Interest only mortgage - questions
Discussion
Ozzie Osmond said:
I'm not familiar with interest only but have always thought all mortages have a "term", whether 25 years or some other duration.
They do, sorry thought that was fairly straight forward.I assumed that the OP was asking if after a few years the mortgage switched from IO to repayment.
eliot said:
jinkster said:
I am not familiar with Interest only. What happens after 25 years - pay the total?
Yes - or panic when you realise you dont have the money.My parents bought their first place for £3.5k, i bought mine for £39k. Both of us struggled to pay the full mortgages in the early years' which got easier as the years went by.
Of course assuming inflation will deal with your debit is not a great strategy
98elise said:
It depends on how inflation has affected your debt.
My parents bought their first place for £3.5k, i bought mine for £39k. Both of us struggled to pay the full mortgages in the early years' which got easier as the years went by.
Of course assuming inflation will deal with your debit is not a great strategy
Inflation doesnt affect your debt. Your debt on an interest only mortgage remains the same, assuming you dont repay any principle, over the full duration of the mortgage. What inflation affects is your ability to repay the debt. Positive inflation will generally lead to rising salaries and hence rising personal income. Add to that that you might get promoted in your job or move to a higher paid job and your ability to repay the interest on an interest only mortgage should improve notably over time, assuming that interest rates dont rise faster than you personal income. My parents bought their first place for £3.5k, i bought mine for £39k. Both of us struggled to pay the full mortgages in the early years' which got easier as the years went by.
Of course assuming inflation will deal with your debit is not a great strategy
To answer the OP, yes an interest only mortgage has a duration and at the end the lender will expect you to repay it in full. The sum will come from a) personal savings you make over the life of the mortgage, and/or b) equity built up in the property. So if you dont have any savings you will need to sell your property and hope that it is worth at least what the lender lent you 20/25/30 years ago.
Be warned though that an interest only mortgage is an easy way to financially overstretch yourself because the repayments can be so low. If you are on a 2.5% fix for 2 years and interest rates rise just 1.25 percentage points to 3.75%, your monthly repayments will rise by 50%.
GT2CS said:
98elise said:
It depends on how inflation has affected your debt.
My parents bought their first place for £3.5k, i bought mine for £39k. Both of us struggled to pay the full mortgages in the early years' which got easier as the years went by.
Of course assuming inflation will deal with your debit is not a great strategy
Inflation doesnt affect your debt. Your debt on an interest only mortgage remains the same, assuming you dont repay any principle, over the full duration of the mortgage. What inflation affects is your ability to repay the debt. Positive inflation will generally lead to rising salaries and hence rising personal income. Add to that that you might get promoted in your job or move to a higher paid job and your ability to repay the interest on an interest only mortgage should improve notably over time, assuming that interest rates dont rise faster than you personal income. My parents bought their first place for £3.5k, i bought mine for £39k. Both of us struggled to pay the full mortgages in the early years' which got easier as the years went by.
Of course assuming inflation will deal with your debit is not a great strategy
To answer the OP, yes an interest only mortgage has a duration and at the end the lender will expect you to repay it in full. The sum will come from a) personal savings you make over the life of the mortgage, and/or b) equity built up in the property. So if you dont have any savings you will need to sell your property and hope that it is worth at least what the lender lent you 20/25/30 years ago.
Be warned though that an interest only mortgage is an easy way to financially overstretch yourself because the repayments can be so low. If you are on a 2.5% fix for 2 years and interest rates rise just 1.25 percentage points to 3.75%, your monthly repayments will rise by 50%.
I think you and 98Elise are saying the same thing, you just wrote the long version.
Ozzie Osmond said:
I'm not familiar with interest only but have always thought all mortages have a "term", whether 25 years or some other duration.
They do but in reality if you carry on paying the interest element after the end of the term the lender is likely to be unable/or unwilling to force repayment. This is currently a big problem for lenders, hence another reason (along with MMR) why a new IO loan is much harder to get.cashmax said:
So it does affect your debt then.
I think you and 98Elise are saying the same thing, you just wrote the long version.
Nope doesn't affect your debt on an interest only mortgage, as by nature it is only interest only. If you made overpayments then you could claim that it did affect your debt. I think you and 98Elise are saying the same thing, you just wrote the long version.
eliot said:
jinkster said:
I am not familiar with Interest only. What happens after 25 years - pay the total?
Yes - or panic when you realise you dont have the money.audidoody said:
Just take out an endowment policy on an interest-only mortgage. At the end of the term you'll have enough to pay off the loan and a big cash bonus to spend on coke and hookers.
Or so they told me in 1988
Or a "pension mortgage" - that was flogged to me in 1989 at the age of 20 which was equally daft.Or so they told me in 1988
With an Offset you have a linked bank account that offsets the outstanding balance of the mortgage so you only pay interest on the difference.
e.g. mortgage 250k
offset bank account £100k
interest paid on £150k
With an Interest only there is no linked bank account so even if you had £100k in the bank you would still pay the interest on the full £250k
In terms of the final repayment there's little difference. Basically the advantage of an offset is the flexibility that you can dip into the funds in the linked bank account if / when you need them. Personally I never understood why they weren't more popular in the past although now they won't be because they (usually) have much stricter acceptance criteria than repayment mortgages.
e.g. mortgage 250k
offset bank account £100k
interest paid on £150k
With an Interest only there is no linked bank account so even if you had £100k in the bank you would still pay the interest on the full £250k
In terms of the final repayment there's little difference. Basically the advantage of an offset is the flexibility that you can dip into the funds in the linked bank account if / when you need them. Personally I never understood why they weren't more popular in the past although now they won't be because they (usually) have much stricter acceptance criteria than repayment mortgages.
Offsets are primarily repayment mortgages. They have the linked bank account to enable the interest and repayment elements of the monthly payment to vary.
By increasing the linked bank account balance you therefore reduce the interest payable on the loan and increase the repayment element in your monthly payment enabling the borrower to pay off the mortgage faster.
By increasing the linked bank account balance you therefore reduce the interest payable on the loan and increase the repayment element in your monthly payment enabling the borrower to pay off the mortgage faster.
GT2CS said:
cashmax said:
So it does affect your debt then.
I think you and 98Elise are saying the same thing, you just wrote the long version.
Nope doesn't affect your debt on an interest only mortgage, as by nature it is only interest only. If you made overpayments then you could claim that it did affect your debt. I think you and 98Elise are saying the same thing, you just wrote the long version.
swerni said:
It was more a rhetorical question, In reality an offset and IO are the same in respect that you still need to provide some kind of vehicle to repay the capital.
Not really, if you put no cash in the Offset account you pay the full mortgage payment to cover the capital and the interest. There is no repayment vehicle required.swerni said:
Sarnie said:
swerni said:
It was more a rhetorical question, In reality an offset and IO are the same in respect that you still need to provide some kind of vehicle to repay the capital.
Not really, if you put no cash in the Offset account you pay the full mortgage payment to cover the capital and the interest. There is no repayment vehicle required.Gassing Station | Finance | Top of Page | What's New | My Stuff