Telegraph: Bank Ends Interest-Only Mortgages Without Documentary Evidence

[GordonBrownSpentMyFuture]

Bank ends interest-only mortgages without documentary evidence

Britain’s biggest mortgage lender has announced the end of interest-only mortgages without documentary evidence of how the loan is going to be repaid.

By Myra Butterworth, Personal Finance Correspondent 12:30PM BST 15 Apr 2011

Halifax requires borrowers to provide written proof of how the loan will be repaid before a mortgage offer is made. Until April 6, it only asked borrowers to say that they had a repayment vehicle in place before the mortgage offer.

It is the latest example of banks and building societies tightening their lending criteria amid growing fears that home owners will default on their loans due to high unemployment.

Halifax allows borrowers to repay interest-only mortgages using endowment policies, Isas, pensions, shares, savings or the sale of a second home.

It means a borrower – who says they will use the money saved in Individual Savings Accounts to repay their home loan – must provide a copy of their latest Isa statement for the last 12 months before they can receive an offer from the lender.

Melanie Bien, mortgage brokers Private Finance, said: “High-street lenders have been tightening their interest-only criteria since the downturn because they regard these loans as more risky than repayment deals. If this continues, interest-only mortgages could vanish, or become so limited in scope that they are available to only a handful of borrowers.

“Interest-only loans aren't inherently bad. What about first-time buyers who don't have a repayment vehicle but are due an inheritance? Or someone with a modest income but sizeable and regular bonuses which can comfortably be used to clear the capital?

“‘One size fits all’ does not work when it comes to mortgages. For some borrowers, not all, interest only is the right choice.”

Lloyds TSB introduced the change earlier this year and has since scrapped the higher rate it used to charge for interest-only mortgages.

Other lenders have also tightened their policies on interest-only mortgages this year, with RBS and Coventry Building Society no longer offering this type of deal to first-time buyers.

RBS said: “It is prudent for first-time buyers to build up equity in their property by reducing the capital from day one.”

A Halifax spokesman said the changes were "designed to reflect the additional risks and responsibilities associated with interest only lending.”

Lock. Door. Horse. Bolted. Still, it's a start.

Self-Certified LIAR LOANS next please.

[FIGGY]

For new buyers? Will that include re-mortgage with 0% equity???

[South Lorne]

.....Britain’s biggest mortgage lender has announced the end of interest-only mortgages without documentary evidence of how the loan is going to be repaid.....

...that's what they should have beeen doing in the first place ...have they only found out they were doing it wrong..?....no wonder they had to be rescued.....sack all involved for such past stupidity....and that includes the Board and Auditors......

Edited April 15, 2011 by South Lorne

[Reck B]

What a marvellous idea!

Financial innovation at it's finest.

Bravo!

About 12 years ago, I had a meeting with my old mans bank manager discussing mortgages. he asked if I was looking at repayment or interest only, i didn't know too much about mortgages at the time so asked him to explain the pro's/con's of each.

I remember him saying that interest only is "a bit of a gamble that prices would continue to rise."

At no point did he say that a repayment vehicle would be required to run alongside the interest only option and would have leant me on either basis. Anecdotaly, the flat I was looking at was a 3 bedder in one of the shittiest parts of exeter for £60k (similar flats are now 'priced' at £170k) Average wages have barely changed.

There's plenty of room for a 50% crash here.

Edited April 15, 2011 by Reck B

[arrgee1991]

If this continues, interest-only mortgages could vanish, or become so limited in scope that they are available to only a handful of borrowers.

This would be a great shame. I have had an interest only mortgage for the last 20 years and because I earn in bursts it has allowed me to part redeem and overpay to the point where I have a overpayment reserve of £15K and a low mortgage. The money I would have used to pay the capital has instead been invested and would now more than cover the original mortgage amounts.

I'm not sure what documentary evidence could convince anyone you could pay back the capital in 25 years time. No investment is risk free, and I could easily withdraw funds from ISAs in the interim.

[bingobob]

Bank ends interest-only mortgages without documentary evidence

Britain’s biggest mortgage lender has announced the end of interest-only mortgages without documentary evidence of how the loan is going to be repaid.

By Myra Butterworth, Personal Finance Correspondent 12:30PM BST 15 Apr 2011

Lock. Door. Horse. Bolted. Still, it's a start.

Self-Certified LIAR LOANS next please.

So if I take out an ISA at the same time as my interest only mortgage, and set up a direct debit at 600 GBP a month to cover the repayment of the mortgage, everything will seem in order. What if I cancel the direct debit 2 months into the mortgage term (rather like people do with the life insurance that they force people to take out)? I don't think the bank will reposses somehow, this seems unenforceable to me.

[arrgee1991]

About 12 years ago, I had a meeting with my old mans bank manager discussing mortgages. he asked if I was looking at repayment or interest only, i didn't know too much about mortgages at the time so asked him to explain the pro's/con's of each.

