Interest only mortgages?

substr

And im not talking about the ones with endowment/insurance policies, just the ones where you have to pay the interest for a duration, then at the end of the duration pay the capital on the mortgage in one big lump sum.
Does anyone know anything about these? Like do you still need an 8-10% deposit? Would it be possible just to pay the interest on a place, let it out, and when the time comes sell it to pay off the capital?
Any information/sources appreciated,
Thanks

Victor

I'd say it's possible, but what in it for the bank if they are taking all the risks (i.e. you aren't putting any moeny into it)?

substr

Well they are still getting the exact same amount of money from you, as if your paying a normal mortgage.
Consider this:

House: €250,000 + 3% interest = €257,500 (total payable to bank)
Over 10 years for example you would be paying the bank €25,750/year

House: €250,000 + 3% interest = €257,500 (total payable to bank)
Over 10 years you would pay the bank €750/year and at the end of the duration, pay of the €250,000 in a lump sum, the bank are still receiving the same amount of money

Victor

€1 tomorrow isn't worth as much as €1 today.

Surely the interest portion would be €250,000 x 3% = €7,500/year?

In your scheme the bank is taking a lot more risk than with a traditioonal mortgage. Stamp duty and transaction fees mean a property depreciates 5-10% on the day of sale. Over 10 years, it is quite possible for a property to devalue (drop in market price, depreciation, change in zoning, etc.), not to mention inflation reducing the value of the money. Of course you could just rip the bank off and skip the country.

A bank would want to suitably rewarded for taking this rick and might charge a much higher interest rate and insist on insurances, assurance and other protections.

shoegirl

The banks generally do it for people buying second and subsequent properties though I think they expect a much larger deposit. I think people who've done it have been banking on the property value to rise, so when they sell the property the difference between the value and the capital amount gives them a profit. Also inflation means that the amount will mean less to them. So if you bought a 30,000 pound property in Dublin suburbia in 1981 on an interest only loan and were finished tomorrow, you could probably sell for 300,000 or more and reap a huge profit. It depends on property values rising.

But if they fell you'd be in right trouble.

substr

Sorry my mistake, 3% a year would amount to about €75,000 interest over a 10 year period? Thats quite a lot, but considering at the moment house prices are still rising at 8-10% a year, despite an expected slowdown it might be worth it.

cdebru

substr wrote:

Sorry my mistake, 3% a year would amount to about €75,000 interest over a 10 year period? Thats quite a lot, but considering at the moment house prices are still rising at 8-10% a year, despite an expected slowdown it might be worth it.

that is the way alot of investors buy property

it works out better for the banks as they get interest on the full loan for the whole term rather than interest on the outstanding reducing balance anyone with a mortgage knows the first couple of years you pay nearly all interest gradually the interest goes down and the repyment part goes up untillinthe final years it is nearly all repayment and very little interest

as for risk the banks are obviously confident that property prices are not going to drop

as i understand it if you get someone to rent the house that pays the interest
if the house value is increasing at 8 to 10% as it has done for the last 10years at least the house will have doubled in value in about 7 years then you pay off the orignal loan and have a tidy profit or take out your equity and start again

of course if the arse falls out of it your left with a loss but thats the risk


the figures do add up 250,000 euros is 7500euros a year 850 to 900 euros a month rent easily covers that and allows for up keep of the property

Victor

Hmmm, a certain logic there all the interest coounts as an expense agaisnt tax, minimizing the income tax bill. Then when the property is sold is cover the CGT bill.

My experience has been banks are only willing to have shorter mortgages for commercial property of 10 years.

cdebru

Victor wrote:

Hmmm, a certain logic there all the interest coounts as an expense agaisnt tax, minimizing the income tax bill. Then when the property is sold is cover the CGT bill.

My experience has been banks are only willing to have shorter mortgages for commercial property of 10 years.

10 years is plenty
the property market over the last couple years people could cash out well before then

of course it is not risk free but what is
if it works out its money for nothing

you can put the property with an agent then you dont have to even deal with the tenant or upkeep
as long as property prices rise you just sit back and wait

Hornet

Interest-only mortgages are easy to get. Normally mainly for investment property, but they are available in different situations as well.

The mortgage has the normal "running time", i.e. 20-30 years, but in the first 3-10 years you only pay the interest. After that you pay interest AND principal. However, I wouldn't be surprised if in 3-10 years time, you could re-mortgage the property and get another interest-only period.

