Friday, Aug 13, 2010
Oooh dear I can hear the bleating already
Yahoo: Interest only mortgages for the chop
It is estimated that more than one million people took out these loans between 2005 and 2009, as house prices boomed. David Hollingworth, of London & Country said: "As the name suggests, the monthly mortgage repayments are only covering the interest on these loans. Borrowers are not paying back the money they've borrowed to buy the house."
Posted by mark @ 11:02 AM (1871 views) Add Comment
12 Comments
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1. general congreve said...
Another nail in the coffin for HPI. Nice.
2. techieman said...
"WHAT WOULD COUNT AS A SUITABLE REPAYMENT VEHICLE?
Most banks would want to see you paying into an investment where, even on modest growth projections, it would repay the loan at the end of the mortgage term. Previously, banks would have accepted a future inheritance, or even selling the property and downsizing as a way of paying off the loan, but far fewer will grant an interest-only mortgage on this basis now."
Oh dear oh dear.... so the choice will be paying into an investment vehicle - eg an endowment [low cost types which have had their assumed bonus rates reduced re mis-selling] or a repayment loan.
If the latter [and based on low rates ] the amounts is an extra £300 on a £150k loan .... and thats on a 3.5% rate.
3. sibley's love child said...
The numbers that have emerged recently is disgraceful insomuch the absolute number and percentage of IO mortgages taken out over the previous years. Unless i'm mistaken, the only purpose of an IO mortgage is simply for property speculation? It's been a long, hard slog but - as you say General - another one in the balls for HPI.
Larvely.
4. mark said...
wonder if shares would count?
5. mark wadsworth said...
All this "repayment vehicle" is arrant nonsense (unless you are a self-employed delivery driver and buy a vehicle as a business asset).
By and large, the best kind of investment is to pay off your mortgage as quickly as possible a) there is no risk of losing money b) the after-tax return is very good indeed. In fact, the after-tax return is 100% of the interest saving and c) if you hit hard times, the bank is far more likely to be lenient if you have repaid a shedload of your mortgage and have built up equity the hard way.
But banks love this IO and repayment vehicle stuff - they have you on the hook for far longer and they can collect loads of lovely fees and charges for the administering the "investment vehicle" on which you bear all the risk. See also "endowment mortgages".
6. Si said...
I thought i'd butt in here to point out that some people, albeit naiively, were heavily persuaded to take up these kind of mortgages by estate agents and mortgage advisors, and willingly given to them by the banks, all of whome professed confidently at the time that HPI would mean they would be able to sell at a handsome profit and have a deposit for the next place.
I'm close friends with a lovely couple who did just that at the top in '06/07 and now are stuck in a tiny 1 bed flat in a less desirable area with a large amount of -ve equity. I'm not sure how they're going to get out of it, the flat is way too small to raise a family. Spare a thought for these guys eh?
If the older generation is wondering why ours is having less kids to support their pension, this is one of the reasons why. There isn't anywhere available to us suitable for doing so, especially when it often takes 2 people in full time work to sustain the rent/mortgage on a pokey flat these days.
7. str 2007 said...
Interest only should be an option to step down to in recessions, not to borrow more in boom times.
It would however be unfare for BTLers to be able to price houses using IO payments and owner occupiers to have to repay.
It could be argued it takes away the capital growth element from the flawed BTL business model but the playing field should be levelled from th offset. If indeed BTL should be allowed atall in it's present form.
8. miken said...
They are dead right about there being a mortgage time bomb. Yet to explode IMHO.
9. bystander said...
someone ought to tell ING about this. The Head of ING commercial banking in South East Asia has encouraged his employees to advice anyone looking to buy a house that interest only mortgages are the best bet and you are bound to be able to move up the property ladder faster, than if you try to repay any of the capital.
10. uncle tom said...
Some short memories emerging here..
Endowment mortgages were a huge scam and the first really big mis-selling scandal.
As MW says, the only appropriate vehicle for paying down a mortgage is to have a repayment mortgage.
It is very mportant, IMO, for govt to ensure that the tax system does not favour any other type of repayment method.
IO mortgages used to be reserved as a temporary fall-back arrangement, when couples split up and the party left living in the mortgaged house needed time to sort his or her affairs..
..this should once again become the norm.
11. tenyearstogetmymoneyback said...
What has been happening is far worse than endowment mortgages.
Back in the Eighties the building sociaety insisted that THEY held the endowment policy. I would gues that had you missed a couple
of payments they would have treated it just as seriously as missing a couple of interest payments. What is to stop someone with a
"Suitable Repayment Vehicle" cashing it in if they suddenly fancy a new car or something ?
Of course some of the predidictions were a bit out. Next year I will be able to tell you how much. However, which is worse; a 30% shortfall
after 25 years or a 100% one ?
12. Stoatgobbler said...
Superb finger wagging. I'm sure you all live model lives and never make a mistake. Why shouldn't I have access to available financial products on the basis that you lot don't like them? It's just chippy.
This house price bubble has to do with the exclusion of mortgage interest from the RPI and the subsequent socialisation of capital by Labour. It's now being kept going by a clear collusion between banks and government to avoid a decimation of privately held wealth in the UK. Interest only mortgages? Neither here nor there.