Topic: About a ban on interest-only credits (Read 126 times)

In my region, it's common to have fixed-rate mortgages for longer periods, usually between 10-30 years. While interest-only mortgages are available, they are not as popular as traditional mortgages because they require a larger payment at the end of the term.

Regarding your question about whether there should be a ban on "interest only" mortgages to favor live-in owners, it's a complicated issue that requires careful consideration. On one hand, interest-only mortgages can drive up property prices and make it difficult for first-time homebuyers to enter the market. On the other hand, they can provide a viable investment opportunity for property investors and contribute to the growth of the rental market. Ultimately, it's important to strike a balance between the needs of homeowners and investors while ensuring that the mortgage market remains stable and sustainable.

One more clarification - are we talking about the primary market or the secondary one?
I will just tell a little about the market in my country:
Primary market - most often sold by the developer/subsidiary. Less often it is sold through realtors - these are usually specific objects. If we are talking about residential real estate, developers in Ukraine now, most of them, give installment payments themselves. It's not even a mortgage. It's just the value of real estate, broken down into 1-3-5 years, broken down into quarterly payments, for example, and you just pay fixed amounts. There is a small percentage (from 0.1 to 0.2 per YEAR) - for installment maintenance. The only caveat, in connection with the terrorist aggression against Ukraine from the side of Russia, and, accordingly, problems in the economy, the cost is fixed in dollars, and part of the payment is recalculated as an amount in dollars * the current exchange rate. Yes, there is inflation, since March 2022 the rate has increased from 28 UAH/USD to 39 UAH/USD, and since May 2022 it has been in the range of 35-39 UAH/USD.

Secondary market, i.e. used living space. Here, as a rule, payment is 100%. There used to be a mortgage, but it was not in great demand. Yes, banks provide such a service even now, but the interest rates there are not adequate, and people choose installments from the developer in the primary market than buy an old fund with depreciation of all communications for inadequate money. Again, this is about residential real estate.

Commercial real estate is a completely different topic

The maximum loan term that we can get is 30 years for the housing loan that is being organized by the government agency and we will fall under the category of B which we are going to pay the interest along with the principal and if you are going to look at your statement, you’ll see there that they are putting more payments into the interest than to the principal and yes, this can make your renting business less profitable.

I think this type of finance does create very hot markets and can eventually be abused to the extreme by landlords who seek to control hundreds, if not thousands of properties through this sort of setup - ultimately getting renters to pay while trying to scrape a profit from the underlying capital value of the property going up. There is too much variety around the world when it comes to property related taxes to say any method is wrong, but some might be a bit more prone to bubbles than others if the financial sector is allowed to get out of control (like we saw with the subprime mortgage crisis in 2008). However some people are also tricked into this type of setup without realizing that they have to pay a massive lump sum at the end which they'll never be able to afford - the idea of interest only is you could potentially put your money to use elsewhere in savings/investments but few people do.

If you bought a house priced at $100,000 in 2020.

Then sell it for $110,000 in 2023.

If inflation were around 7% annually. Would you have lost money on this deal?

While inflation might reach 8%. Real estate markets cannot necessarily bear matching those rates. Leading to depreciation.

If current real estate market prices are unaffordable for the vast majority of residents. Then prices cannot reasonably be expected to appreciate in value, to match inflation. Leading to depreciation.

Aren't all loans "interest only"? I mean it's normal for all loans that the borrower would repay the interest first and then the rest of the loan.
The business you are describing has been done all over the world. Even in my country(a member of the EU) many people were buying apartments via mortgage loans and renting them in the capital city. This has been done several years ago, but the interest rates went up, so it's not that profitable anymore. I know that some people in the USA were doing the same business. Just look at the Youtuber Graham Stephan.
This isn't some kind of revolutionary business idea. It can be done anywhere in the world, where the interest rates are low and the real estate(and rent) prices are going up. It doesn't seem fair though, because it artificially pumps the rent prices, so it becomes really expensive to rent a house/apartment.

