Interest Only Mortgages

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??
Click to expand...

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.
 
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
Click to expand...

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
 

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.
 
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.
Click to expand...

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.
 

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
 

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.
 
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.
Click to expand...

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.
 

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?
 
grackal said:
OK, but that does not take into account the cost of borrowing the 1,000,000. You have dismissed this
Click to expand...

I think because "the rent covers the interest" he sees the 50k as his profit.
 
kramer2006 said:
Shanegl, the OP has come here for advice. No need for gloating.
Click to expand...

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.
 
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.
Click to expand...

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.
 
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%.
Click to expand...

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.
 

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.
 
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.
 
You must log in or register to reply here.
Menu
Log in
Register