Ombudsman Warning On Interest-Only Mortgage Debts

[housespider]

OP

View Postmiko, on 19 May 2010 - 03:24 AM, said:

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?

Re: The OP

I did not think people could do this. When my 1st husband and I split back in 1992, it was decided that he signed the house over to me. Before he could do that, he was checked out, checking that he was not in debt and hiding from creditors etc. He also had to 'swear' in the presence of a QC type that he was signing the house over to me with his own free will and that he was not doing it to avoid any debts that were as yet unknown of. It cost about £250 for the necessary docs.

Made perfect sense really - Has all this really changed?

Edited to show OP at the top

Edited May 19, 2010 by housespider

[Toto deVeer]

Reading this thread makes me realize just how utterly screwed up the entire UK property market and mortgage system is. It's all just a mirage.

Right, I'm off to the 'What is Gravity' thread where the subject is more sensible....

[miko]

OP

View Postmiko, on 19 May 2010 - 03:24 AM, said:

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.

Re: The OP

I did not think people could do this. When my 1st husband and I split back in 1992, it was decided that he signed the house over to me. Before he could do that, he was checked out, checking that he was not in debt and hiding from creditors etc. He also had to 'swear' in the presence of a QC type that he was signing the house over to me with his own free will and that he was not doing it to avoid any debts that were as yet unknown of. It cost about £250 for the necessary docs.

Made perfect sense really - Has all this really changed?

Edited to show OP at the top

No i don't think anything has changed , sure the rules for this have been around for years .

The reason the official receiver allows this is due to there being no equity in the house , it may as well be signed over to the spouse as sold , no creditors of the bankrupt will benefit either way .

Remember reading about ten years back about people who had been bankrupt in the last recession where the family home was in negative equity , again the OR left them with the property as it would have cost more to sell than leave the bankrupt in the home. Years later after discharge and rising property values equity returned to the houses and ex creditors came looking for their money . The artical was about these people having to sell up and pay ( they described it as like being bankrupted all over again ) a main point of the artical was the fact that they could have transfered the asset to their wives for £1 but had not been told.

With the new laws on going bankrupt im not sure if creditors can still chase after discharge or not . However the transfering of the family home to wife has always been there.

[Scunnered]

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.

All house-buyers are sophisticated. I've seen it on the TV.

[R K]

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 ?

His wife will go bankrupt too.

[fluffy666]

All house-buyers are sophisticated. I've seen it on the TV.

True. They are sophisticated investors because house prices only ever go up.

[bomberbrown]

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 .

Sorry, but that window of opportunity (2001 to 2007) has been and gone. Every house in my street that was bought and sold in this time frame, doubled in price.

God knows when the next one will be?

[Bloo Loo]

No i don't think anything has changed , sure the rules for this have been around for years .

The reason the official receiver allows this is due to there being no equity in the house , it may as well be signed over to the spouse as sold , no creditors of the bankrupt will benefit either way .

Remember reading about ten years back about people who had been bankrupt in the last recession where the family home was in negative equity , again the OR left them with the property as it would have cost more to sell than leave the bankrupt in the home. Years later after discharge and rising property values equity returned to the houses and ex creditors came looking for their money . The artical was about these people having to sell up and pay ( they described it as like being bankrupted all over again ) a main point of the artical was the fact that they could have transfered the asset to their wives for £1 but had not been told.

With the new laws on going bankrupt im not sure if creditors can still chase after discharge or not . However the transfering of the family home to wife has always been there.

thats not right. A bankrupt has no assets...they all belong to the OR.

creditors cant come back for a house later in years.

What happened was sometimes the house, which was in joint names, was, with agreement from the lender, moved to the spouse.

the alternative was to sell the house, evist the wife and family and close the loan. the wife would have been up for the shortfall....if she has a job she would be paying it herself...she may have gone bankrupt herself.

In the case here, the bank decided to resign the wife for the 50% of the house...they still have a stake in the house and a person paying up.

the husband is scot free.

If the wife subesequently cant pay, she'll lose the house. Its IO so they are just renting anyway.

Its all up to the lender and the OR. sometimes the OR can decide that creditors will be able to claim from the sale of the house if it is sold for more than the equity at a later date.

they wont be coming after the bankrupt though, whatever happens.

[Saving For a Space Ship]

May I suggest a suitable 'homecoming' to end it all...

http://www.youtube.com/watch?v=-TFrB4tCFgo

[miko]

thats not right. A bankrupt has no assets...they all belong to the OR.

creditors cant come back for a house later in years.

