7m face a shortfall as endowment crisis grows
Millions with endowment mortgages face a growing threat to their homes.
The proportion of policies expected to see a shortfall is thought to have reached 85 per cent.
This means that as many as 7 million of the 8.2 million policies in existance are facing a cash crisis.
The average size of the shortfall is thought to be approaching £6.000, which suggests the total is heading towards £42 billion.
Also allow for the nice nest egg as a bonus when the property is paid off, which is not now coming, and this type mortgage has worked out in real terms more expensive than a repayment one.

So what chance for IO mortgage payers surviving a storm at maximum borrowing levels.

A £6000 short fall is a small beer compare to someone buying a 300K house on an IO mortgage today, only to find in 2 years time it could be worth 120K less. Now thats a short fall.

OH YES INDEED!!!!!!

panic selling ahead!..once they wake up and smell the coffee!

Both of our endowments are looking like having a 50% shortfall. In the case of the larger one, that's about £18,000.

You might consider showing a little more sensitivity, since we were the poor sods who bought during the last boom (I was a FTB in 1991), saw houses drop 50% in value in 3 years, and NOW find that the endowments are falling short too. I've effectively lost 100% of the value of my first property.

Pick your targets with care guys - EAs and greedy clueless BTLs are one thing, but don't alienate average joe public who was just plain unlucky.

By the way, I doubt if the endowment shortfalls will have much impact. We've all been getting doomladen letters for years. I paid off the shortfall long ago, and am now on a nice little flexible repayment morgage (overpaying massively). We're actually sitting here waiting like vultures to pick over the property corpses for our next move up (I'd STR but it's too much hassle to uproot).

Not only did you buy property at the peak of the last crash, you also took out an endowment mortgage to pay for it with. Talk about double whammy.


Did you have a case for mis-selling?

Yandros,

During the last property bubble, endowments were the means by which the lending industry made buying "cheaper" and pushed price up - by relying on far too optimistic investment returns from equities. They caused the bubble and set in place the conditions necessary for the resulting crash and the wipeout of 100,000's of borrowers. They're been at it again, but this time suggesting that the repayiment vehicle can be cast aside altogether.

Don't blame the messenger, the blame lies with the crooks in the banks and BS's.

Hmm, something occurs to me when thinking back to my first flat.

Those people who are casual about the prospect of negative equity (and there are a lot of FTBs talking that way still) should think again. It's quite a shock when you get letters from your building society suggesting repayment plans to cover the shortfall.

Remember that if you've got a £100K morgage on a £50K house, you've effectly got a 50K unsecured loan, and the lender is going to want that remedied ASAP.

Possibly. I bought through a financial services firm, not the lender, so my case would be with them. Fortunately I recently found a "about choosing your mortgage" leaflet from them, circa 1991. There are no warnings of any kind. It just says that endowments are their most popular product and will remain so for the foreseeable future, offering great bonus payments etc etc. Time to try my luck with a claim then!

Don't worry though, we didn't sell up until the price had recovered, and made some good decisions to buy in 94 and 99.

One last frightening thought regarding my first flat. We bought in 1991 at £42K. It crashed down to £13K. Those same flats are currently on the market for £75K!!!
If it goes like last time, small flats will fall fastest, and you'll be able to get some incredible bargains. I might even get into the BTL business myself!

This is my advice if you have an endowment shortfall and have yet to make a compensation claim. Go to http:// www.which.net/endowmentaction/

You will find on this site all the information that is needed to start the claim. They have draft letters on this site. All you need to do is fill out your own relevant details in the letter which should take no longer than ten minutes. Telephone the insurance company and confirm the exact address of their office dealing with compensation claims. The web site and draft letters are entirely FREE.


DO NOT BE TEMPTED BY THE ADVERTS FROM COMPANIES OFFERING NO WIN NO FEE DEALS. IF YOUR COMPENSATION CLAIM IS SUCCESSFUL THEY NORMALLY CREAM OFF 25% AS CHARGES. YOU HAVE BEEN WARNED!

Good luck!

Yandros my post was not intended to cause offence to anybody, but a warning to those who may look at EMs or IOs. I am glad that you are overpaying your variable mortgage, I have on past posts always advised people to do this.
In 1970 the ES tried to sell me an endowment ( or similiar ) mortgage but I refused, and my discussions with him was passed to another of his clients who happened to be a friend. The EA told him that people like me could not see a gift horse and would regret his advice in the future.
When you have a VR mortgage you know where you stand and can budget accordingly, allow for IR rise and falls and know when that final payment is made it is yours every single brick.
I would not even recommend these low rate starter mortgages, as now those which have come to the end are having to find 27% more each month.

