Wednesday, Nov 19, 2008
And they made such a fuss over endowment shortfalls?
Press Association: Concern over interest only mortgages
Nearly half of people with interest-only mortgages have no investment in place to repay the money they owe, research has shown.
Around 2.9 million homeowners are on interest-only deals, but 45% of these are not contributing to an investment to repay the capital they have borrowed, according to LV. Instead 41% of people plan to repay the money they owe by selling their house and cashing in the equity.
Despite falling house prices, many of these homeowners hope to raise enough money to not only repay their debt, but also to buy a new property.
Borrowers have not been obliged to have an investment plan linked to an interest-only mortgage since the early 1990s.
Posted by little professor @ 01:22 AM (1315 views) Add Comment
16 Comments
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1. quiet guy said...
"Around 13% of people said they were aware that they needed to find the money to pay off the capital on their mortgage but they did not know how they would do so, while 12% said they had not given the matter any thought."
So 12% signed the mortgage without any thought (other than prices always rise). The funny thing is that if inflation really kicks off, these thoughtless people may yet get through this mess financially intact. Without rampant inflation, these people are very vulnerable.
2. gardeniadotnet said...
and the leaves that are green turn to brown
3. Cogs said...
Someone should tell them that renting is dead money!
4. charlie brooker said...
Beggers belief reading that article.
People actually thought they could conttibute nothing to an investment vehcila in the hope therr would be sufficient postitive equity to repay the mortagage AND buy another house. Astounding.
5. fjcruiser said...
Interest only mortgages as well as over 25 years terms have pushed prices of properties. In countries like France, interest only mortgages are not allowed and the term of mortgages are between 15 and 20 years, hence some hefty repayments, only allowing people with decent equity to buy reasonably priced properties. This is to protect the consumer. In my days as a tied FA in the UK, I used to see a lot of people aged over 60 on an interest only mortgage going into retirement with the prospect of solely receiving a meagre state pension which would barely cover the interest on the mortgage. These people had simply stopped paying into endowments after the outcry and banks had not advised them to switch to a repayment as these repayment mortggaes would not have become unaffordable.So interest only it was! This is 7 years ago when interest rates were low. How many young FTB have bought properties on onterest only mortgage in the last few years ? Quite a few IMHO.
6. Si said...
Sounds like a couple of friends of mine.
The bought the smallest flat in a not so nice area on IO mortgage, because they had been force fed the mantra that house prices only ever go up. It was very naive of them of them, but then everyone I knew believed that until recently. Even the bank that lent them the money must have done.
They are lovely people. I feel very bad for them on behalf of this government.
7. jack c said...
I believe Hargreaves Landsdown conducted research into the number of people using residential property with no repayment vehicle as a "pension" - they looked at the age profiles and concluded that it would lead to a concentration of property being dumped on the market thus forcing prices down at the very time the "investor" needs the cash.
Interest only lending (no repayment vehicle at all) is IMO irresponsible lending and is another factor that has led to residential property becoming way over priced.
8. theboltonfury said...
it wasn't until about a year ago that I even realised what an IO mortgage was. I just thought it was cheaper alternative to a mortgage, similar to 3rd party or fully comp
Basically it's a bank just asking you to pay them a ton of money for 25 years and then they own your house.
Unreal
9. last_days_of_disco said...
Its sweet that the banks are left with the stupid house though actually. Especially since it isn't worth anything. So there is a silver lining in there.
10. Gtrjazz said...
and talking of those endowment shortfalls, how short are they now in the current market
11. str 2007 said...
jack c
agreed, GB has precided over this aswell, surely he must know what an IO mortgage is and the implications of letting them run.
If everyone had been on repayment mortgages up until now (apart from the fact houses wouldn't be so inflated) IO mortgages could of acted as a safety net for borrowers to fall back on for say a max 4 year period and helped to get the country throught the tough times.
Now so many are maxed out on them, the only route the bank has is to lower interest rates.
The only exception to IO I can see is for self employed (like myself) who can demonstrate an understanding of money and who may hardly pay themselves through the year and then take a dividend on annual profits. But even in this case there should be an agreement to pay a minimum amount of capital off (but at the end of the year rather than monthly).
12. paul said...
Mreover, if inflation turns to deflation, which I still don't think the Bank of England will let happen, their debts will start looking like an awful lot more money than when they first took the mortgages out.
I've always said I thought interest only mortgages are the next endowment mortgage trainwreck waiting to happen.
13. fahrenheit451 said...
If anyone who signed up for an IO morgage did not realise that it is really only just a longer term rental agreement, but without the protection of the Housing Act, they were badly advised. As always it is "The Management" that are to blame, but as any manager knows, its easy to shift the blame downwards, and very difficult to get it moved upwards.
14. jack c said...
@str 2007 - all valid points you have made and to expand upon my original posting many people took a view that it was cheaper to buy than to rent and when prices were rising rapidly there was the opportunity to make a capital gain - so someone who bought a property had lower monthly payments than if they rented and walked away with say £50k tax free after a short period of time (say 2-3 years) which equates to a better return than working for a living. In addition when the property frenzy was in full swing residential property was much more liquid than it is today hence you had people who would "spin" their property and simply make an easy profit. Approximately 4-5 years ago you had people in the Newcastle upon Tyne region camping out for days and nights on end to be the first to secure a plot on phase 1 of any new development - hence many were fooled into thinking property (even on an interest only basis) could only be a one way bet.
15. uncle tom said...
This is going to be a developing issue that won't go away for many years. There are a huge number of old endowment mortgages that are now approaching maturity, many showing a shortfall, although the shortfalls will generally be in the order of a few thousand, rather than tens of thousands - IF the borrower kept up the payments...
However, it seems that many endowment mortgage holders (I can't find a stat) gave up on the endowment contributions and just continued with the mortgage interest payments. For the last decade, a high proportion of mortgages have been interest only from the outset.
IO deals were trumpeted as being the norm in Switzerland, so why not here - missing the point that the Swiss were not in the habit of borrowing on such a ludicrous scale.
There is a fairly rational argument that a couple could pay IO on a spacious family home for 25 years before using the equity acquired over that period to downsize into something more modest once the kids have flown the nest, but the notion that young couples should use an IO loan to buy a cramped flat "to get a foot on the ladder" is utter lunacy, as they are then on the first rung of a ladder where the other rungs are out of reach.
However, for those who have yet to buy their first home, the outlook is looking fairly rosy, as few of the preceding generation now have the means to compete for the better homes..
..enjoy, but borrow sensibly!
16. the haunted said...
"Nearly half of people with interest-only mortgages have no investment in place to repay the money they owe, research has shown" - Well, what a suprise..... Not! I know of at least 2 people who have IO mortgages and have no concept of investing to offset the debt.
Even after all the fuss with the endowment mortgages sold in the 80s people still don't get it. At least an endowment mortgage forced people to invest to offset the debt though! Interset only mortgages are just endowment mortgages without the endowment!
Agreed that the IO mortgage has added to the houe price inflation over recent years. However, it will now be just another part of the unraveling of the housing market. As for these f***ing idiots deseve everything that happens to them.