What happened was sometimes the house, which was in joint names, was, with agreement from the lender, moved to the spouse.

the alternative was to sell the house, evist the wife and family and close the loan. the wife would have been up for the shortfall....if she has a job she would be paying it herself...she may have gone bankrupt herself.

In the case here, the bank decided to resign the wife for the 50% of the house...they still have a stake in the house and a person paying up.

the husband is scot free.

If the wife subesequently cant pay, she'll lose the house. Its IO so they are just renting anyway.

Its all up to the lender and the OR. sometimes the OR can decide that creditors will be able to claim from the sale of the house if it is sold for more than the equity at a later date.

they wont be coming after the bankrupt though, whatever happens.

" thats not right "

which bit ? you say thats not right and then repeat back to me most of what i said.

As i said the OR allowed the wife to take the house over for a sum of £1. there was nothing to be gained for any creditor form a sale.

The bit about debtors chasing at a later date after discharge , is the bit i was not sure of . If they can not chase now maybe the rules have changed but i remember this being a problem about 10-12 years back after the last ressession. The houses had been left in joint names on bankruptacy. You say that a bankrupt can have no assets yes agreed but was a house in negative equity an asset ? what ever the OR left the bankrupts with the houses and after discharge they rose in value.

[Prof]

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

That`s what IO Liar Loans are for, to keep prices rising.

The higher the price, the bigger the lie. Simples !

[miko]

That`s what IO Liar Loans are for, to keep prices rising.

The higher the price, the bigger the lie. Simples !

Regardless , there have been IO mortgages over the last 2-3 years but prices have not risen they have fallen.

[eric pebble]

That`s what IO Liar Loans are for, to keep prices rising.

The higher the price, the bigger the lie. Simples !

Correct.

[ChumpusRex]

The bit about debtors chasing at a later date after discharge , is the bit i was not sure of . If they can not chase now maybe the rules have changed but i remember this being a problem about 10-12 years back after the last ressession.

I think it's always been the case that once bankruptcy is declared all debts to that person cease to exist (except in the case where the debtor is allowed to keep a secured asset - e.g. house without equity).

However, in the 90s, mortgage lenders didn't always force people repo'd in negative equity into bankruptcy. These people who opted not to declare bankruptcy (e.g. declaring bankruptcy would mean they lost their job), did sometimes get stung 10 years later. E.g. they had acquired savings over the previous 10 years (maybe they wanted to buy another house) - then suddenly, the debt resurfaces (before the 12 year statute of limitation).

[Prof]

Regardless , there have been IO mortgages over the last 2-3 years but prices have not risen they have fallen.

Something to do with higher deposits being required ?

Lenders being slightly more careful who they dish the dosh to ?

A general reduction in confidence in the property market ?

What you have stated is a bit like saying "well, there are still plenty of guns and bullets being made, but there have been less shootings".

I would say for sure (and it`s only a gut feeling) that if IO mortgages had not been available, then property prices would not have risen by as much as they have. Further to this, if liar loans (self cert) mortgages weren`t available, then prices would have been held back quite a bit.

[eric pebble]

I would say for sure (and it`s only a gut feeling) that if IO mortgages had not been available, then property prices would not have risen by as much as they have. Further to this, if liar loans (self cert) mortgages weren`t available, then prices would have been held back quite a bit.

100% correct.

[Bobajobbob]

I've thought about going IO a number of times because generally and with a little work it is relatively easy to outperform the interest rate of the loan investing in quality stocks in an ISA wrapper every year. You benefit from compounding and assuming no significant market shocks, inflation and some capital repayment along the way you could pay off the loan quicker and more cheaply this way.

Having said this I never did it because I don't trust myself or the financial system. I do invest alongside the loan anyway with any spare cash but I prefer the conservative approach of repayment and shortening the mortgage term with overpayment whenever I can. It costs me more financially but saves me peace of mind as I'd rather not have my pension and house equity all tied up in the same financial products.

Having said this I know a lot of people who have naked IO mortgages and were never advised about parallel investment vehicles nor have they consider the reality as in their eyes it is too far away to worry about.

[Greg Bowman]

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.

+1

[crash2006]

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?

What you forget is, service charges, and other expenses that a would have been covered by the landlord.

[SEW247]

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

NO S**T!

I'm surprised that it is only 1/5 of mortgages; I would expect it to be much higher than this.

A lot of the usual comments on here about reckless borrowing etc., and I agree to a certain degree with some of the comments.

