Ombudsman Warning On Interest-Only Mortgage Debts

[Blue Nose Bear]

A fifth of IO deals agreed with no repayment vehicle specified

http://www.moneysavingexpert.com/news/mortgages/2010/05/ombudsman-warning-on-interest-only-mortgage-debts?utm_source=forum&utm_medium=sidebar&utm_campaign=box

Figures from the Council of Mortgage Lenders (CML) show in 1994, 61% of mortgages sold were on an interest-only basis where the borrower declared they had a separate repayment plan, while 12% were interest-only deals where no plan was in place. Many of the 61% would have been on an endowment basis.

By 1999, 31% were interest-only with a repayment plan, but the percentage sold without a plan shot up to 22% of all mortgages, equating to almost 400,000 new home loans in that year alone.

The key, says the Ombudsman, is to ensure you have a mechanism to pay off the loan itself, as well as the interest. It says lenders can do more to warn borrowers.

NO S**T!

[cashinmattress]

IO mortgages in a flat or falling market.

Lol.

Fools fall in!

[jethrotull]

Fools fall in!

IO mortgages often work out cheaper in the interest calculations, allow you to make repayments when you want, and are generally all round more suitable for the sophisticated house buyer.

You cannot protect a fool from himself.

[CHF]

possibly the next big mis selling scandal. Right up my street that would be

[Bruce Banner]

You cannot protect a fool from himself.

If they had brains they would be dangerous.

[miko]

I have a friend who has just been made bankrupt , he has a £500k IO mortgage , the offical receiver is letting the house be signed over to his wife as there is no equity in it , selling would release no funds to pay creditors. He has no idear how they will ever clear the debt and own the house , but due to being on a base rate + .75% mortgage paying the interest is cheaper than renting a tiny place at the moment.

He lives in an affluent area and knows many people with good jobs city ect, most have large 3/4/5 hundred k , IO mortgages , they earn good wages but live right up to their limits . When he asks them how they will ever pay off their loans the answer is more often than not the house will double we will sell and trade down buying a smaller place outright .

What happens if house prices half in the the next ten years not double ?

[Kazuya]

What happens if house prices half in the the next ten years not double ?

[Guest KingCharles1st]

I have a friend who has just been made bankrupt , he has a £500k IO mortgage , the offical receiver is letting the house be signed over to his wife as there is no equity in it , selling would release no funds to pay creditors. He has no idear how they will ever clear the debt and own the house , but due to being on a base rate + .75% mortgage paying the interest is cheaper than renting a tiny place at the moment.

Did anyone ever think of this scenario...? First time I have seen it posted up on HPC.

Maybe I should have highlighted the last three words of the quote?

Edited May 19, 2010 by KingCharles1st

[Pent Up]

Did anyone ever think of this scenario...? First time I have seen it posted up on HPC.

Maybe I should have highlighted the last three words of the quote?

once his tracker ends. Bye bye housey.

[miko]

once his tracker ends. Bye bye housey.

Yes

He is actually on a tracker for life the bank really messed up on this one. I know two people like him who are paying just 1.25% but for how long ?

One day rates will rise.

[GordonBrownSpentMyFuture]

What happens if house prices half in the the next ten years not double ?

Fat chance. Everyone knows that house prices...

[Blue Nose Bear]

I have a friend who has just been made bankrupt , he has a £500k IO mortgage , the offical receiver is letting the house be signed over to his wife as there is no equity in it , selling would release no funds to pay creditors. He has no idear how they will ever clear the debt and own the house , but due to being on a base rate + .75% mortgage paying the interest is cheaper than renting a tiny place at the moment.

He lives in an affluent area and knows many people with good jobs city ect, most have large 3/4/5 hundred k , IO mortgages , they earn good wages but live right up to their limits . When he asks them how they will ever pay off their loans the answer is more often than not the house will double we will sell and trade down buying a smaller place outright .

