Interest-Only Timebomb... Today's Times Page #2

[winkie]

Interest only is good for the lenders whilst property prices are rising, they get their interest, their income...they know that the borrower will be less likely to default whilst they have an interest in that property, their so called valuable equity, they know that when the property is sold they will get their money back in full,,,,all hunky dory.

When they can see prices falling, interest rates rising and the debt outstanding gradually becoming greater than the real value of the asset they start calling in their debt because they do not want to be landed with awkward property on their books with no income coming in because the borrower has handed in the keys and walked....

[arrgee1991]

10-15 months more like, alot of people got 2, 3 and 5 year deals since 2008, and these matured or are due ot mature nowish. with the banks saying you need 50% equity or £50k income to have a IO deal and or putting up IR's as well as forcing many IO'ers on to the SVR. its not going to happen enmass untill after June, but it will happen

Many will go onto BMR and find they pay less. Had you got a Nationwide mortgage on or before 29 April 2009, you will only pay 2.50% and that will be guaranteed not to be more than 2% above Bank of England base rate which is at least 1% better than any deal Nationwide offer right now. And they aren't the only bank/building society with a BMR. I suspect most of those on IO mortgages (self included) will just not bother to move simply because they will be happy to stick with the deal they are on rather than looking to re-mortgage on far less favourable terms.

[arrgee1991]

Interest only is good for the lenders whilst property prices are rising, they get their interest, their income...

+1

The lenders have only just woken up to the potential disaster. Anyone with interest only going onto BMR (or any base rate tracking variable rate) will be paying peanuts for the foreseeable future.

[arrgee1991]

I'm so mad about the liar loans. You see I am exactly the sort of person who can afford, and arguably needs an I/O option, and I've had it taken away because of the irresponsible buggers who abused it.

I was offered a 70% LTV IO mortgage last year, but the BSoc has cut it to 50% so I was pretty much forced to go for repayment. Not in itself a terrible thing, but less flexible giving the feast to famine cycle of my income.

Fortunately I got mine many years ago. Made big capital repayments when I could, and made the interest payments when times weren't so good. Even managed to get back £15K of the overpayments to help fund building of extension last year. Remaining mortgage now just 5% of property value, so just paying interest as I earn more than that with the savings in NS&I certs and a fixed rate ISA.

[MrPin]

Speaking from experience, be cautious about giving out specific info on this (or any) forum - you'd be surprised how often and how quickly our anecdotes can find out that they've been 'outed'....

It's not very specific, just the Wales bit!

[markyh]

I'm so mad about the liar loans. You see I am exactly the sort of person who can afford, and arguably needs an I/O option, and I've had it taken away because of the irresponsible buggers who abused it.

I was offered a 70% LTV IO mortgage last year, but the BSoc has cut it to 50% so I was pretty much forced to go for repayment. Not in itself a terrible thing, but less flexible giving the feast to famine cycle of my income.

Are you a professional Father Christmas? Spending 10 1/2 months of the year fattening up for the role?

M

[Bland Unsight]

+1

The lenders have only just woken up to the potential disaster. Anyone with interest only going onto BMR (or any base rate tracking variable rate) will be paying peanuts for the foreseeable future.

Weighted average tracker rates have been over 3% since January 2009. They are currently about 3.5%.

As the best tracker deals are the ones with the least risk on them a high-LTV IO may be paying much more. As the reason many of these people took IO over repayment was the enormous amount they wanted to borrow, the interest charge may well not be peanuts. £200k at 6% is £1,000 interest each month.

The Nationwide BMR looks like the kind of brilliant idea that only a mutual trying to run with the big dogs would come up with. This is Money are suggesting that it cost Nationwide £600m last year to keep that promise, against profits for the year to 4th April 2011 of £276m.

Without a decision to reduce their impairment provision against losses on their loans by 30%, which contributed £193m to the bottom line, the cost of this promise would have been more than 7x their profits.

Good job that all those loans suddenly sorted themselves out - must have been the economic recovery that I missed...

IO is going to kill these lenders.

[winkie]

Weighted average tracker rates have been over 3% since January 2009. They are currently about 3.5%.

As the best tracker deals are the ones with the least risk on them a high-LTV IO may be paying much more. As the reason many of these people took IO over repayment was the enormous amount they wanted to borrow, the interest charge may well not be peanuts. £200k at 6% is £1,000 interest each month.