You do NOT have to sell at the end of the interest-only period!!

Keep in mind that there are risks involved as you never (during the interest-only period) own more of the property than on the first day. However, due to inflation and general development in the money market (300k are most likely easier to pay in 10 years than today, so you could maybe say the house gets cheaper), the risk is not necessarily huge.

I wouldn't worry too much about the risk the bank takes. In the end the bank knows that the property is still 100% theirs. So only a desastrous property price crash (which is more than unlikely) could cause trouble for them.

For an investor it makes a lot of sense to use interest-only simply because he doesn't neet to own a property to make money if he did his figures correctly.

If you own a property for which you pay EUR 800 interest, but you get EUR 1200 per month in rent, you make EUR 400 per month. You might want to subtract other cost and taxes etc, but if you have done your homework money will be left over. If you are a serious investor you will buy more property in the 10 interest-only years and with likely house price increases over that time, you might not have to sell toooo many properties to repay the mortgage for the others. In any event, you have made up to EUR 400 x 12 x 10 = EUR 48,000 in these 10 years without ever owning it. Would you have paid interest AND principle, you probably wouldn't have any money left over. So 10 years on you own a part of the house, but instead of making money you paid otherwise earned money.

You might see the attraction.

Hope this helps.

--Hornet

substr

Yes Hornet that does help thanks
But Im just curious about a few things like: Is there such a thing as a 100% interest only mortgage (ie not just for the first 10 years ofa 20-30 year mortgage) and: Would a deposit of 8-10% still be required on the mortgage?
Thanks

cdebru

its not really a good idea if you want to live in the property yourself as your main home
more for investors

Hornet

substr wrote:

Yes Hornet that does help thanks
But Im just curious about a few things like: Is there such a thing as a 100% interest only mortgage (ie not just for the first 10 years ofa 20-30 year mortgage) and: Would a deposit of 8-10% still be required on the mortgage?
Thanks

Theoretically there is a possibility to get a 100% mortgage, but it is not straight forward and there is some risk as well.

To get a 100% mortgage, the propoerty has to be valued higher than the purchase price. So if a property is valued at 250k, but the seller is willing to sell for 230k you now have an opportunity to get a mortgage that is 100% or even above. Yes, there are legal and moral implications (which I won't go into), there are financial implications (there is a risk that you can't afford what you are buying) and there are administrative challenges (Does the mortgage company accept such a deal and if not are you willing and able to "fudge" the issues).

A much better solution is this: You buy a property with improvement potential. After it has been bought (with less than a 100% mortgage) you make some improvements for a relatively low cost and subsequently get the property revalued. Based on the new value, you can re-mortgage the property. If the price was 230k and the new valuation results in a value of 250k, you can within a short period of time from the purchase get more than 100% of the original purchase price. Downside of this is that it doesn't help you WHATSOEVER if you didn't have the required downpayment to buy the property in the first place! But I hope you get the picture.

An "eternal" interest-only mortgage is possible but not from the beginning. Instead you can get a 3-10 year interest-only mortgage and then in 3-10 year re-mortgage either with the same lender or a new lender. However, keep in mind that you will never own the property then and that you always will have a debt.

I agree with cdebru: This only makes sense if you are an investor, not if you live in the property yourself. If you live there yourself, you do NOT get any rent, so the danger is that the money that you "save" is spent on other things.

A deposit is typically required and even if you could get a 100% mortgage you still would require money for solicitor, stamp duty etc. Someone said elsewhere that if you DON'T have a deposit you should very carefully check why that is the case and you ashould ask yourself if you will be able to come up with the mortgage payments. Or if there are maybe reasons for not being able to save money, which could impact on your ability to pay the mortgage.

One other thing I should mention: Typically interest-only mortgages only cover 80-85% of the purchase price, while interest+principal mortgages cover up to 92% or even a bit more. This is probably the way the banks reduce the risk somewhat. The approx. 12% difference can be quite a lot and could precent you from considering interest-only any further.

If you have any more questions, bring them on.

--Hornet

Victor

Hornet wrote:

So if a property is valued at 250k, but the seller is willing to sell for 230k

This would need a seller that was under duress, not quite a "fire sale", but close.

cdebru

Victor wrote:

This would need a seller that was under duress, not quite a "fire sale", but close.

100% mortgages are usually only available to what they call professionals ie solicitors, doctors etc