What happens if house prices half in the the next ten years not double ?

And therein lies the rub, it's this lunacy that has been the catalyst for the unprecedented rise in HP during the past 10 years.

The only way ahead for the UK is for Camoregg to now engineer HPC back to 2000 levels and then lock prices into CPI. This is a sustainable way forward. To lock them in at current levels would solve nothing and draw out the pain for years and years.

Yes these IO mortgage holders would feel they are suffering but that is the point they caused it in the first place, so should now pay the price. As long as they keep thier well paid jobs they will get by, just at a more realistic level, with the lesson learned that you cant have everything today and only prudence is the way ahead.

[Dorkins]

He lives in an affluent area and knows many people with good jobs city ect, most have large 3/4/5 hundred k , IO mortgages

So he lives on a street full of people with negative net worth who are playing at being millionaires courtesy of the Bank of England.

[Bloo Loo]

IO mortgages often work out cheaper in the interest calculations, allow you to make repayments when you want, and are generally all round more suitable for the sophisticated house buyer.

You cannot protect a fool from himself.

frack off with the "sophisticated buyer"

say what you mean..

one that has an excess of income over the debt.

IOs were sold to BTLs, who in the main rely on rental income, and to overstretchers, who dont have excess income, thats why they get them.

[miko]

So he lives on a street full of people with negative net worth who are playing at being millionaires courtesy of the Bank of England.

No not what i actually said , they live in an area where many people have massive mortgages who are banking on price rises to trade down and pay of the debt , the problem comes when the prices do not rise.

Do not know about their net worth assets minus debt = net worth .

Edited May 19, 2010 by miko

[eric pebble]

When he asks them how they will ever pay off their loans the answer is more often than not the house will double we will sell and trade down buying a smaller place outright .

What happens if house prices half in the the next ten years not double ?

[since the beginning]

No not what i actually said , they live in an area where many people have massive mortgages who are banking on price rises to trade down and pay of the debt , the problem comes when the prices do not rise.

Do not know about their net worth assets minus debt = net worth .

A 1/5, yeah right! More like a 50%+ Everyone I know with a I/O mortgage has got it because it is the only way they could afford it. This means they can't afford to repay.

I wonder what some of the "Repayment Vehicles" are, probably asked a question like "Do you have a savings account?"!

[Rozza]

No not what i actually said , they live in an area where many people have massive mortgages who are banking on price rises to trade down and pay of the debt , the problem comes when the prices do not rise.

Do not know about their net worth assets minus debt = net worth .

You'll probably find for a lot of them the picture appears like this

House - 500k, BMW - 50K, Other BMW - 50K, Giant Telly + all the other crap - 50K

so they are worth 650K.. brilliant, until you see the real figures

House - IO Mortgage with no plans other than capital gains = -500K (the whole lot is a debt)

2 BMW's bought on credit = 100K + Interest payments = -130ishK

Giant Telly + all other crap = bought on credit cards so 50K + 18% per year

So actually, when you really look at the figures, they are in debt to a point where most of our parents would have been terrified to be.

[kingsgate]

frack off with the "sophisticated buyer"

say what you mean..

one that has an excess of income over the debt.

IOs were sold to BTLs, who in the main rely on rental income, and to overstretchers, who dont have excess income, thats why they get them.

A "sophisticated buyer" is just someone who wants the flexibility to pay off his loan as and when he wants to, as opposed to being forced to pay it back in equal monthly instalments over 25 years.

I've got a load of IO loans, and guess what? When I have spare money (like I do at the moment) I pay off chunks of the capital. I like the flexibility. I don't see anything wrong with this at all. We will have cleared the most expensive loan (BASE + 3.5%) in another year, we've paid it down from £300K in 2008 to £130K now. Then we'll start on the next one down (BASE + 2%). Etc.

I also don't think that people have been "mis sold" these loans. The clue is in the name, really.