That said, I think that you do really have to take off the one-size- fits-all "blinkers" and consider that different people are in different situations when they take out a mortgage in terms of earning power and career progression potential, particularly working as professionals where these two things can happen very quickly.

I totally agree that IO mortgages are a key reason as to why we are where we are now and I hold up my hand as one of those who got an IO mortgage to buy my first place in London. I would say that IO was personally a good option for me as my earning power has increased 4x and I work in a role with great job security and good career prospects. I also have a below BOE tracker until 2013 and am canny enough to invest all spare cash elsewhere.

That said, I’m sure there is an array of people who did similarly as me and are not in such a good position, particularly when rates rise / deals come to an end.

[Alan B'Stard MP]

I totally agree that IO mortgages are a key reason as to why we are where we are now and I hold up my hand as one of those who got an IO mortgage to buy my first place in London. I would say that IO was personally a good option for me as my earning power has increased 4x and I work in a role with great job security and good career prospects. I also have a below BOE tracker until 2013 and am canny enough to invest all spare cash elsewhere.

OIIII NO SWEARING ON THE FORUM !!

Can't believe the ******ing profanity filter didn't pick that up.

Edited June 4, 2010 by Alan B'Stard MP

[Warwick-Watcher]

Something to do with higher deposits being required ?

Lenders being slightly more careful who they dish the dosh to ?

A general reduction in confidence in the property market ?

What you have stated is a bit like saying "well, there are still plenty of guns and bullets being made, but there have been less shootings".

I would say for sure (and it`s only a gut feeling) that if IO mortgages had not been available, then property prices would not have risen by as much as they have. Further to this, if liar loans (self cert) mortgages weren`t available, then prices would have been held back quite a bit.

We probably went through the maths on this about 3 years ago. IO is around 1/3 cheaper than repayment in most interest rate scenarios (current low rates exaggerate the difference), so the same amount of mortgage monthly cost allows you to pay 30% more for the property. Hey presto property prices increase by 30% over a few years as more people go IO and the remainder are forced to in order to keep up with rising prices.

The real fun starts if (rather than when) the banks start reviewing their loan books to examine what percentage are likely to default. I have a suspicion that in 10 years time this will be seen as a massive issue and mis-selling will become the next compo gravy train for lawyers and "victims".

Self cert should only be available to people who don't have a PAYE code.

[Hip to be bear]

No i don't think anything has changed , sure the rules for this have been around for years .

The reason the official receiver allows this is due to there being no equity in the house , it may as well be signed over to the spouse as sold , no creditors of the bankrupt will benefit either way .

Remember reading about ten years back about people who had been bankrupt in the last recession where the family home was in negative equity , again the OR left them with the property as it would have cost more to sell than leave the bankrupt in the home. Years later after discharge and rising property values equity returned to the houses and ex creditors came looking for their money . The artical was about these people having to sell up and pay ( they described it as like being bankrupted all over again ) a main point of the artical was the fact that they could have transfered the asset to their wives for £1 but had not been told.

With the new laws on going bankrupt im not sure if creditors can still chase after discharge or not . However the transfering of the family home to wife has always been there.

Potentially they could be better off being reposessed, declared bankrupt and having their debts wiped clean rather than the house with no equity being transferred into the solvent wife's name.

In 5 years they might end up with a debt of say £500k on a house now worth £250k and with base rates up at 10%, paying £54k per annum to rent the house from their bank.

At that point they would be wishing that they had just got out, posted back the keys and rented a nice little place for £1,000 per month!

Edited June 4, 2010 by Hip to be bear

[Si1]

Potentially they could be better off being reposessed, declared bankrupt and having their debts wiped clean rather than the house with no equity being transferred into the solvent wife's name.

except you can't 'just go bankrupt' that easily...?

[dances with sheeple]

Potentially they could be better off being reposessed, declared bankrupt and having their debts wiped clean rather than the house with no equity being transferred into the solvent wife's name.

In 5 years they might end up with a debt of say £500k on a house now worth £250k and with base rates up at 10%, paying £54k per annum to rent the house from their bank.

At that point they would be wishing that they had just got out, posted back the keys and rented a nice little place for £1,000 per month!

Many will walk from their house loans any way they can when it becomes clear that the house is just a money pit, this day is not here yet but UK sheeple will get the message at some point. Banks know this and will be busy pricking about with their models and projections, probably getting it spectacularly wrong of course. Are we really measuring in years before it all just falls apart?