Please, re-read. You put a deposit, you buy interest only and then rent it out to others. Usually the interest will be (for example) 1000, rent will be 2000, expenses 300, so the owner will be netting 700 a month. It is a real business, I am not making it up.

On top of that, it is very likely that long term the property increases in price and then they make extra. On top of that, they can sell at any time and can re-mortgage if required many times.

Yeah but if you take an interest-only loan, who wins in that case? Its pretty much just the bank. Unless your home appreciates more than double of what you paid then you could close the mortgage and get a 100% gain. However that won't help you because you wont be able to buy another house like that either because houses will appreciate also 100%.

In these types of markets only the banks win because they pretty much are the landlord and own the property. They have a very low risk loan. And unless there is something such as a 2008 recession where home prices tanked then they are in a good position.

Nope, not for subprime, pretty much the opposite, to clients who own a home and are buying to let the one with mortgage. BTW I am not sure how you link depreciation with inflation. They work exactly the opposite of what you say: physical goods in general tend to appreciate with inflation. For example gold, art, etc...

The business model has been working for a century. Large firms may have some advantages, but there are millions of people that own two or three properties and rent them all over the world.

With inflation being 7% or higher annually.

How much can the value of a home depreciate over the span of a 30 or even 50 year mortgage. Especially if payments aside from interest are deferred until the mortgage reaches maturity.

I think that business model may not be sustainable over the long term.

If there are interest only credits, I would hope they would exclusively be offered in subprime mortgage cases.

Rather than used by large investment firms to make it easier and more cost effective for them to consolidate and centralize real estate markets.

In my country, real estate financing is prohibited with long-term loans for residential or investment purposes, meaning that your first home you can buy with a long-term loan in installments, where you pay an additional 20% of the price and pay it over 10 or twenty years, and foreigners can obtain citizenship with investments of more than half Million dollars.
As for investment, fixed prices are available for long periods, and thus people benefit from the length of the period by establishing the place and benefiting from the rent and selling it after the ownership is completed.

I heard about it. I think it can heal a bit of the damage done, as some investors will be selling while others cannot get in the market.

 In some cities in Mediterranean countries there are severe limitations on allowing touristic rental for properties in city centres. Some cases like Barcelona have made it quite difficult, while in some very touristic areas such as Palma de Majorca there are extreme difficulties to find personnel for hospitality as the renting prices are inaccessible for the salaries offered.

It's more of a political issue than an economic one as good homes are starting to become unaffordable for common folk at any rate.

You can do what Canada is doing and ban foreign investors on homes, but honestly that will only prevent more damage, not repair existing damage to affordability.

Not sure if it's the case in that country by interest only mortgages in the UK are often collateralised a home the person owns outright (or part of it) and interest only is given more scrutiny, the interest is normally a business rated loan too afaik (so it could be double or quadruple interest rates - I know people who move house from ones they've lived in to dodge having interest only mortgages). Assuming a "normal" mortgage is 5x leverage, an interest only one is likely limited to 20x in the most extreme cases.

I think a lot of countries have more or an issue of people getting too close to others' investment capital to create an unfair market. I assume there's perks for well to do bankers to take (furnishings) mortgages from their banks for example.

In the country I spend most of my time (country A), you can access interest-only credits. You only pay the interest during the mortgage and then the loan value at the end. Also, in general, fixed rates are rarely available for more than 5 yr. so people re-mortgage many times along the life of the loan.

In countries (B) and (C) this is very rare. Mortgages tend to be for at least 20 years and some are to even 40 years. Fixed rates are available for long periods and people rarely would change bank and mortgage.

In country (A) investors use interest only mortgages to buy a place an put it to rent. They can profitably pay more money than someone who would buy to live in, making the market quite "hot". In countries (B) and (C) the markets require investors to re-pay including interest, which makes getting a loan to rent less profitable and thus the market is less "hot".

How does it work in your region? Do you think there should be a ban on "interest only" to favour live-in owners?