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The Death Of The 'repayment Mortgage'

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There has never been such a proliferation of people taking out ‘Interest Only Mortgages’ (IOM‘s) or to give them their correct name ‘Life Mortgages’. According to the latest releases from the British Banking Association, (BBA), showing July 2005 figures, the number of loans for re-mortgaging stood at 62,989, together with a further 65,611 new approvals for house purchases. With the average value of loan per house purchase now standing at £132.700, it is not difficult to see the attraction of this type of mortgage over the good old fashioned and trusted ‘Repayment Mortgage’.

British Banking Association Stats for July 25/08/05

When taking out a new mortgage most ‘First time Buyers’ don’t worry about the long term, it is the here and now that matters. It is what they can stretch to afford short term, and that is their monthly fixed payments. The (IOM‘s) offer them just that, greater borrowing against reduced payments. The same is true of existing borrowers coming to the end of fixed terms on their ‘Repayment Mortgages’ and jumping over . Not only can they release equity but negotiate new lower monthly fixed payments. All adding to the illusion of greater wealth and prosperity.

This has created an unavoidable and prolonged situation where it is not the house that is now viewed as being overpriced but the type of mortgage. Let me reiterate on this point because I believe it be of great importance to the current housing boom. In other words, house prices have climbed but mortgages pertaining to monthly repayments have remained affordable and static.

Unfortunately many of these people seem to be unable to grasp the dangers in what they have undertaken. The blind belief that house prices will continue to rise and pay a dividend at the end of that term, to have accumulated vast equity to the value of their principle borrowing is a fool hearty unrealistic dream. They have unwittingly and without regard just become the lenders tenant.

The talk of a plateau amongst house prices for the moment are in large true. This is because wages have not climbed at the same rate of house price inflation. If this had been the case then you would still be seeing a continual and steady rise in both, the latter being further fuelled by more expensive ‘IOM’s’. Instead house prices have for some time now peaked, and are looking incredibly shaky. The only thing that is keeping them afloat now are the last and final wave of ‘First time Buyers‘, ‘Buy to Letter’s’ and of course the ‘Mortgage Jumpers’.

So what of the long awaited house price crash amongst the more sceptical of us. It will happen and that is without a doubt. In theory it should have happened several years ago left to the normal scheme of things. But with the intervention of outside forces and a new way of marketing it has been inflated and manipulated beyond all recognition. Though forces are in action that are already undermining the very foundations of this biggest ever bubble. Though the effects will not be felt until the borrowers themselves start to feel the squeeze on their monthly outgoings, and there is a limit to which even they are denied any further credit to fuel their debt.

On the other hand the banks and building societies know exactly what they are doing . They have virtually replaced ‘Repayment Mortgages’ and engineered a system that necessitates the borrowing of huge principles of money, maintaining for themselves a healthy balance of monthly returns no longer just for the twenty five years or so, but from now until the ever after. For those that manage to scrape through still in ‘possession’ of their house, ‘Life Mortgage’ will not refer to the life of the mortgage, but to the borrower, because it will take them the rest of their natural life, if ever, to pay it back.

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When we discussed mortgages with our bank, the lady on the phone seemed rather surprised that we were only interested in a repayment mortgage. We were obviously the exception rather than the rule.

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yes indeed paperclip.GOOD POST.

I don't think many people have grasped the concept of interest only yet.

IT'S BASICALLY AN ENDOWMENT MORTGAGE WITHOUT THE ENDOWMENT.

this is unbelievably risky,unless you had the foresight to take out an ISA or something at the same time....I doubt many did.

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yes indeed paperclip.GOOD POST.

I don't think many people have grasped the concept of interest only yet.

IT'S BASICALLY AN ENDOWMENT MORTGAGE WITHOUT THE ENDOWMENT.

this is unbelievably risky,unless you had the foresight to take out an ISA or something at the same time....I doubt many did.

Surely non-repayment mortgages should cease being offered in a falling market, or perhaps the banks and BS think that we are in a temporary blip.

I do not believe most lenders have a "strategy" at all, they are all at each others throats and do everything to get ahead. After all, a senior manager at XXX building society is interested only in his or her salary and pension. If they can construct a business plan which keeps 'em appearing to be ahead of the game then the long term doesn't matter....they will be pensioned off (they hope) before their "strategy" comes undone.

