Dear Readers,

How is everyone today? I hope you’re all well as usual! Things here are ok too. Actually, I’ve still got a lung issue, and I’m on new antibiotics now (who doesn’t love to try something new right?). This is my third batch of antibiotics in 3 months. I’m not 100% sure, but I think that’s a new personal best for me! Woohoo!

Anyway, so when I was a kid, I don’t ever remember antibiotics bothering me, but now as an adult, some of these antibiotics really tire me out. The ones I’m on now (clarithromycin) are included in that list (though they’re not as bad as moxifloxacin – that’s like a frying pan whacking you in the face…)! 

(Errr.. hello? Is today’s property story about a hospital…?)

OK, so today we’re going to talk about “interest only” mortgages, which in recent years, made a bit of a comeback. In my previous post, we talked about how interest only mortgages can… errr.. “make you rich”. Today, I just wanted to talk a bit more about them, in case anyone’s not overly familiar. 

Interest Only Mortgages In The UK

There are apparently around 1.5 million active interest only mortgages in the UK right now (2017). I remember a friend first told me about how great they were around 20 years ago. Actually, he was a friend of my uncle, and he had taken an interest only mortgage 20 years earlier.

(So a brand new and contemporary story then…?)

Now, I don’t remember exactly, but I’m guessing he got an interest only mortgage around 1980. That means the interest rates were at their peak (or thereabouts).

How Do Interest Only Mortgages Work Again?

Well, in an interest only mortgage, you only pay the interest on the loan for the period of the mortgage (so if you borrow £100,000 at 3%, your annual repayment amount is £3,000). When the mortgage period is over (e.g. 25 years later), you will need to have found the original loan amount from somewhere (i.e. the £100,000) so as to repay the bank. 

My Uncle’s Friend’s Mortgage

In the case of my uncle’s mate, to illustrate what I mean (with easy to understand amounts…), the story went something like this:

He calculated that he could pay £1,000 a month. As it happened, he got a mortgage at the peak of the interest rates (by pure chance), which cost £800 a month (leaving some breathing room in case interest rates went up). However, as it turned out, the interest rates fell significantly, and he was left needing to pay £50o a month instead of the “£800 to £1,000” he had calculated.

Note that in the 1980s, £500 a month was a lot of money, so these numbers aren’t real. Just illustrative…

Meanwhile, he had an endowment to go with it, but he wasn’t too fussed, because his salary went up and so he was able to save (with relative ease) the initial capital. The endowment covered most of the loan and he just topped it up a little. Now, it’s important to remember that inflation in the 80s was significantly higher than what it is today (though the Brexit and weak pound are likely to help bring inflation to higher levels that we’ve been used to for the past 20 years). 

So Then What Happened?

Well, my uncle’s friend was one of the lucky ones. He essentially got a house with a pretty cheap loan (additionally, it’s in central London, so worth tons now!). I don’t know whether there were more lucky ones than unlucky ones, but it all went downhill at one point. 

Organisational Skills Required

The thing is, interest only mortgages assume that you are a bit organised. You have to be organised enough to actually put money aside (significant sums of money)! You must save enough to buy a house outright! Who can do that…? 

Most people can’t. So most people shouldn’t get an interest only mortgage. Now, if you’re like my wife, and generally doubt what I say…  you can check out this survey from 2013. It says that 66% of homeowners on interest only mortgages (that’s two-thirds!), will not be able to pay off their mortgage comfortably. This 66% will either remortgage, extend their mortgage, take out another loan, downsize or borrow from friends and family. Just 34% will pay out of their savings or overpayments. 

And this brings us the cons…

The Cons of Interest Only Mortgages

The disadvantages that interest only mortgages have, generally depend on your personal situation. Older people, for example, can’t remortgage. People without equity in the property can’t remortgage either. If the property loses its value and you’re in negative equity, then you can’t sell the house either (if you do, you won’t get the full amount). 

So, imagine, you bought a house, you’ve been paying interest for 25 years, and now you can’t sell the house, because it’s not worth enough. That’s just not funny…

Now, if you’re in the South East, then you’re not likely to be in negative equity. However, even here, if you don’t have the money, you’re probably going to have to downsize. That’s hardly a catastrophe, because you may well have made some money! You’ll still need to sell up though and find another place to live.

However, many of these are moot points. This is because the government in recent years has forced the banks to take more care in ensuring that people with big loans are not left in the proverbial ditch. 

The Interest Only Mortgage Landscape Today

These days, a bunch of banks don’t even offer interest only mortgages (not at all). The interest only mortgage today has become a tool primarily for those trying to expand their property portfolio. Essentially, if you don’t already have a decent wad of cash in the bank, you’re not going to be able to get an interest only mortgage. 

They’ll ask you to tell them in significant detail, exactly how you’re going to make the initial loan amount in the mortgage period, just to give you the money. Additionally, they’ll only give you 75% of the property’s value (and those are the generous ones). Many banks will only give you 50% of the purchase price. That’s no good to people trying to get on the property ladder for the first time (but it works just fine if you want to build up a property portfolio! ;-).

On the other hand, there is a “new thing”, called the “part and part mortgage”. This is a combination of an interest only mortgage and a traditional mortgage. So if you borrow £100,000, the £50,000 will be interest only and the other £50,000 will be on the traditional repayment basis. This is one way to get on the property ladder with lower outgoings (to begin with). Note though, that you will still need to show exactly how you’re going to come up with the interest only loan amount at the end of the loan period.  

Conclusion

Thankfully, the banks these days are acting a little more responsibly than in the 80s and 90s. In my opinion, that’s a good thing. Practically, it means that for most people, the interest only mortgage is simply a “loan relic” of the past. For those already pretty well off, then it’s potentially a tool to faster portfolio expansion. For the in-between, they can get the part and part mortgage, but they’ll have to prove in advance that they’re organised folk. I’m a big fan of organisation myself!

And that concludes our little casual history.

Which leaves me with some comments from the missus. She says the part about my lungs and antibiotics are way more interesting than the sleep inducing topics I’ve been writing recently…  

Is that true dear Readers? Is she right? And if so, should I tell her so? Let me know dear Readers!

Till next time,
SJ

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