Yandros,

nobody on here blames joe public.they have been suckered into this by the VI's,just like the last crash.The trigger last time was the abolition of MIRAS.this time it's BTL.The only thing joe public is guilty of is buying into the hype.

unfortunately,lots of joe public are also being duped into this "easy money from propery"tosh and with this extent of"greed" mentality comes the equal and opposite reaction of "fear" on the flipside....see NASDAQ 2000/2003.

DON'T KID YOURSELF THINGS ARE DIFFERENT,THEY ARE DRIVEN BY EXACTLY THE SAME PSYCHOLOGY,WITH EXACTLY THE SAME CONSEQUENCES.

it's not nice being the last off the bandwagon,but somebody has to be and it certainly won't be us.it'll be joe public(again)

Don't worry guys, I took no offense. It was just a gentle reminder about tactful posting. There are a lot of factors that will probably bring prices down, but it won't be a good idea to crow about them, particularly since this site is developing a higher public profile these days.

For example, a "Woohoo!! Loads of job losses announced by Manufacturer X...houses prices bound to drop nearby" thread would not be wise.

Very very good point Yandros. I have to say I have been recently wondering if HPC should 're-brand' itself - in name, structure, and content - to serve a wider community.

As the market gets worse I expect that there will be a mushrooming in new users of the forum - both buyers wondering whether/when to jump in, and sellers wondering what on earth is going on and seeking to share experiences with others in the same boat.

In its current format HPC probably alienates many new browsers, particularly vendors. Could we (Should we?) do something to encourage these guys to come on and tell their stories, and perhaps use HPC as a source for info on how to deal with issues relating to neg equity for example...

I'd like new-generation BTL'ers to come on here and tell everyone else what it's really like out there for them.

Just think how useful all this kind of content would be to through back at the vested interests!

Just a thought. What do others think?

With you 100%, i'll build the site for nothing, HPC but with a better design, no offence but it's a bit dull you guys from essex

All for it!

But it is still worth reminding folks...as the BTL's have said(and taken great pleasure in), for a while....there are winners and losers,who said life was fair?

this site may actually be the salvation of some folk who were initially drawn in by this "easy money" phenomenon,and if they take heed of the extensive research that members of this site have conducted then good on them!,they have learned how to survive and capitalise on a downturn...which is actually very tricky!...for those still obsitnate enough to keep their heads firmly buried in the sand then I'm afraid I have only one answer:

there are winners and losers....who said life was fair!!!

I bought a small flat in 1991 and this halved in value in two years and have
only managed to sell it in the last 12 months without making much profit at all.
I also had an endowment mortgage on the property.
I was only 21 at the time and naive but the experience although unpleasant
taught me a lot of lessons and in the end I was not out of pocket but
at times things did look bleak.
Thankfully I got through ok and sold the flat and have also cashed in endowment
(it is hard to sell endowments now) but I do worry about the people who are
taking out interest only mortgages because I would say a high proportion
do not realise what they are taking on.
By coincidence I was telling my mum today that IO mortgages are now very
common but I don't think she believed me as she said well how is the capital
going to be paid off and I said this is why prices rocketed as people have been
conned into believing prices will keep on rising.
Does anybody know the percentage of mortgages granted as IO?
My mum also said that if it is the case that there are a high number of
IO mortgages then they should be made illegal.Quite right!

Wouldnt it be the idea that most people on IO mortgages presume that the capital will be paid off eventually when the price of their property increases. This happens when they downsize which pays off the capital. IO mortages have no other purpose otherwise - it would be better to rent.

IO morgage % is very high,especially among BTL/FTB.

which is worrying.IO's are really just endowment mortgage in disguise.
works along very similar principals.

whereas endowments were supposedly for repayment of mortgage from a stock fund,IO's are for repayment of mortgage through capital growth in property.In fact there is a lot MORE risk to this than endowments!for those who buy in at the top of the market.

Correct.

The number of IO mortgages last year was about 40%. Vey Very worrying.

gives a lot of weight to the argument that if there is negative capital growth the drop in HP's will be fast and furious.

Even dodgey council estate loan shark loans have a date when the loan is finally paid off..... but interest is high of course

IO mortgages at 40% !!!!

Clearly, the British public are barking mad. More so, than I gave them credit for.

No wonder, people I meet rave about Big Brother, X Factor and the rest. ........ hang on a minute, I think I hear wolves howling in the street outside .........

I am once more convinced, that I am no longer part of 'normal' society.

