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 Post subject: Interest Only Loans - Ticking Time bomb
PostPosted: Sun Jun 24, 2007 4:24 pm 
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In recent years, more than 75 per cent of Bank of Ireland investment customers have availed of the bank's ten-year interest-only mortgage, according to Bank of Ireland Mortgages Manager Olive Moran.


http://www.finfacts.com/irelandbusiness ... 5328.shtml

Quote:
Interest-Only Mortgages
As the name suggests, you pay only the interest of the loan, thereby lowering your monthly payment by quite a lot at least initially. The problem is, once you do begin paying principal, you have to play catch-up to pay off the debt before your term is up. These loans can be of value for people who want to save or invest the money they would have paid in principal. Interest-only loans are for people who have a better use for their cash, such as investments like stocks or shares, or renovations to add value to the property. One must be financially astute or this method can be extremely dangerous.
. Interest-only loans make sense for people whose income is sporadic, either because they are paid on commission or because they receive annual bonuses. In this case, they have the option of only paying interest some months but can pay above and beyond the amount due when they get their bonus checks.
. Interest-only loans may be suitable for people who want to buy a house and carry out renovations to add value to the property and sell it on.
. Interest-only loans may be suitable for a solicitor-in-training who wants to buy a house now but isn't earning a lot yet but is confident that he/she will in the future.

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


Last edited by Blindjustice BATONEFFECT on Sun Jun 24, 2007 5:04 pm, edited 1 time in total.

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 Post subject:
PostPosted: Sun Jun 24, 2007 4:32 pm 
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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.


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 Post subject:
PostPosted: Sun Jun 24, 2007 4:42 pm 
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The Central Bank has advised Finfacts that it does not require lenders to provide data on interest-only loans.


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


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 Post subject:
PostPosted: Mon Jun 25, 2007 9:46 am 
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Blindjustice BATONEFFECT wrote:
Putting two and two together - the investors who go interest only do so on the basis of capital appreciation.


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.


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 Post subject:
PostPosted: Mon Jun 25, 2007 1:26 pm 
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Blindjustice BATONEFFECT wrote:
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.


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...

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 Post subject:
PostPosted: Mon Jun 25, 2007 1:35 pm 
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4/10 were investor mortgages no? Not necessarily IO.


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 Post subject:
PostPosted: Mon Jun 25, 2007 2:12 pm 
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From March 2006

http://www.finfacts.com/irelandbusiness ... 5328.shtml

Quote:
In recent years, more than 75 per cent of Bank of Ireland investment customers have availed of the bank's ten-year interest-only mortgage, according to Bank of Ireland Mortgages Manager Olive Moran.


the 75% figure is not new either :)


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 Post subject:
PostPosted: Mon Jun 25, 2007 2:52 pm 
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Ive said it before and I`ll say it again, the country is ******


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 Post subject:
PostPosted: Mon Jun 25, 2007 2:54 pm 
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Blindjustice BATONEFFECT wrote:
Ive said it before and I`ll say it again, the country is ******


Nah, we've loads of wealth "squirelled away", don't ya know!


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 Post subject:
PostPosted: Mon Jun 25, 2007 3:04 pm 
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 Post subject:
PostPosted: Mon Jun 25, 2007 3:28 pm 
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daveirl wrote:
4/10 were investor mortgages no? Not necessarily IO.


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...

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 Post subject:
PostPosted: Mon Jun 25, 2007 4:18 pm 
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What in God's name is the gameplan of people using IO loans on their PPR?


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 Post subject:
PostPosted: Mon Jun 25, 2007 4:20 pm 
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daveirl wrote:
What in God's name is the gameplan of people using IO loans on their PPR?


Plan probably doesn't enter into it.

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

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 Post subject:
PostPosted: Mon Jun 25, 2007 4:35 pm 
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daveirl wrote:
What in God's name is the gameplan of people using IO loans on their PPR?


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.


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 Post subject:
PostPosted: Mon Jun 25, 2007 4:51 pm 
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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???


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