I remember him saying that interest only is "a bit of a gamble that prices would continue to rise."

I suspect that gamble would have paid off in spades. When I first bought the general ways people bought were repayment or endowment (another flavour of IO).

I remember going to the Abbey National and spending an hour convincing them that with the PEP investments I had and was planning to do over the next 25 years that I would be able to pay off the capital and have a nice little nest egg. Instead they tried to get me onto a pension mortgage. Had they done so, I would not have been able to take advantage of selling my PEPs to make part redemptions when they were highly valued. Instead, I'd be stuck paying more and more into a pension to cover lower annuity rates when it matured in another 20 years.

I just see this as more meddling. People need to become more financially aware rather than having banks wiping their noses and ar$3s all the time.

[Mrs Bear]

Bank ends interest-only mortgages without documentary evidence

Britain’s biggest mortgage lender has announced the end of interest-only mortgages without documentary evidence of how the loan is going to be repaid.

By Myra Butterworth, Personal Finance Correspondent 12:30PM BST 15 Apr 2011

Lock. Door. Horse. Bolted. Still, it's a start.

Self-Certified LIAR LOANS next please.

I like this bit: 'What about first time buyers who are due an inheritance?'

Yes, and what about when they find there isn't one because it's all gone in care home fees?

Or one parent dies and the other makes a late marriage to someone who's going to talk them into changing their will?

Happens often enough.

Mr B's grandfather married the woman who nursed his wife through a terminal illness. She then married him, got him to sell his house and whisked him off to her home base in NZ. A few years later, when the g-father died, Mr B's mother got precisely nothing.

Same woman went on to marry another two in quick succession and buried them nearly as fast.

And yet to look at her you'd wonder what on earth they saw in her.

[arrgee1991]

So if I take out an ISA at the same time as my interest only mortgage, and set up a direct debit at 600 GBP a month to cover the repayment of the mortgage, everything will seem in order. What if I cancel the direct debit 2 months into the mortgage term (rather like people do with the life insurance that they force people to take out)?

That's why they are stopping them.

Last year when I was looking to borrow for a house purchase, one bank would only give me a mortgage if I gave them a large chunk of my savings and stuck it in their 0.1% interest account! They wouldn't let me leave it where it was earning a measly 3% despite providing proof because I might spend it.

[NEO72]

As I've commented under the article:

"Melanie Bien, mortgage brokers Private Finance, said: “High-street lenders have been tightening their interest-only criteria since the downturn because they regard these loans as more risky than repayment deals."

What Melanie, you mean a loan without concrete proof that it can actually be repaid could be viewed as more risky? How did you reach that conclusion then?

"Interest-only loans aren't inherently bad. What about first-time buyers who don't have a repayment vehicle but are due an inheritance?"

LOL! So we would need to assume that the lucky relative pops their clogs before the borrower wants to move house or remortgage. And that's assuming that the inheritence (mostly likely in the form of a house) is 'worth' what they think it is (most unlikely). What could possibly go wrong?

"Or someone with a modest income but sizeable and regular bonuses which can comfortably be used to clear the capital?"

You do realise of course that bonuses are just that - a bonus ie not guaranteed. And even if they have previously been fairly consistent, they tend to dip in economic downturns. For example, I'll bet estate agent (and-ahem-mortage broker) bonuses have all gone downhill over the past few years...

[arrgee1991]

I like this bit: 'What about first time buyers who are due an inheritance?'

Yes, and what about when they find there isn't one because it's all gone in care home fees?

Or one parent dies and the other makes a late marriage to someone who's going to talk them into changing their will?

There are no guarantees in this world, save death and taxes.

Interest only has its advantages for those who overpay. Should you lose your job, you can use the reserve to keep up payments. With a repayment mortgage you go straight into arrears with no acknowledgement of the reduction of capital. My reserve will allow me to keep the interest only payments up for the next 300 months.

[Reck B]

I suspect that gamble would have paid off in spades. When I first bought the general ways people bought were repayment or endowment (another flavour of IO).

I remember going to the Abbey National and spending an hour convincing them that with the PEP investments I had and was planning to do over the next 25 years that I would be able to pay off the capital and have a nice little nest egg. Instead they tried to get me onto a pension mortgage. Had they done so, I would not have been able to take advantage of selling my PEPs to make part redemptions when they were highly valued. Instead, I'd be stuck paying more and more into a pension to cover lower annuity rates when it matured in another 20 years.

I just see this as more meddling. People need to become more financially aware rather than having banks wiping their noses and ar$3s all the time.

Being the age i was, had i bought into the housing market then, I would probably have churned the equity a couple of times and be sat in a house 'worth' £350k and mortgage of £300k

This is the situation a lot of my associates are in. They've rode the HPI wave and are living in houses and have mortgages waaaaay beyond what their base wages should be able to support in a normal economic environment. A lot are PS employee's getting very twitchy about cuts.

I'm glad I declined to join the party.