With the lunatics in charge of the asylum and the great british public, now being completely mad, we have a recipe for disaster. There will be blood on the streets when this lot goes bang.

Yandros "(I was a FTB in 1991), saw houses drop 50% in value in 3 years, and NOW find that the endowments are falling short"

THE SAGE " I bought a small flat in 1991 and this halved in value in two years and have only managed to sell it in the last 12 months without making much profit at all."

The worst time to buy in the last crash was Q2 89.
ratio was 4.99, in 91 it was 3.77-3.50.
The best time to buy was 95 Q4 £17,837 x 2.86 = £50,930
That's according to Nationwide stats anyway!

year quarter salary ratio price
89 Q2 £12,470 x 4.99 = £62,244
89 Q3 £12,766 x 4.92 = £62,782
89 Q4 £13,097 x 4.70 = £61,495
90 Q1 £13,289 x 4.48 = £59,587
90 Q2 £13,686 x 4.31 = £58,982
90 Q3 £14,017 x 4.08 = £57,245
90 Q4 £14,312 x 3.84 = £54,919
91 Q1 £14,452 x 3.77 = £54,547
91 Q2 £14,804 x 3.74 = £55,418
91 Q3 £15,066 x 3.64 = £54,903
91 Q4 £15,327 x 3.50 = £53,635

I didn't think 91 was a that bad time to buy. depends on area? maybe?

A slight exageration on my part the actual figure is 37%.

According to the new research from Abbey, three in ten borrowers (28 per cent) in Scotland with interest-only mortgages are not saving to repay the amount borrowed. This is less, however, than the national average of 37 per cent.




http://property.scotsman.com/news.cfm?id=1369682004

Everyone I know that has an interest only mortgage (read: most, if not all of my friends who have bought in the last two years) is planning to change to a repayment mortgage 'when they can afford it'. I think most people see it as a 'step onto the ladder', reducing initial payments, rather than never planning to pay any capital back.

Cast-iron proof that one of the factors that has allowed house prices to remain so insane for so long is IO mortgages.





Which will be when exactly? Wage inflation is dead.

Hi kempstar, I feel sorry for your friends. I think they have hard times ahead. Unless they get some hefty pay rises, they will never be able to afford to change to a repayment mortgage. IRs are about as low as they get, so if IRs go up in the years ahead they will never get the chance to convert. An alternative is to start praying for rampant inflation.

All the best, I hope it works out for your friends.

problem with repayment morgages is they are about 20% more than IO's to pay each month.If everyone thought like that then consumer spending would be totally dead and we really would have a full-blown recession on our hands!.

and if national average IO take up is 37%,and scotland is 28%...stands to reason that take-up in england/wales is closer to 45%...BUGGER ME!!THAT'S NEARLY HALF!

average mortgage income multiple is close to 6:1 now....in 1989 is was just over 5...that's not to mention unsecured debt which will account for much higher income multiple than last crash.

anyone got figures for TOTAL debt:income repayments for both these periods?

Firstly on an endowment mortgage.
My neighbour took out a 100% endowment mortgage in 1982 for 35k. The bonus was projected then to be 20k ( a lot of money then ). When it comes to maturity in 2007 they have been informed of a 8k shortfall to pay off the capital and no nest egg. I calculate that a repayment mortgage would have been better and more affordable. They informed me that the 20k estimated bonus made them go for the EM

The IO mortgage.
A young couple have bought a 200k house on an IO mortgage of 180k in July 2004.
The parents informed me that they could only afford to buy it on a IO mortgage.
They both work a six day week and in six months have gutted, new upvc windows, new carpets and interior fittings, and a new car. Spent Christmas in Barbados and are planning an extension this year.
Then the crunch, the parents said they will struggle at first but will have made a good profit in 5 years, after all you have to speculate to accumulate ( where did that silly saying come from ). I know they are both hard working and hope all goes well as they will have to work hard for many years.

Charlie`s story.
Bought a 2 bed maisonette in 1970. Mortgage £28 per month at 8%, went to £32 per month at 15%.
Moved in with a double bed and the wife`s wardrobe from her parent`s home. A kitchen table and 4 chairs the inlaws wedding present, bought a fridge and cooker, and household items all wedding presents. After a year rented a B&W television and the following year managed a carpet and 3 piece suite for the lounge. In the 3rd year central heating and some new kitchen units, and we treasured everything.
How things have changed.

The above figures are a perfect example of how statistics lag behind
events on the ground.
Now whenever I have to make important decisions I ask around a few people whose opinion I trust and go with my gut instinct as statistics are pointless.
Havn't the Halifax just released figures showing an increase in house prices!
I am a veteran of the 90's house price collapse and I can tell you this time it will be bigger and even more painful.
I shudder to think what is going to happen.

