Mortgage question... go to interest only for a while?

Well, lots of people aren't.

Tsk. In the subject line you said "for a while". Would you care to estimate how long you'd propose this "while" to be?

So that would make your gross salary about £24k. You can't really afford a £120k loan, and would be well advised to sell up sooner rather than later.

Don't forget the amount you pay off each year grows exponentially.

Not *yet*.

Yes, probably. But ask yourself whether "probably" is good enough. It's a gamble and you must decide whether the odds are right for you. You'll have less to lose if you trade down. If you were to use your £40k equity to buy a place worth £120k, you'd only have to service a mortgage of £80k, saving you £300 a month while still staying on repayment terms. Or think what you could rent for £600 a month, and your equity could (though it's not a good idea to fritter it away like this but I'll mention it anyway) fund over 5 years' rent, thus freeing up £900pm of your income. Now that could really help you get back on your feet after only a short while. It might even let you save up so that at the end of those 5 years you've got your equity back up to where it was, and let you think about buying again.

Ask the Japanese.

Some good advice there from Ronald: you've got way too much debt and you should be renting, no question. The good news is that renting an equivalent or better place could well work out cheaper for you. Do not, whatever you do, switch to interest only.

Sentiment has clearly changed in the property market and even if you can sell your place you might be unpleasantly surprised at the price you can achieve, which obviously eats into your equity.

Never met you before but sarcasm seems to become you somehow.

"Tsk"? You're not talking to a five year old, Before I've even got this far I feel you're playing the "I'm better than you" card.

A couple of years. Then we're selling up and have other plans.

£27k, to be accurate. They take a lot towards our pension scheme.

Agree on the affordability, but not on the selling up.

Do you know something we don't? Thought not.

Here 120k will buy a flat if I'm lucky. This is not a cheap area.

Sweet FA. Bedsits / 1 room flats here are nearly £500.

I do see the logic, but not around here.

"In" joke I guess.

I do appreciate the answer, but do you realise just how... condesending your attitude looks? Thanks anyway.

Don't I know it, but short of winning the lottery my income won't increase by much in the near future.

Disagree. Renting means I give £xx to the landlord. At the end of a period of time I have nothing but a dry head. Purchasing means I give £xx to a lender. At the end of the same period of time I have value in the property. Exactly how much is, of course, in the lap of the Gods but historicly prices have only increased in the last couple of hundred years.

You say don't, but not why.

Some of us live in houses, sorry I mean homes, and don't just look at them as assets.

It unquestionably *is* a gamble, but I don't think the odds are quite as stacked against us as you do.

Thanks for your opinions, they are appreciated even if I don't think along the same reasoning.

Simply not true, as anyone who bought in the late 80's can tell you. I think you are running a very big risk that property prices will continue to rise and you risk having all your equity wiped out, especially if you are looking to sell in 2 years time. I don't know about your area specifically, but in general there are good quality rentals to be found for less rent than the interest portion of the mortgage for an equivalent property. You should at least explore the option in some detail.

Because the debt will grow by the compound interest you are deferring and it will become an even nastier millstone around your neck - you are putting your head in the sand if you think interest-only is the answer. You are over-leveraged for someone on your income and the sooner you face up to that the sooner you will be able to get out of the hole.

I'm afraid with the level of debt you have you need to consider the value of your assets very carefully.

No, but ask yourself honestly if that is wishful thinking or cold, rational analysis of the current property market data? There is a considerable risk of your equity being wiped out or even going negative.

You're welcome.

"Sammy" wrote

Weren't people saying that, this time last year?

Yes, some were, but I don't recall Halifax forecasting 2% falls last year. They have for 2005.

Moral: just beacause you no longer believe the cries of "wolf" doesn't mean there isn't a wolf.

"Sammy" wrote

They might not have *always* gone up, but the largest falls over any two-year period were all less than 15%. And that was only if you bought in 1989 or early 1990...

"Sammy" wrote

Why compare the rent to the interest portion?

Even paying interest-only, and leaving the mortgage debt constant, would generally lead to the *equity* increasing through price rises - over a sufficient period (few years+).

Hence, you should compare the rent to **less than** the interest portion of a mortgage for an equivalent property.

"Sammy" wrote

Now you are sounding daft.

Under "interest-only", the debt stays exactly the

*same*, because there is *no* interest being "deferred". [The interest is the only thing being paid, hence "interest-only".]

"Sammy" wrote

As I remember it, they forecast only 8-9% rise for 2004. And actual average price rise in 2004 was much more than this, even by the end of the year!

Hence quite possible that the current "-2% forecast" will turn into an "actual +2% rise" ?

"Tim" wrote

Not strictly true. IIRC the 15% figure is based on the whole-year average from one yar to the next. The fall from peak to trough was thus quite a bit higher.

