The Great Interest Only Mortgage Debate

 

The Great Interest Only Mortgage Debate

I’m not sure that I fully understand the ‘who-ha’ about the interest only mortgage problem since the value of a mortgage over time shrinks in relation to the underlying asset value.  Anyone taking out an interest only mortgage, say 20 years ago, has saved capital repayments over time and therefore has enjoyed a higher standard of living.  Unless they have taken out an endowment policy to cover the repayment of the mortgage one assumes that the value of the mortgage in relation to the value of the property has shrunk in favour of the homeowner.

If the interest only mortgage payments are becoming unaffordable the property could be sold, mortgage paid and a cheaper property bought without a mortgage.

Example:  if you bought a two bedroom house in the suburbs of London for around £120,000 in 1998 you would be looking at a probable value today of some £350,000 and your 70% mortgage would now be 20% of the current value.  The property could be sold, the mortgage redeemed and another property, maybe in an adjoining suburb, bought for 20% less.  Problem solved.

In the meantime over the last 15 years, since you have not been paying capital repayments, you have enjoyed a better life style.  There is no such thing as a free lunch.

Of course it is always preferable to make capital repayments along the way even if they are spread over a longer period to make them more digestible.