I took out an endowment mortgage for £45k when I bought my first house, 15 years ago for £58k. Fortunately, for me things worked out well and I managed to pay off the £45k capital back to the BS after 7 years.

And yes, I bought at the top of the market back in 1990 !! - cos, I didn't know any better at the time.

Still paying into the endowment at £50 a month, the latest projection with 10 years to go, is for a shortfall of about £10k and that assumes 6% growth from here on.

The next door house, is currently up for sale (identical to the one I bought, but mine had a bigger garden) for £172,500. A 3 fold increase in 15 years....... now if only the endowment had done the same !!!!

Financial industry = bunch of rip off experts. They make money irrespective of whether your investment turns out to be a dogs dinner ! Never trust a 'financial adviser', is another lesson I've learned in life !!

I had a 25 year life endowment with profits at £50 per month which matured 2 years ago, paid out 85k with a shortfall on the projected profits of 10k.

THE SAGE , did you pay 89 prices in 91.

It will happen again.
Some people will still be paying 2005 prices in 2007.

That's because with repayment mortgages you are actually paying off the mortgage!!!!! With an IO mortgage over the life off the loan you will pay back ******-all of the original capital!!!!

A popular misconception about the last crash is that prices suddenly started falling from say late 1989 onwards.This was not the case.There is always a timelag.
A similar thing is happening now because we are currently in the Denial stage.
In this current crash I expect the denial stage to end in latFeb/March when people will finally realise that they are not going to sell their property fpr anything like what they are asking.
Unfortunately I purchased my flat as the denial stage was ending and crash proper was starting hence the inaccuracy of the figures that were quoted.
We will only start to see real falls from April onwards even though I know lower offers are being accepted now but these are by sellers who know where the market is heading.
Now by real falls I am saying 30k to 40k being knocked off prices as a starting point and then negotiating a price.
Anybody who doesn't believe me obviously did not live through the early 90's
crash and did not see the carnage involved.

why would nationwide lie about figures from 14 years ago?
(If there was a timelag, I'm sure they could have adjusted their figures by now)

maybe they would, I don't know, but, I'm only asking.




people can't even agree about something that happened 14 years ago.
What chance have they got about agreeing about a future prediction.

Slapkirsty,

I must admit that at the time I was young and innnocent of the property market, so I wasn't really aware of what was happening around me. It didn't help that I'd moved down south, so I was expecting sky high prices. Regardless of what the stats say, the truth on the ground was this...

I bought a new build studio flat in late spring 1991 for just over 40K. For a year or two I didn't bother about property, since I was more interested in getting my career off the ground. When I did wake up to things, half the flats all the blocks around me were for sale. The original owners were mostly long gone, and most of the flats were being rented out, usually to people on benefit The communal carpark started to aquire wrecked cars, and the stairwell hadn't been decorated since I moved in. The developers helpfully put a huge sign on entrance to the estate advertising their nearby project..."MOVE IN FOR £21,000!!!" great, thanks guys! The low point was 93/4 with repossessed flats on the market for £13K.

Please note folks, that's a drop of 68%, and that was 2 years after the crash supposedly started according to your stats. The reason for the huge crash is this - it was a leasehold flat in what is now euphemistically called the Thames Gateway. Anyone who has bought a tiny place in the last couple of years in an cheap area should be VERY VERY worried. By 94, you could pick up a 2 bed terrace for just over 50K, so anyone on a half decent income could ignore flats again totally.

I must admit one thing.

people didn't start really complaining until 1993. If my memory serves me.
in 1993 'negative equity' was the conversation.
It was in lots of local TV news bulletins.

Which translated into plain English means "all the shitheap areas that no-one wanted to develop before because most of the inhabitants are barely human" including:

Sheerness
Sheppey
Shoeburyness
Southend
Basildon
Barking
Dagenham
Chatham
Gillingham
Canvey Island
Rochester
Strood

All full of chavs.

Yandros- Your situation sounds exactly the same as the one I was in.
Even down to the burnt out cars and tenants on benefits etc.
What people don't realise is that today's first step onto the housing ladder quickly becomes the flat I would not touch with a bargepole and think yourself luck that I am offering you £12k to take this property off your hands(this actually happened)
Now that the crash has started flats will be ignored and the people who paid 140k for their dream starter home will be nursing losses of thousands.
Yandros - we have both been there and I am sure there are a lot of others who could tell a similar story.We have both come out eventually unscathed(although I do sometimes have the odd bad dream) but I fear for the current crop of naive first time buyers who have fallen for the hype and media spin.
It is going to be a painful lesson learnt.

