Tuesday, June 26, 2007

The trouble with interest-only mortgages

Even if you can get an impossibly low interest rate (Rl) and unbelievable multiples (Mh) so that you can afford the half million or so for that trendy, ex-council two-bed in Clapham (whoops; Tooting), the chances are that this low interest rate requires a low-inflation environment (in which to exist). So in other words, when the time comes to actually pay for the house at the end of the mortgage, the ‘principle’ (P) will be high in real (adjusted for inflation) terms. In other words, if your payments have stayed low, the end result will be an unaffordable bill to pay for the actual house itself.

Keep cycling and don't look back !


Vonric said...

Except that the point of interest only mortgage is a double bet:
- the bet that over let say 20 years the real value of your property will be worth 10 times more (therefore the existing price to pay back will be less important in proportion)
- the bet that in a few years you'll be making more money that will help you to pay back part of the house, what you can afford, when you can afford.

French Fry said...

the first bet is quite a big on eright now between Lehman Brothers saying that the market is 20% overvalued and the OCDE saying 65%.

the second point is ok if you are not strenched to the point that you won't be able to pay and will be repossed. IR are on the rise and my go higher than expected.