Interest Only Loans - Ticking Time bomb


#1

finfacts.com/irelandbusiness … 5328.shtml

Quote from David Kiernan, Managing Director of independent mortgage brokers One Life Home Loans


#2

Interest only mortgages could hold the balance here. Getting information on the volumes of interest only is hard to find. Please post if you do have info.

The finfacts article says 75% of Bank of Ireland etc but its vague and doesnt give enough detail to draw proper conclusions, it only gives a hint.


#3

Putting two and two together - the investors who go interest only do so on the basis of capital appreciation. Now we have no info because of the above. How many interest only loans are due to switch to full paying loans this year or next year. Bank of Ireland have been giving out 10 year loans, they have put people in the position where they can take a wait and see approach. This would put the market in the worst case scenario where we would see a long drawn out crash


#4

Not strictly true.

The fact that you can write off all of the interest on an investment mortgage at the higher rate of tax, versus the marginal rate up to a limit for a PPR, means that it does make sense from a taxation perspective to take on an interest-only and plough any rent received that is above the IO repayment into your PPR mortgage rather than the investment property.

The net effect is that you are building up equity in your PPR quicker than you could otherwise do so in the investment property.

Having said all that, the danger here is that you might find yourself in a situation where cashflow is being strangled by rising IO repayments yet you have little or no equity in your investment should prices crash.

The only asset you can liquidate in order to free up equity/cash is your PPR. I suspect this might be an unforeseen consequence of this taxation regime over the coming years.


#5

Didn’t the 2006 review of mortgages drawn down according to the Central Bank show 4 in 10 mortgages were interest only last year…

That figure is certainly stuck in my head but I don’t really recall the source article…


#6

4/10 were investor mortgages no? Not necessarily IO.


#7

From March 2006

finfacts.com/irelandbusiness … 5328.shtml

the 75% figure is not new either :slight_smile:


#8

Ive said it before and I`ll say it again, the country is ******


#9

Nah, we’ve loads of wealth “squirelled away”, don’t ya know!


#10

Remember, Cyril the Squirrel is alive and well!
cyril.anpost.ie/


#11

I saw that 75% figure earlier but I’m positive there is an article on here somewhere that states 4/10.

daveirl is right, 4/10 were investors but the overall proportion of the type of mortgage product drawn down last year was also 4/10.

Not necessarily, the same 4/10 but 4/10 all the same?

Clear as mud? :wink:

I’ll try and dig up the article at some point…


#12

What in God’s name is the gameplan of people using IO loans on their PPR?


#13

Plan probably doesn’t enter into it.

Pity, we all can’t get access to the Bank of Bertie! Interest free loans, hoy!!! :wink:


#14

I know of at least two couples who have done this. They are relatively high earners and I was shocked to hear from them that they had done so. They were of the opinion that property can only go up brigade (this was over a year ago I talked to them about the purchases). I suspect they have changed their tune since then.


#15

Mate of mine went IO on his PPR also. His logic was not based on house price increases it was based on the fact in 2/3 years time he’d be on a higher wage and thus able to convert to a normal mortgage! Skip the apartment first syndrome and go straight for the 3 bed house on the strength of the xtra money he was able to borrow on IO.

Sensible guy - silly bank???


#16

Have rising interest rates punched a gaping hole in this theory though?

It’s probably a step above IO on an apartment 30 miles from Dublin, at least a 3-bed house cushions him from having to, but being unable to, trade up in a few years time.

On the other hand, if you’re gonna pay IO, why not just pay rent.


#17

Sounds like an OK plan. Especially when you consider that going the apartment route uses up your FTP stamp duty exemption. And he could have been left with an apartment that wasn’t suitable for him long term, but was also difficult to sell.

Once he had made the decision to buy something buying a house instead of an apartment was probably wise. Interest Only is risky, but is it any mores risky than buying a shebox apartment? He could well be earning more in a few years, and nothing is stopping him throwing extra cash at the mortgage if he has it.

-Rd


#18

moneyweek.com/file/31286/the … gages.html


#19

No they wouldn’t, they’d sit you down and try to figure out a way to get you to allow them to borrow serious multiples of your projected pre-tax income to bet on a single investment idea on your behalf.

-Rd


#20

But would they succeed?