What people don't appreciate is that, with the present soul-crushing property prices and the low-inflation environment, that first step on the property ladder could be your last . Bulls say "We all had to start somewhere", problem is, buying today, that's where you'll end up as well. The property ladder is dead.

Quite right zz.

With the way the economy is heading luxury studio flats at £110k will be unsellable
at even 50% reductions.
Do you think things may go into reverse now in so much as inflation may start creeping up but house prices conversely go sharply downwards?
I know prices will fall but wondered if you think inflation is going to increase?

LOL! contradiction in terms! There's nothing luxurious about a 10'x10' cell where you bump into the walls every time you get up!



I do. With the US raising their rates significantly over the next 12 months the pound is almost certain to weaken against the dollar and this in itself will create inflationary pressures in the economy which will rapidly feed through into headline consumer prices. I think REAL (RPI) inflation could well hit 5% by year's end.

Agreed.

Inflation makes it all very different.

I think we will see some inflationary pressures, but unless the remit of the BoE changes then they will seek to keep this artificially low.

Its funny to think that the current ruling party comes from a generation where their houses have been largely paid for through rampant inflation, and now they want to take that away from our generation but still harp on about housing being a good bet in the long term.....

W**kers

I tihnk this crash will be many times worse than the last, as inflation will not mask the real falls in price, the level of debt is at disgusting level and people seem to have even less idea of how to manage their inaces than ever... Its all going tits up....

ENDOWMENT mortgages: a question?

I'm an American, and I do not understand these things:

What I understand is this: with an downment mortgage, you borrow a little extra, and invest that in the stock market, and over a period of time, that extra investment is meant to grow to a point where it repays the mortgage. Is that how it works?

I suppose the sensible thing behind it is, you are diversified: either the house or the equity portfolio can grow in value. But what if they both fall? Which is the prospect from here.

The problem is that both houseprices, and equities ten to rise when rates fall (a double virtue in the endowment mortgage.) But both may fall when rates rise. So if we have passed the bottom in the long term rates cycle: property is high, and equities are struggling, this double-barreled game may be a very poor idea indeed.

NOW someone please set me straight

It has been interest only mortgages which have allowed the boom to go on longer than the pundits thought. Andrew Farlow did not take into consideration the effect these would have on the HM when he wrote his January 2004 paper " Housing Again".
We need a recession now to teach the idiots that they must come back to reality, painfull maybe, but a clear out is much needed. IMO if IRs are held this month there are unlikely to be cuts this year, more like a couple of .25% rises after the election. I can see the disaster in Asia causing problems to the global economy, and we are all in for a hard time in the near future. But they will cut rates to steady things some will say, yes? and create a further massive debt bubble, no way.
The days or ultra low IRs are over for many years and saving will become the new norm. IO mortgages are the curse of the debtor and they will learn to their financial cost.
The lenders would not suffer in a recession, they have all the interest from the 1.1 trillion debt to come into their coffers, maybe they planned it as they may still believe in boom and bust even if GB does not.

Dr Bubb an endownment mortgage is like an IO mortgage, the difference is you take out a policy with an Insurance Company which also can give life cover.
The premiums are invested and a share of the profits go to the policyholders as bonuses which are added to the guaranteed payout every year. During the 90s the bonuses were good due to the performance of the stockmarket, as that under performed the bonuses dropped considerably thus leaving a shortfall to repay the capital at the end of the mortgage period.

dr bubb,

you've got the general idea of endowment mortgages.

The correlation between IR's and stocks is not so simple.

IR's are reduced to stop economies stalling,usually taken quite negatively by stock investors as a whole,the sectors that benefit from IR cuts are retail,banking and housing,so their shares rise,usually at the expense of a lot of other sectors.

IR's were falling from 2001 to 03,but so was the stock market.

IR rises,if in small sequences, are seen as positive for the most part as they indicate confidence in profit growth with a little bit of inflation,which is healthy.

of course this is not always the case,if raw materials increase dramatically this causes more inflation than desireable,so higher IR's are used to cap spending...but this is negative for GDP.

WE SAW SHARP RISES IN COMMODITIES LAST YEAR SO US I/R policy is a bit more aggressive than id desireable...so I'm positioning for a bit of a pullback in the short term.

ZZ when I used the term luxury studio flat my tongue was placed firmly
in my cheek.
These shoebox's currently fetching 150k will be unsellable in two years time.
I agree with you that at present effectively there is no housing ladder and it will
take years for things to go bact to the correct equilibrium.