People with Interest Only Mortgages

[coolsurfer]

They get comparatively cheaper mortgages because they get 20% tax relief on mortgage interest payments - they used to get 40% until this year! As a home owner why don't I get that? Rent is charged at the market rates, not the cost of the mortgage - for the last few years rents have been going up and mortgages have been getting cheaper which means £££ for landlords.

The problem is that "selling on" is key to the business of BTL. Consider the following scenario:

1. Buy new build flat for £200k for minimum investment (10% @ £20k)
2. Interest-only mortgage of say £600pcm
3. Rent at market rates of £900pcm
4. Wait 10 years, that's £36k gross profit but then like you say you've got costs, tax to pay - so let's be pessimistic and say you've "only" made £25k. I agree that's not a massive profit over 10 years, but still a nice to have (>10% ROI).
5. Sell the flat for £300k - £180k for mortgageco and £120k for you - that's 60% ROI per year for doing basically sod all.

Granted there's risks e.g. voids, and who knows, maybe one day house prices really will crash and all the BTLers will lose out. I can't help feeling though that in that scenario the poor old tenant still loses their home when the mortgageco repossess the property.

Good post. I just don't get why more in this country don't think about things with a 20 or even a 30 year horizon. Too much 'live for now' going on if you ask me. How much you wanna bet all these folk with interest only mortgages have a nice car, expensive smartphone, sky and the annual holiday(s) to go with it.

They just don't understand the concept of "live within your means". Once you've done that, invest the savings so that you get a passive income and then mess about with that if you like. A few of these folk need to read "Richest man in Babylon" or "The millionaire next door". £10 or so of investment will change your life! Doesn't need to be taught in school.

 

[coolsurfer]

Sometimes people are forced into that position. Job opportunity somewhere. Parents kicking them out. Various reasons.

Appreciated mate but if someone's parents kicked them out, the parents clearly lack understanding about how the world works and are likely in the same financial scenarios and so that should give the "kicked out" child a proverbial kick up their arse so that they're never in that position again. Which means learn and do not follow in their footsteps.

Why do people have kids to kick them out at 16? I want to have kids soon and they will be my legacy...I will not kick them out and make sure they think long term about financial decisions.

 

[scorza]

I heard there's affordable property in Syria atm.

Yeah, especially if you're after a bit of a do'er-up'er

 

[Haggisman]

And one of those reasons will be because they are cash poor but asset rich.

You know BTL don't get cheap mortgages because they are "trade".
They still have a mortgage to pay which your rent will only just cover.

BTL landlords only really make money when they have no mortgage or sell on

No. When you buy a house you are also liable for wear and tear and repairs etc.
Its not as simple as that.

As for if they can rent then can afford to buy. There was a house near me up for sale at 1.2 million or £2k per month rent. I'd rather rent @2k that mortgage at £4k +

This is completely dependent on area though.

If I was renting my house instead of having bought it, the rent would be close to double my mortgage.

Even on a higher interest BTL mortgage, the mortgage would still be less than 60% of the rent, and the interest would be tax free...

Even with paying agency fees, and maintenance, that's still a couple of hundred every month, plus the bonus of someone else building the equity in your asset for you.

I'm sure it's different elsewhere, but to say outright that "BTL landlords only really make money when they have no mortgage or sell on" is a fallacy.

Appreciated mate but if someone's parents kicked them out, the parents clearly lack understanding about how the world works and are likely in the same financial scenarios and so that should give the "kicked out" child a proverbial kick up their arse so that they're never in that position again. Which means learn and do not follow in their footsteps.

Why do people have kids to kick them out at 16? I want to have kids soon and they will be my legacy...I will not kick them out and make sure they think long term about financial decisions.

Nice to see you failed to address the other reasons

 

[coolsurfer]

Fine, job opportunities elsewhere.