The Nationwide BMR looks like the kind of brilliant idea that only a mutual trying to run with the big dogs would come up with. This is Money are suggesting that it cost Nationwide £600m last year to keep that promise, against profits for the year to 4th April 2011 of £276m.

Without a decision to reduce their impairment provision against losses on their loans by 30%, which contributed £193m to the bottom line, the cost of this promise would have been more than 7x their profits.

Good job that all those loans suddenly sorted themselves out - must have been the economic recovery that I missed...

IO is going to kill these lenders.

Must be the main reason why the Nationwide savings rates are now so uncompetitive.

[The Knimbies who say No]

Weighted average tracker rates have been over 3% since January 2009. They are currently about 3.5%.

As the best tracker deals are the ones with the least risk on them a high-LTV IO may be paying much more. As the reason many of these people took IO over repayment was the enormous amount they wanted to borrow, the interest charge may well not be peanuts. £200k at 6% is £1,000 interest each month.

The Nationwide BMR looks like the kind of brilliant idea that only a mutual trying to run with the big dogs would come up with. This is Money are suggesting that it cost Nationwide £600m last year to keep that promise, against profits for the year to 4th April 2011 of £276m.

Without a decision to reduce their impairment provision against losses on their loans by 30%, which contributed £193m to the bottom line, the cost of this promise would have been more than 7x their profits.

Good job that all those loans suddenly sorted themselves out - must have been the economic recovery that I missed...

IO is going to kill these lenders.

Yes, NW seem to be headed for an 'interesting union' of rising savings rates to protect its deposit base, and the mortgage rate promise. The profits are heavily skewed by various provisions, not a good sign.

"The building society also managed to reverse an exodus of savers' cash. It posted net retail deposits of £600m, compared with savings outflows of £8.2bn a year earlier.

Nationwide added that its balance sheet continued to strengthen, while arrears were less than one third of industry levels."

[Bland Unsight]

Yes, NW seem to be headed for an 'interesting union' of rising savings rates to protect its deposit base, and the mortgage rate promise. The profits are heavily skewed by various provisions, not a good sign.

"The building society also managed to reverse an exodus of savers' cash. It posted net retail deposits of £600m, compared with savings outflows of £8.2bn a year earlier.

Nationwide added that its balance sheet continued to strengthen, while arrears were less than one third of industry levels."

These arrears must all be being calculated on models.

I wonder if the models have found a way to factor in a 20 year credit binge interrupted and a long, deep depression in the Eurozone. I'm sure the herberts at the Nationwide who found a way to get themselves a massive unhedged interest rate risk have that one covered.

The industry goons always bang on about the lack of a correlation between repossessions and negative equity. I wonder how that is going to hold up since the advent of mass BTL lending and IO, let alone the ungodly IO BTL. I rather suspect that once again something that was assumed to be uncorrelated will turn out to rather well correlated. We'll see.

Ho hum.

[interestrateripoff]

Weighted average tracker rates have been over 3% since January 2009. They are currently about 3.5%.

As the best tracker deals are the ones with the least risk on them a high-LTV IO may be paying much more. As the reason many of these people took IO over repayment was the enormous amount they wanted to borrow, the interest charge may well not be peanuts. £200k at 6% is £1,000 interest each month.

The Nationwide BMR looks like the kind of brilliant idea that only a mutual trying to run with the big dogs would come up with. This is Money are suggesting that it cost Nationwide £600m last year to keep that promise, against profits for the year to 4th April 2011 of £276m.

Without a decision to reduce their impairment provision against losses on their loans by 30%, which contributed £193m to the bottom line, the cost of this promise would have been more than 7x their profits.

Good job that all those loans suddenly sorted themselves out - must have been the economic recovery that I missed...

IO is going to kill these lenders.

Is the BMR a legally binding? Did they put it in the contract? People certainly aren't going to shift whilst the BoE keeps it at 0.5%

Or could they increase the BMR but then would they run the risk of legal action and test cases to see if the "promise" was legally binding?

[MrPin]

At one time Mr Chairman you would not take out a loan,unless both you and the bank had a reasonable expectation you would pay it back!

So quaint like fax machines and mangles!

[interestrateripoff]

http://www.nationwide.co.uk/savings/cash_isa/flexclusiveisa/introduction.htm

A variable rate of 4.25% AER tax-free including an introductory fixed rate bonus of 2.25% until 31 October 2013

Seems the nationwide is looking to pull people in with this, but you need to have a current account with them to qualify.