Not everyone is a plodder who doesn't expect to be earning more money in 10 or 15 years than they are now.

[Blue Nose Bear]

You'll probably find for a lot of them the picture appears like this

House - 500k, BMW - 50K, Other BMW - 50K, Giant Telly + all the other crap - 50K

so they are worth 650K.. brilliant, until you see the real figures

House - IO Mortgage with no plans other than capital gains = -500K (the whole lot is a debt)

2 BMW's bought on credit = 100K + Interest payments = -130ishK

Giant Telly + all other crap = bought on credit cards so 50K + 18% per year

So actually, when you really look at the figures, they are in debt to a point where most of our parents would have been terrified to be.

+1

and from the article this was 400,000 homes in 1999, so a conservative estimate to date makes that at least 4 million homes, probably a lot lot more in this position. The mind boggles at the shear stupidity of both the borrowers and the lenders.

Edit:spelling

Edited May 19, 2010 by Agent Provocateur

[Shrink Proof]

A "sophisticated buyer" is just someone who wants the flexibility to pay off his loan as and when he wants to, as opposed to being forced to pay it back in equal monthly instalments over 25 years.

Er...so what was wrong with the old-style repayment mortgage then, which allowed you to do just that, but included a "pay off the original loan" function?

[Bloo Loo]

A "sophisticated buyer" is just someone who wants the flexibility to pay off his loan as and when he wants to, as opposed to being forced to pay it back in equal monthly instalments over 25 years.

I've got a load of IO loans, and guess what? When I have spare money (like I do at the moment) I pay off chunks of the capital. I like the flexibility. I don't see anything wrong with this at all. We will have cleared the most expensive loan (BASE + 3.5%) in another year, we've paid it down from £300K in 2008 to £130K now. Then we'll start on the next one down (BASE + 2%). Etc.

I also don't think that people have been "mis sold" these loans. The clue is in the name, really.

Not everyone is a plodder who doesn't expect to be earning more money in 10 or 15 years than they are now.

get over with it!

sophisticated!...you are describing someone with a simple budget plan.!

I agree however, that unlike endowment policies with false illustrations, IO mortgages even have a clue to the method of repayment that even the thickest could understand, or they could have had another type, where the clue is in the NAME OF THE PRODUCT.

repayment or interest only?

wonder what the difference is?

[Georgia O'Keeffe]

get over with it!

sophisticated!...you are describing someone with a simple budget plan.!

I agree however, that unlike endowment policies with false illustrations, IO mortgages even have a clue to the method of repayment that even the thickest could understand, or they could have had another type, where the clue is in the NAME OF THE PRODUCT.

repayment or interest only?

wonder what the difference is?

with a repayment you have to repay the mortgag taken out, with an interest only you only have to pay a nominal agreed amount whilst you remain interested in doing so, if it falls into neg eq you just lose interest in the property game and give it back to the bank to sort out.

as you say the clues in the name interest

What do i win

Edited May 19, 2010 by Tamara De Lempicka

[Bloo Loo]

with a repayment you have to repay the mortgag taken out, with an interest only you only have to pay a nominal agreed amount whilst you remain interested in doing so, if it falls into neg eq you just lose interest in the property game and give it back to the bank to sort out.

as you say the clues in the name interest

What do i win

you are a lawyer, and £5 is your prize.

[kingsgate]

Er...so what was wrong with the old-style repayment mortgage then, which allowed you to do just that, but included a "pay off the original loan" function?

Nothing is wrong a straightforward repayment .... I've got one myself on my own home.

But IO on our rented houses means that we can be flexible: we are only paying back what we HAVE TO each month, the interest.

We can decide if and when to pay off chunks of the capital borrowed, when we have the spare dosh. Other times we may need that money for renovations, repairs, whatever.

Every mortgage holder will get at least an annual statement showing the interest paid, balance owed etc, so I cannot see anyone seriously claiming that they did not realise that they were not paying off the original capital sum.