Well pick a job close to home for a start (choose a career baring in mind these things). Or, maybe the mentality of parents giving the house deposit could be a new way of life going forward. I plan to buy over 10 properties over the next 30 years (only got my home and one flat investment so far). So kids house deposits-covered. If I have a daughter, wedding costs - covered. Remember think on a 20-30 year horizon. I don't even have kids yet and I'll be damned if I don't plan accordingly.

 

[krooton]

Appreciated mate but if someone's parents kicked them out, the parents clearly lack understanding about how the world works and are likely in the same financial scenarios and so that should give the "kicked out" child a proverbial kick up their arse so that they're never in that position again. Which means learn and do not follow in their footsteps.

Why do people have kids to kick them out at 16? I want to have kids soon and they will be my legacy...I will not kick them out and make sure they think long term about financial decisions.

My parents live in South Africa, I moved here 13 years ago, I kinda have to rent

 

[balky12]

Fine, job opportunities elsewhere.


Well pick a job close to home for a start (choose a career baring in mind these things). Or, maybe the mentality of parents giving the house deposit could be a new way of life going forward. I plan to buy over 10 properties over the next 30 years (only got my home and one flat investment so far). So kids house deposits-covered. If I have a daughter, wedding costs - covered. Remember think on a 20-30 year horizon. I don't even have kids yet and I'll be damned if I don't plan accordingly.

I only said two quick that spring to mind. Parents dying could be another (and they have nothing to pass on), some people will just never be able to hold down a job that pays enough for them to save for a mortgage against the cost of rising house prices in the current environment?

Some people have jobs that move around the country, renting is a lot easier and more practical from a mobility point of view.

 

[wesimmo]

As a former Financial Advisor (salesman) I have some sympathy with these people, you're all talking as relatively intelligent people, if i had been immoral i would probably still be doing the job and have left a string of out of pocket people behind me by misadvising them and getting them to sign documents they never understood.

 

[Snookums]

I understand it can be an issue etc etc. but interest only mortgages are useful and needed. Take my family for example, all happy and everything paying a mortgage then one day, my parents split. So that leaves a single parent running a house off one income now not two. They never bought a house they couldn't afford, unfortunate events happened, we couldn't downsize so had to change to an interest only mortgage. But yes they shouldn't be supporting the idiots that took one out not realising they have to pay the whole house off.

 

[Dj_Jestar]

Ignorance shouldn't be an excuse, but there are mortgage brokers that lie through their teeth to get that commission. It is their duty to ensure they are not mis-selling products to customers, or signing them up for something they do not understand or worse can't afford. The FSA says so, before anyone disagrees, so it's irrelevant if you don't think it should be their responsibility. I wouldn't for a single second believe anyone is in their right mind to think that every single broker is honest about this.

 

[Haggisman]

Fine, job opportunities elsewhere.

Well pick a job close to home for a start (choose a career baring in mind these things).

That's all well and good, until you take into account the vast rural areas of villages and the more deprived areas around the country.

Are you suggesting no-one should live in Wales, Somerset, Cornwall etc. given that the job opportunities in these areas aren't great (unless you want to be a farmer or work in a newsagent/local supermarket)?

What if the big local employer goes out of business or decides to offshore?

Suddenly the local area is saturated with people with similar experience looking for similar roles in a job-market where there are none of those roles. Should those people stay at home to save for a deposit (on what wage exactly?) or be prepared to move across the country to find work?

Ignorance shouldn't be an excuse, but there are mortgage brokers that lie through their teeth to get that commission. It is their duty to ensure they are not mis-selling products to customers, or signing them up for something they do not understand or worse can't afford. The FSA says so, before anyone disagrees, so it's irrelevant if you don't think it should be their responsibility. I wouldn't for a single second believe anyone is in their right mind to think that every single broker is honest about this.

People still need to take responsibility for their choices.

If you don't understand what a mortgage is and how it works then either educate yourself, or perhaps you shouldn't be getting one?

Or perhaps all financial applications should be accompanied by an exam and IQ test to make sure you have a) read the T&Cs, and b) are intelligent enough to understand them?

