amongst many others adhere to.

I would certainly not call it gloating drawing on my own experiences as an example of that investment strategy.
In fact - if anything it showed i was putting my money where my mouth was instead of just mouthing off hypothetically.


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## redo (14 Jul 2008)

qwertyuiop said:


> The reason I started the previous thread is because many many time on this site people would come on asking whether they shoudl sell a property.
> So i figured for once and folr all create a thread dedicated to teh argument.
> 
> I always have - and still do - strongly think that someone should NEVER sell (unless they absolutely have to).
> ...


If you NEVER intend selling, how do you expect to 'realise' a profit?


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## z106 (14 Jul 2008)

grackal said:


> So whats your plan if they will not keep the current favorably fixed rate interest only terms going?


 
As an update, I have been onto the bank manager and have been informed that he would see it very unlikely for the bank to insist on capital repayments.


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## Kemo_Sabe (14 Jul 2008)

qwertyuiop said:


> As an update, I have been onto the bank manager and have been informed that he would see it very unlikely for the bank to insist on capital repayments.


 
someone's view is worth nothing, ask him to put it in writing *TODAY*


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## JohnBoy (14 Jul 2008)

qwertyuiop said:


> As an update, I have been onto the bank manager and have been informed that he would see it very unlikely for the bank to insist on capital repayments.


 
An excellent reason not to buy the shares of an Irish bank (if an Irish bank is doing the lending here).


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## grackal (15 Jul 2008)

qwertyuiop said:


> As an update, I have been onto the bank manager and have been informed that he would see it very unlikely for the bank to insist on capital repayments.



Thats great news for you. As the lads say, get it in writing!


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