Saturday, Dec 20, 2008
"half a million are relying solely on rising property values"
Guardian: Pay-back times for the interest-only mortgage
Next year could be a challenging one for many thousands of people with "interest-only" mortgages. Research by friendly society Liverpool Victoria shows that more than half a million have no specified investment vehicle in place to pay back the loan, and are relying solely on rising property values and cashing in equity to see them through. But for some, this strategy may have been derailed by current and predicted future falls in house prices. Anyone relying solely on an increase in the value of their property to repay their mortgage is taking a risk. Even over the long-term, when it is reasonable to assume house prices will go up sufficiently, this strategy always commits you to trading down price-wise in later life to make it work.
Posted by drewster @ 02:14 AM (543 views) Add Comment
14 Comments
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1. A Harris said...
The FSA are a joke, you might as well put a mortgage broker in charge of regulation.
The widespread availability of interest only loans simply results in house prices increasing to compensate.
Many buyers have taken the maximum interest only mortgage they could afford to pay each month. “Buy now before you’re priced out!!”, “Your income will increase and rates will come down” etc
It just amazes me that after thats happened the FSA carry on regardless with their disastrous “regulatory” polices.
2. This comment has been removed as it was found to be in breach of our Blog Policies.
3. growler said...
Simple solution: make interest only illegal for a mortgage. It only encourages other problems
4. goweresque said...
I always thought that interest only mortgages were insane. How did people think they were going to pay back the loan? I mean you need a house to live in, so you can't just cash your chips in and take the equity and run. However high prices rose you'd still be left with the original loan amount. Utter madness. A sign of the tulip mania at work.
I think there should be one sort of mortgage only - the repayment type. No endowments, the stock market has proved to be too volatile, even over 25 years for ordinary people to put their houses at risk in. Certainly no interest only mortages. Cap the amount you can borrow legally at say 4 times certified income, and minimum deposit of 20%. Then houses could become something people save towards, and live in. Not investments, or pension substitutes.
5. Rob said...
Interest only mortgage = renting (without the benefit of being able to give notice to the landlord)
6. it_is_going_with_a_bang said...
Can you imagine the state of the housing market if people were forced to borrow AND pay it back!
7. drewster said...
I agree. Ban all these complicated mortgages, for the good of the wider economy!
8. Ajt said...
goweresque fine words. I've long held a view that the banks are forced to do stupid things, so it's best to legislate so they can't and then they compete on a sensible and level playing field.
9. Britishblue said...
In other countries you have to repay back the loan. You can't just have an interest only mortgage.
In Poland, for instance, you need a 20% deposit and then an agreement to pay back the loan in period of up to 30 years. Also their lending criteria is much more complicated. When I negotiated a mortgage there three years ago, I had a half built house and only needed a further 40% capital to complete. The loan amount was equal to 1 x combined salary of my wife and I. It took over six months to get the mortgage.. The bank there carefully analysed everything: Not only did it look at credit cards and bank statements. It also looked at limits on credit cards. Therefore, If I had a 10k limit on the credit card, but an outstanding balance of only £500, it was the 10k figure they took into consideration. Their view was that I could spend that 10k at any time so therefore, they would treat it as a potential debt. They also queried every payment I made out of my account. I had a regular payment going to my parents. They took this into consideration.
If I had had a problem with the amount they would lend me, I would have been required to cut up and cancel the credit cards before they gave me the loan.
Even though Poland isn't exempt from the current economic woes, Its banks are some of the few that haven't been caught on the mortgage front.
The repayment part of a loan in Poland is fixed. It would be unheard of to borrow money and not pay back the capital. How you pay the interest is the varied bit as you can choose for instance to pay on Libor plus 1.5%. However, Polish banks still lend to each other and the Polish Libor is just 0.9%, meaning that a LIbor mortage would be 2.4%.
The scary thing is that my Polish repayment is twice as much as my interest payment. If the banks in the UK expect house prices to further fall in the UK , expect them to phase out interest only mortgages and move to repayment ones. Imagine what impact this will have on house prices in the UK in the longer term.
10. Omikin said...
The article completely ignores the 'demographic' of the kind of people who take these IO mortgages out. A lot of them are self-employed and during the 'boom' were seeing their income rise. Now the opposite is the case. A lot of them are not going to be able to make overpayments for a long time. And yet psychologically they ignore the fact that their debt is not falling.
11. paul said...
I heard others here say that today's interest only mortgages are tomorrow's misselling scandal.
12. Mrb said...
How can you pay off a mortage with the increase in the value of your property?
13. jackas said...
Hyman Minsky defines an interest only mortgage as a ponzi scheme/unit.
People used to not know what a ponzi schenen was until Madoff Made off with all the money.
14. Cr4shw4tcher said...
@Mrb - by assuming the price will double.