[arrgee1991]

You do realise of course that bonuses are just that - a bonus ie not guaranteed. And even if they have previously been fairly consistent, they tend to dip in economic downturns. For example, I'll bet estate agent (and-ahem-mortage broker) bonuses have all gone downhill over the past few years...

For most self employed people (like me) income can be erratic. There are times in the year when the actual earnings are low. I don't know exactly what I have earned until the books are done, and a lot of the time the money remains in the company to cover expenditure.

Employees don't see this with steady incomes, but pretty much every business has its cycles.

[arrgee1991]

Being the age i was, had i bought into the housing market then, I would probably have churned the equity a couple of times and be sat in a house 'worth' £350k and mortgage of £300k

I have a £500K house and a £15K mortgage. And the small mortgage is thanks to IO. I overpay when I can and just pay interest if strapped. People choose to be responsible or not. No one forces you to spend. Well except the wife!

[rantnrave]

Does this news count as an innovative lending solution to help FTBs?

[The Knimbies who say No]

I have a £500K house and a £15K mortgage. And the small mortgage is thanks to IO. I overpay when I can and just pay interest if strapped. People choose to be responsible or not. No one forces you to spend. Well except the wife!

I hope those like yourself are not disadvantaged by this move. Seems to me like someone in your situation would and should be accommodated within the system. I may well be in a similar boat in time and very much agree with your view expressed further up that people ought to take a greater interest in their own financial futures rather than bumbling along waiting for it to happen magically. The poor private investor culture in the UK is partly to blame for increasing poverty in retirement; people are just too happy to let any old spiv manage their greatest assets. If only they would realise that they can have a brilliant impact on their quality of life further down the track if they take a keen interest. Not without risks, but managable to a degree.

[arrgee1991]

I hope those like yourself are not disadvantaged by this move. Seems to me like someone in your situation would and should be accommodated within the system. I may well be in a similar boat in time and very much agree with your view expressed further up that people ought to take a greater interest in their own financial futures rather than bumbling along waiting for it to happen magically.

Thanks. I am not at any disadvantage as I have no plans to buy property in the next few years and can stay on my IO low tracking rate, but it is wrong that there is this one size fits all approach.

[exiges]

Blanket bans on interest only mortgages without proof of income is silly.. If you have say 50% equity and therefore no risk to the bank then they should be able to lend

[miko]

...that's what they should have beeen doing in the first place ...have they only found out they were doing it wrong..?....no wonder they had to be rescued.....sack all involved is such past stupidity....and that includes the Board and Auditors......

When a friend first told me they were getting an IO mortgage when they first came about we nearly ended up in a big row as when she told me about having an IO mortgage with no repayment plan set in place I thought she was talking rubbish. I just could not get my head around the concept . Yes i did have to eat my words as she was right and I was wrong they were avaliable .

[hpc-craig]

Rather than banning IO mortgages which (as shown in this thread) people can use sensibly, the Government should pull all SMI and the banks should repo when they want to rather than the gov encouraging them not too.

People should be told if you take on more than you can afford and run up massive credit card bills on top then it's tough and it's time to pay for your actions.

My view is this is less to do with banks being more responsible but rather to get people to start paying regualary into low interest paying ISA's for 25 years.

The banks won't do anything that doesn;t benefit them in some way.

[Bloo Loo]

There are no guarantees in this world, save death and taxes.

Interest only has its advantages for those who overpay. Should you lose your job, you can use the reserve to keep up payments. With a repayment mortgage you go straight into arrears with no acknowledgement of the reduction of capital. My reserve will allow me to keep the interest only payments up for the next 300 months.

you can overpay any mortgage,

[Bloo Loo]

When a friend first told me they were getting an IO mortgage when they first came about we nearly ended up in a big row as when she told me about having an IO mortgage with no repayment plan set in place I thought she was talking rubbish. I just could not get my head around the concept . Yes i did have to eat my words as she was right and I was wrong they were avaliable .

no, they werent available, you had to provide a repayment vehicle.

You just needed to say you had one before, now you need evidence.

[the shaping machine]

People choose to be responsible or not. No one forces you to spend. Well except the wife!

Unfortunately the government seems unable to let either banks or mortgage holders live with the consequences of their bad choices (or bad luck).

Treating people as responsible adults is clearly not popular with the voting public. The direct consequence is that we end up with regulations appropriate to spoilt children.

[Bloo Loo]

Unfortunately the government seems unable to let either banks or mortgage holders live with the consequences of their bad choices (or bad luck).

Treating people as responsible adults is clearly not popular with the voting public. The direct consequence is that we end up with regulations appropriate to spoilt children.

entitlement

[Georgia O'Keeffe]

Unfortunately the government seems unable to let either banks or mortgage holders live with the consequences of their bad choices (or bad luck).

Treating people as responsible adults is clearly not popular with the voting public. The direct consequence is that we end up with regulations appropriate to spoilt children.