"Mike Barnard" wrote

Rental yield is about 5% of property value, so renting a property costs about 5% of its price per annum. Mortgage interest rates are also about 5%, so renting the money with which to buy a property also costs about 5%. Basically they cost the same so you are betting that the capital gains will exceed the maintenance cost. You may or may not end up ahead on that basis.

Sorry, I posted the last in a bit of a rush, you are correct: I should of course have said that the *real* debt burden would increase by the compound amount of the capital repayments you are deferring. Happy now?

Not sure about your assumption of price rises. Huge leap of faith.

When has a mortgage lender ever talked the market down? Come on, even they have admitted things have gone too far.

"Sammy" wrote

That's better!

"Sammy" wrote

OK - you want to talk about the "real debt" - which will decrease with inflation (100K 'in the future' is worth less than 100K 'now') ...

"Sammy" wrote

Eh?

"Sammy" wrote

What are you trying to say? Care to put any figures to it, in an example?

"Sammy" wrote

Certainly not - is what you said this time meant to make any sense?!

"Sammy" wrote

"Leap of faith"? - Can you show me a single 15 year period in the last 50 years that hasn't shown an overall increase in house prices?

"John Redman" wrote

" **the*** 15% figure " ??

I haven't pulled this 15% figure out of a report or anything - I simply calculated all the two-year changes myself from the Nationwide figures and noted that the largest was actually under 14% ...

This guy said he was considering selling up in 2 years time. What has

15 years got to do with anything? The price risk is on the downside over the next 2 year period - do you disagree?

Are you advising he doesn't continue to pay down his debt or sell? That's irresponsible. The debt is not being eroded by inflation (as lots of people relied on in the past), you can no longer continue to rely on house price inflation, or wage inflation, there is evidence that the next move in interest rates will be up, his LTV will increase/equity decrease and the debt will stick around for a long time if he does not get on top of it now. It will seem pretty real to him.

Sammy was actually quite right. The debt *does* grow exponentially, but this should have been qualified by calling it a "relative" debt, i.e. what grows exponentially is the *shortfall* between making the normal repayments and paying only interest.

If the OP pays £200 less each month, then 2 years down the line his debt will be the same as it is now, but if he instead continues to pay those £200pm, it will be less by an amount equal to £200 growing exponentially for 24 months, plus £200 growing for 23 months, etc.

Essentially, by "saving" £200pm now, he's incubating a hornet's nest which will come back to bite him (what an awful mixed metaphor) as somewhat more than £4800 of extra debt he would not otherwise have had. Still, to keep a sense of proportion, the effective shortfall would only be about £230 over the 24 month timescale (based on an interest rate of 0.4%pm).

"Sammy" wrote

My "assumption" (as you called it) was about general price increases over the fullness of time - to which you said "Not sure about your assumption of price rises. Huge leap of faith." This is what 15 years has "got to do with".

"Sammy" wrote

If I knew which way prices were going to go over the next two years, I'd be a very very rich man at the end of them!

I note that two years ago, an awful lot of people were also saying: "The price risk is on the downside over the next 2 year period" ...

"Sammy" wrote

I'm not advising anything. It's up to him. But the point is, we don't know which way things are going to go - maybe up, maybe down, maybe sideways.

"Sammy" wrote

Some are suggesting that the next movement will be up, but followed by successive moves *downward*...

"Sammy" wrote

Only if prices *do* fall - but he's a gambling man ...

What you're forgetting, though, is the *overall* picture. Using an interest-only mortgage with a bigger house can actually lead to the person's "net worth" (house value less mortgage debt) growing more quickly than it would using a repayment mortgage with a smaller house!!

Let's suppose the mortgage interest rate is 5%:

If house prices increase at exactly 5%pa, then the equity will increase by enough to cover the 5% interest being paid on the mortgage, plus a 5% return on his original equity - in other words, his total "net worth" (house value less mortgage debt) would be the same as if he had sold-up and placed his entire equity into a savings account giving 5%. [BUT - note that it's equivalent to receiving 5% NET of tax - as there is no tax to pay on increases in the value of your main home!]

Now, anything over 5% for house price rises will make him even better off than receiving 5% tax-free!

The OP is a gambling man - so he's hoping that house price increases won't fall below, say 5%. If he keeps the bigger house, he gets to make much more than 5% on his equity (leveraged). If he sells and buys a smaller house, then the return won't be leveraged as much and he'll effectively make less on his equity (down to as low as 5% if he buys outright).

Of course, if house prices rise at much less than 5% - or even fall - then he's leveraged against himself. But that's why it's called a GAMBLE!! However - taken over a sufficient period of time, the gamble is more & more likely to "pay off"...