[The Knimbies who say No]

These arrears must all be being calculated on models.

I wonder if the models have found a way to factor in a 20 year credit binge interrupted and a long, deep depression in the Eurozone. I'm sure the herberts at the Nationwide who found a way to get themselves a massive unhedged interest rate risk have that one covered.

The industry goons always bang on about the lack of a correlation between repossessions and negative equity. I wonder how that is going to hold up since the advent of mass BTL lending and IO, let alone the ungodly IO BTL. I rather suspect that once again something that was assumed to be uncorrelated will turn out to rather well correlated. We'll see.

Ho hum.

Regarding the third paragraph, fanciful in the extreme for industry types to suggest there will be no relationship between repossessions and NE when they know full well it's the only tool in the box for the late entrant 'no known repayment vehicle' brigade who can't afford the switch to repayment. How else will they deal with these cases? Let them all run to term and hit that spike in the graph of the 2 million IO loans ending by 2030? Seems unlikely.

Edited April 10, 2012 by cheeznbreed

[Bland Unsight]

At one time Mr Chairman you would not take out a loan,unless both you and the bank had a reasonable expectation you would pay it back!

So quaint like fax machines and mangles!

I hear tell of a golden age when there was no such thing as a mortgage broker.

Which brings me neatly to this gem, which is a very short and sweet article in Mortgage Strategy from May 2010.

I am a broker and have a Nationwide mortgage. I went onto its base mortgage rate earlier this year and since then have been bombarded with letters and telephone calls asking me to take a new product from it.

But in the small print it states that if I take a new product I will not revert back to the BMR in future.

The BMR is far better than the SVR so how can this be treating customers fairly and how many of its customers have unwittingly fallen into this trap?

Not me, that’s for sure.

MARK SUTTON

You tell 'em Mark! Fancy that, trying to trick people into favouring a mortgage product that benefited the lenders more than the borrower.

A little more digging shows that they closed the stable door on the BMR with the BoE + 2% in April 2009. I wonder when Mark moved his mortgage.

Of course, the Nationwide aren't fools and put the ceiling on the BMR up to an astronomically high 3.99%, (i.e the savings rate Santander are offering today). Oh dear.

This Mortgage Strategy piece piece suggests that by November 2010 40% of their loan book was on the BMR deal. It's not clear if that's all on the BoE +2% or the post April 2009 deal, but they only turn over about 10% of their lending each year and nobody is going to leave a 2.5% mortgage, so presumably 35% of their book is still on the BoE +2.5% deal.

Their book is about £120bn give or take - could be £40bn of the BoE +2% BMR deal!

Still it explains why they've jumped into BTL. They must be chasing spread, trying to drum up fees.

You couldn't make it up.

[Bland Unsight]

Regarding the third paragraph, fanciful in the extreme for industry types to suggest there will be no relationship between repossessions and NE when they know full well it's the only tool in the box for the late entrant 'no known repayment vehicle' brigade who can't afford the switch to repayment. How else will they deal with these cases? Let them all run to term and hit that spike in the graph of the 2 million IO loans ending by 2030? Seems unlikely.

It's amazing what people will think when they are paid to think it. Quoting from CML research's Housing equity: a market update, which can be found here and was released in August 2011, (the emphasis is mine):

And, as we pointed out at the time and repeatedly since – most recently in our discussions with the Financial Services Authority in the context of its ongoing mortgage market review – mortgage payment problems predominantly stem from unexpected changes in circumstances, such as unemployment, accident or relationship breakdown, and not from being nominally in negative equity.

You can almost hear the petulant tone!

They have two options:

Make fantasy low provisons on the assumption that repo performance from the 1990s is a good basis on which to decide what will happen next and declare profits

or

Make a stab in the dark guess on how bad it might be and declare losses.

You know what decision they reached.

Best of all if you download "Housing equity: a market update", your pdf reader will tell you the filename, which is "01-2011-negative-equity (5)"

[Bland Unsight]

How else will they deal with these cases? Let them all run to term and hit that spike in the graph of the 2 million IO loans ending by 2030? Seems unlikely.

Did a 125% LTV loan seem likely before it happened? Did interest only mortgages with no certified repayment vehicle seem likely till 30% of new borrowers had them? Did a 10 year plus Ponzi scheme in housing seem likely until it happened?

Hopefully the bubble will burst for good very shortly.