BS's long ago abandon any concept of principles or sensible behaviour. They are in a cut throat business and they are all operating in the short term.

VP

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I'd be interested to know other peoples experiences though as when I spoke to my bank they discussed an IOM with me, but advised that they would only consider it if I could prove some method of paying off the principal amount at the end of the mortgage period.

When I told them about my share portfolio (all blue chips) that had a rolling cash maturity of 10k per annum they seemed very reticent to consider this as proof that I would be able to pay them back in 25 years.

Maybe we're in for a REALLY tough time of things.

Nevertheless, do banks pay out IOMs with the capital in the house as guarantee of principal loan amount repayment (i.e. you will sell your property in order to repay within the 25 year period)?

What if it's your primary residence? (i.e. you'd have to throw yourself on the street to sell up and pay off your mortgage)

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Can Life Mortgages be inherited? If so, they would become permanent mortgages. (I recall the "intergenerationl loans" of the Japanese bubble back in the late 1980s: 50-year loans to be paid off by your grandkids.)

I feel another deja-vu moment coming on.....

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Guest Charlie The Tramp

The IO mortgage is a bonus to the lender. More interest charged and more profit made, and at the end of the day, if young enough and still employed, they will only be to happy to extend it for you as after all you have been a very good customer. :D

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What if it's your primary residence?  (i.e. you'd have to throw yourself on the street to sell up and pay off your mortgage)

That's the main thing. The money has to be repaid and even if prices have gone up, the only way you can get the cash to repay the loan is to sell your house!

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When I told them about my share portfolio (all blue chips) that had a rolling cash maturity of 10k per annum they seemed very reticent to consider this as proof that I would be able to pay them back in 25 years.

Maybe we're in for a REALLY tough time of things.

Of course mortgage lending officers are aware of what the value of your blue chip investments will be in 25 years.

Do you think they are muppets with 5 GCSEs earning 15k a year or something?

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Of course mortgage lending officers are aware of what the value of your blue chip investments will be in 25 years.

Do you think they are muppets with 5 GCSEs earning 15k a year or something?

Um, most of them yeah. ;)

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That's the main thing. The money has to be repaid and even if prices have gone up, the only way you can get the cash to repay the loan is to sell your house!

No, the other way is to extend the mortgage or remortgage.

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Guest Charlie The Tramp
No, the other way is to extend the mortgage or remortgage.

That is exactly what they will have to do.

Time passes very quickly and they will say, I will look at saving to pay the capital off tomorrow as I rather like the new model of the BMW.

They will wake up one morning finding the 25 years has passed. :blink:

Believe me, I don`t know where the past 25 years went. :(

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From a more morbid slant - would it be fair to suspect that a number of recent first time buyers with IO mortgages might be banking on inheriting their parents properties, and using those proceeds to pay for/towards the home they have already bought?

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Guest Charlie The Tramp
From a more morbid slant - would it be fair to suspect that a number of recent first time buyers with IO mortgages might be banking on inheriting their parents properties, and using those proceeds to pay for/towards the home they have already bought?

You could be right.

The Future Looks Bright

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Not in favour of Interest Only Mortgages.

But, if you have one don't forget to take out a level term insurance policy so that your kids can still inherit the house at full market value!

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From a more morbid slant - would it be fair to suspect that a number of recent first time buyers with IO mortgages might be banking on inheriting their parents properties, and using those proceeds to pay for/towards the home they have already bought?

But with life expectancy increasing so much now, they may be in for a VERY long wait, surely?

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From a more morbid slant - would it be fair to suspect that a number of recent first time buyers with IO mortgages might be banking on inheriting their parents properties, and using those proceeds to pay for/towards the home they have already bought?

Valid point, but that is assuming the parents have any equity left in their house when they demise. The possibility of the future generation of pensioners having any spare funds to leave in a will are growing slimmer with each passing year. As the article posted on today’s news blog clearly states tomorrow’s pensioners are not a generation in a hurry to save. Sky News Spenders not Savers

Lets look at this in a number of other ways as well. How much money is little Jonny and Jenny realistically expecting to be left, to help pay of their ‘Interest Only Mortgages’?