 

[Kenai]

I wouldn't for a single second believe anyone is in their right mind to think that every single broker is honest about this.

I can appreciate the sentiment there but then again, we're talking about people not realising that an INTEREST ONLY MORTGAGE means a mortgage where you only pay the interest. It's not rocket surgery. Unless these brokers are flat out lying to people and telling them INTEREST ONLY actually means repayment, I still struggle to have any sympathy. It's in the name for goodness sake.

 

[RoyMi6]

Come on guys, do you really think they're that stupid or are they in fact GENIUS!

I mean it's a pretty cunning plan: pay less for 25 years then just say you're so stupid you didn't realise what you signed up to then get your house for free!

Damit, pretty ashamed I didn't come up with it myself!

/sarcasm

I would like to say that the idea that people don't realise that they still need money to pay off the actual mortgage/original loan at the end of an interest only mortgage surprises me, but it doesn't.

Unfortunately I agree.

 

[dowie]

Or perhaps all financial applications should be accompanied by an exam and IQ test to make sure you have a) read the T&Cs, and b) are intelligent enough to understand them?

funny you should say that - some banks are looking at psychometric testing for loans:

http://www.telegraph.co.uk/finance/...e-into-your-brain-with-personality-tests.html

no doubt people will moan about that being 'discrimination', 'big brother' etc..

but people like to moan about banks in general - if they're too slack with their lending then people get into trouble and it is all the bank's fault, if they tighten up then small businesses can't get credit, 'hardworking' people are turned down for mortgages, don't have a big enough deposit... and it is the banks fault too

 

[dowie]

I can appreciate the sentiment there but then again, we're talking about people not realising that an INTEREST ONLY MORTGAGE means a mortgage where you only pay the interest. It's not rocket surgery. Unless these brokers are flat out lying to people and telling them INTEREST ONLY actually means repayment, I still struggle to have any sympathy. It's in the name for goodness sake.

and regardless they'll have been receiving letters for several years now informing them of the issue even if they were clueless and didn't even try to understand what they were agreeing to when making the biggest purchase of their life

 

[Dj_Jestar]

People still need to take responsibility for their choices.

If you don't understand what a mortgage is and how it works then either educate yourself, or perhaps you shouldn't be getting one?

Or perhaps all financial applications should be accompanied by an exam and IQ test to make sure you have a) read the T&Cs, and b) are intelligent enough to understand them?

As I already clearly explained (irony++) it is the duty of the broker to ensure the customer understands this. If the customer buys it without understanding it, the broker has failed his or her duty and the law. This does not absolve the customer of ignorance, also as I already explained.

 

[Dj_Jestar]

I can appreciate the sentiment there but then again, we're talking about people not realising that an INTEREST ONLY MORTGAGE means a mortgage where you only pay the interest. It's not rocket surgery. Unless these brokers are flat out lying to people and telling them INTEREST ONLY actually means repayment, I still struggle to have any sympathy. It's in the name for goodness sake.

See above. The broker is still at fault for selling it to someone who doesn't understand, because they are legally obligated to ensure they understand and have the means to repay. This is a wholly separate issue from the customer being an idiot.

 

[Noxia]

Why do people rent? Why not stay at home, save the deposit and get a house within your means?

Surely this is common sense? As the son of an immigrant, my father knew that without any education in this country at least.

Think of a lot of it is the social stigma about living with your parents into adulthood. I live at home with mine with my girlfriend and we haven't rushed into buying yet as we are in an excellent position to keep on saving and have a relatively small mortgage for our first house.

 

[SlyReaper]

Why do people rent? Why not stay at home, save the deposit and get a house within your means?

Surely this is common sense? As the son of an immigrant, my father knew that without any education in this country at least.

Better idea: why don't be people just be more wealthy?

 

[Scam]

Average age of a ftb is over 36yrs old now so perhaps he's suggesting that we all put our lives on hold until then?