The longer it goes on, the more the lenders will lend, hoping to gamble their way out of trouble, whilst really just digging themselves deeper into hole. It's human nature. Eventually the government will have to step in one way or another, at which point we may find that the state is on the hook, one way or another, for 50% of the £1.2 trillion CML mortgages outstanding.

Scan your eyes down the 2010 market share table from the CML here. We're already good for about 40% of it.

God knows what will happen, but it is not going to be something that seemed likely, or even plausible, in the summer of 2007.

[bmf]

Did a 125% LTV loan seem likely before it happened? Did interest only mortgages with no certified repayment vehicle seem likely till 30% of new borrowers had them? Did a 10 year plus Ponzi scheme in housing seem likely until it happened?

Hopefully the bubble will burst for good very shortly.

The longer it goes on, the more the lenders will lend, hoping to gamble their way out of trouble, whilst really just digging themselves deeper into hole. It's human nature. Eventually the government will have to step in one way or another, at which point we may find that the state is on the hook, one way or another, for 50% of the £1.2 trillion CML mortgages outstanding.

Scan your eyes down the 2010 market share table from the CML here. We're already good for about 40% of it.

God knows what will happen, but it is not going to be something that seemed likely, or even plausible, in the summer of 2007.

Thanks for that link. What is the status of Santander I wonder? I had no idea they had such a big share. 17.8%. If Spain goes under what then for Santander and who would own these mortgages if they went pop?

[The Masked Tulip]

If Spain goes under what then for Santander and who would own these mortgages if they went pop?

I think we know the answer to that one.

[The Knimbies who say No]

Did a 125% LTV loan seem likely before it happened? Did interest only mortgages with no certified repayment vehicle seem likely till 30% of new borrowers had them? Did a 10 year plus Ponzi scheme in housing seem likely until it happened?

Hopefully the bubble will burst for good very shortly.

The longer it goes on, the more the lenders will lend, hoping to gamble their way out of trouble, whilst really just digging themselves deeper into hole. It's human nature. Eventually the government will have to step in one way or another, at which point we may find that the state is on the hook, one way or another, for 50% of the £1.2 trillion CML mortgages outstanding.

Scan your eyes down the 2010 market share table from the CML here. We're already good for about 40% of it.

God knows what will happen, but it is not going to be something that seemed likely, or even plausible, in the summer of 2007.

Indeed. The sooner, the better.

[dances with sheeple]

Thanks for that link. What is the status of Santander I wonder? I had no idea they had such a big share. 17.8%. If Spain goes under what then for Santander and who would own these mortgages if they went pop?

Thomas cook? Thomas the Tank engine? The Hoff............?

[Bland Unsight]

I think we know the answer to that one.

Interesting.

Santander will end up being "owned" by either the ECB or the Spanish government. They are going to end up with the proverbial sh!t ton of garbage UK mortgages.

Whoever ends up on the hook for these losses will just want rid. Presumably they'll either sell them to the UK government, for some printy-printy or at a suitably distressed price some other speculative money could pick them up.

[tinker]

This can only end in tears.

It will be brushed under the carpet as to the causes. It is amusing that in the main people have no idea how bad things are because of the debt taken on and misallocation of resources. Silly and so unnecessary.

The moment Northern Rock was bailed, the course was set. Like dominoes.

[The Masked Tulip]

Interesting.

Santander will end up being "owned" by either the ECB or the Spanish government. They are going to end up with the proverbial sh!t ton of garbage UK mortgages.

Whoever ends up on the hook for these losses will just want rid. Presumably they'll either sell them to the UK government, for some printy-printy or at a suitably distressed price some other speculative money could pick them up.

If Santander went pop then the UK would have to pay up to save all the UK savers' deposits so I suspect the UK would confisicate Santander's UK mortgage book in return. It used to be B&B or Abbey anyhow.

They could then sell the mortgage book off or, more likely, just allow the feckless to stay in homes they cannot afford forever.

[thecrashingisles]

If Santander went pop then the UK would have to pay up to save all the UK savers' deposits so I suspect the UK would confisicate Santander's UK mortgage book in return. It used to be B&B or Abbey anyhow.

They could then sell the mortgage book off or, more likely, just allow the feckless to stay in homes they cannot afford forever.

No, the way it works is you get the CEO of a big solvent bank drunk and get him to agree to a merger. HSBC are sure to fall for it...