1. The possibility is that equity has already been released from their parents home to pay for their deposits on their new houses in the first place. Adding many more years onto their parents mortgage.

2. Pensions are not performing and elderly home owners who are lucky to have already paid off their mortgages are increasingly turning to schemes that will unlock value in their homes. In other words they are currently equity rich but cash poor. They will need to use up that equity to fund the final years of their lives.

3. There is also the possibility that they may need to go into care in which case the house will be sold first and the proceeds from the sale will need to be used towards the cost.

4.Then there is the Inheritance tax.

Many years ago the banks and building societies where more responsible and would never of allowed these types of mortgages to happen in such reckless numbers, how times have changed.

Quote: 'Times on Line March 26 2005: ‘Five years ago Halifax, the UK’s biggest mortgage lender, would grant an interest-only loan only after inspecting the policy documents of an endowment or other investment vehicle. Borrowers who were relying on rising house prices or an inheritance to pay off the loan would not have passed the application process. But Halifax changed its rules in 2000. Now the bank, in line with many other lenders, does not check any paperwork, but regularly reminds borrowers that it is their responsibility to set aside enough cash to repay their loan.’

For full article see link: Times on Line March 26 2005 'Interset Only Mortgages'

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The one and only time I have ever enquired about a mortgage I ended up being asked more questions by the building society's mortgage lender about whether she had done the right thing re her mortgage - she was not at all confident.

She then offered me a mortage offer of up to half a million pounds. I declined.

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But with life expectancy increasing so much now, they may be in for a VERY long wait, surely?

Is it not the case that elderly folk are forced to pay for nursing homes if they own their own homes? Combined with the wonders of modern medicine, a large number will be forced sellers leaving little in the way of inheritance.

When the baby boomer generation hit their 70s this will go into overdrive - a huge number of forced sellers of family homes with a reduced demand side due to the demographics of the IPOD generation?

Effectively, the baby boomer generation will pay for their own retirement. The generation below will not be forced to pay for them and will access the housing stock they are tying up.

How long is the wait though? 10-20 years?

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Is it not the case that elderly folk are forced to pay for nursing homes if they own their own homes? Combined with the wonders of modern medicine, a large number will be forced sellers leaving little in the way of inheritance.

When the baby boomer generation hit their 70s this will go into overdrive - a huge number of forced sellers of family homes with a reduced demand side due to the demographics of the IPOD generation?

Effectively, the baby boomer generation will pay for their own retirement. The generation below will not be forced to pay for them and will access the housing stock they are tying up.

How long is the wait though? 10-20 years?

This to me is the great unknowable when trying to discern demographic trends - AFAIK, there has never been a historical demographic phenomenon that equates to the boomers, at least in terms of its effects on economic shifts/property ; & I guess it's where I take the view that we are, as ever, entering uncharted territory - just remember the seismic effect that the boomer generation had on mass culture & social values in general from the 60s on - whatever befalls this 'pig in the python' is always remarkable & interesting to observe, the last 50 years have been historically remarkable ones to have lived thru, & I don't doubt the boomers' twilight years will also upset a few applecarts..

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Guest Charlie The Tramp
just remember the seismic effect that the boomer generation had on mass culture & social values in general from the 60s on - whatever befalls this 'pig in the python' is always remarkable & interesting to observe, the last 50 years have been historically remarkable ones to have lived thru, & I don't doubt the boomers' twilight years will also upset a few applecarts..

I would not have missed it for the world. Forget all the economic problems, we just laughed and carried on having a whale of a time especially in the sixties.

I think you could be right there. :D

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I would not have missed it for the world. Forget all the economic problems, we just laughed and carried on having a whale of a time especially in the sixties.

I think you could be right there.  :D

Glad to hear it Charlie! Hopefully you will all reignite it in your old age. SKIers are the way forward and provide the inevitable redistribution of wealth to the younger generations.

I've often thought that the twilight years would be a good time to experiment with mindbending drugs, given that you hopefully won't need to be concerned about the impact on the ability to support yourself financially.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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