Jump to content
House Price Crash Forum
interestrateripoff

150,000 Customers At Lloyds Are In Negative Equity

Recommended Posts

I am fully aware of what an IO/endowment mortgage is, but I fail to see what this statement means.

How does overpaying the mortgage interest and shortening the repayment term become a good policy for erratic, or even steady income earners?

What you are doing is lessening the time that your principle repayment parallel investment has to accrue interest etc..

Explain?

The advantage for someone with an irregular income is that they can pay of larger chunks infrequently rather than small ones regularly, which better matches how their income comes in. If the country was sensible only those people would've taken out IO mortgages.

Share this post


Link to post
Share on other sites

Plus thats 150,000 properties which wont be going on the market unless the "home owner renting from the bank" want to stump up for the Neg Eq losses!

Thing with negative equity is though, banks want to get paid.

Punitive interest rates, huge arrangement fees, etc...

These people are all fvcked.

Better to take the losses now and restart your life than it is to pretend its going to get better and starve.

Share this post


Link to post
Share on other sites

The advantage for someone with an irregular income is that they can pay of larger chunks infrequently rather than small ones regularly, which better matches how their income comes in. If the country was sensible only those people would've taken out IO mortgages.

Those in repayment mortgages overpaying makes a lot of sense.

Ok, so you can pay off more when you have more, but you are still only paying off interest.

On the flip side of the arguement, by paying off the interest sooner, you are shortening the term, and therefore have less time to save/invest the principle for the final, big payment.

I still don't understand what you are getting at?

Share this post


Link to post
Share on other sites

I am fully aware of what an IO/endowment mortgage is, but I fail to see what this statement means.

How does overpaying the mortgage interest and shortening the repayment term become a good policy for erratic, or even steady income earners?

What you are doing is lessening the time that your principle repayment parallel investment has to accrue interest etc..

Explain?

Overpaying on an interest only mean you build up a reserve you can draw on. Making repayments doesn't. Overpaying will reduce the interest payment. There is no need to shorten the mortgage term, just reducing the capital that will ultimately need to be re-paid.

Some people can make the interest payment monthly from base salary but would prefer to reduce capital with bonus/commission. In times where they get no bonus/commission they just keep the interest payments up, but if they do they reduce capital.

You may not have a principle repayment parallel investment at all. I have PEPs/ISAs/Pension but I don't have them to pay back the capital, even if they could ultimately be used for that purpose.

Share this post


Link to post
Share on other sites

by paying off the interest sooner, you are shortening the term, and therefore have less time to save/invest the principle for the final, big payment.

The term remains the same. Your overpayments go into an overpayment reserve that you can draw upon at any point.

So if you had a £200K mortgage and overpaid by £500/month, in three years your capital is now £182K and you have a £18K pot you can withdraw at any point at the same rate of interest as your mortgage. Over 10 years, your capital is £140K and there is a reserve of £60K.

On a typical 25 year mortgage you can end up with £50K in capital and a £150K reserve. So your repayment vehicle only has to pay £50K. You also save on the interest payments over the time as they reduce with each overpayment.

The worst thing you can do is pay off the mortgage as you lose access to all the cheap money in your reserve!

Share this post


Link to post
Share on other sites

The good thing about a lot of interest only mortgages was that there was no penalty for early re-payment and no limit on how much you could overpay per year. I overpaid mine every month from day one and paid off the entire debt in 17 years. The repayment vehicle pays out in two years and will be cash straight in my pocket. Job done. These products are fine if you know what you are doing. Sadly a great many people do not.

Share this post


Link to post
Share on other sites

Overpaying on an interest only mean you build up a reserve you can draw on. Making repayments doesn't. Overpaying will reduce the interest payment. There is no need to shorten the mortgage term, just reducing the capital that will ultimately need to be re-paid.

Some people can make the interest payment monthly from base salary but would prefer to reduce capital with bonus/commission. In times where they get no bonus/commission they just keep the interest payments up, but if they do they reduce capital.

You may not have a principle repayment parallel investment at all. I have PEPs/ISAs/Pension but I don't have them to pay back the capital, even if they could ultimately be used for that purpose.

However you 'work it', you still have the principle repayment at the end of the term.

TheDude.jpg

Look man. You are not making any sense whatsoever.

....

I digress. You win.

Share this post


Link to post
Share on other sites

The good thing about a lot of interest only mortgages was that there was no penalty for early re-payment and no limit on how much you could overpay per year. I overpaid mine every month from day one and paid off the entire debt in 17 years. The repayment vehicle pays out in two years and will be cash straight in my pocket. Job done. These products are fine if you know what you are doing. Sadly a great many people do not.

+1

Overpay and effectively get shot of the mortgage. Leave a little in case you need to access the reserve. And then pocket all the cash from your ISA/PEP/pension!

Yes, some people don't know what they are doing. That's why forums like this are helpful. And in my case right now the tradesman forums!

Share this post


Link to post
Share on other sites

The good thing about a lot of interest only mortgages was that there was no penalty for early re-payment and no limit on how much you could overpay per year. I overpaid mine every month from day one and paid off the entire debt in 17 years. The repayment vehicle pays out in two years and will be cash straight in my pocket. Job done. These products are fine if you know what you are doing. Sadly a great many people do not.

In my experience, these people who took out IO mortgages with no plan/intention to pay off the loan knew exactly what they were doing. Different priorities you see. Most take an 'it'll be alright' approach, without thinking about the consequences too much. The MINI Cooper, the Koi carp, the foreign holidays... all these things must be acommodated. A roof over your head seems like a small price to pay for the life of Riley, when repayment day is 25 years in the future.

Edited by cheeznbreed

Share this post


Link to post
Share on other sites

In my experience, these people who took out IO mortgages with no plan/intention to pay off the loan knew exactly what they were doing. Different priorities you see. Most take an 'it'll be alright' approach, without thinking about the consequences too much. The MINI Cooper, the Koi carp, the foreign holidays... all these things must be acommodated. A roof over your head seems like a small price to pay for the life of Riley, when repayment day is 25 years in the future.

Nail. Head. Impact.

Share this post


Link to post
Share on other sites

In my experience, these people who took out IO mortgages with no plan/intention to pay off the loan knew exactly what they were doing. Different priorities you see. Most take an 'it'll be alright' approach, without thinking about the consequences too much. The MINI Cooper, the Koi carp, the foreign holidays... all these things must be acommodated. A roof over your head seems like a small price to pay for the life of Riley, when repayment day is 25 years in the future.

...paying it off was the least of their priorities, IO was good because the monthly payments are low and money was to be made from borrowed money...buying/paying for the house didn't come into it....it was low rent for high profit made from money they didn't have.....the rest is history. ;)

Share this post


Link to post
Share on other sites

However you 'work it', you still have the principle repayment at the end of the term.

Some people have a mortgage of £1 and a large overpayment reserve that really hack off the banks/building societies. They have all the cost of administration, yet they know these mortgage holders can just demand £100K plus and they have to give it to them at the prevailing interest rate (as low as 2.5% for a number of them). Many still have 20 odd years on their term and intend to use this as canny method of equity release.

Share this post


Link to post
Share on other sites

Some people have a mortgage of £1 and a large overpayment reserve that really hack off the banks/building societies. They have all the cost of administration, yet they know these mortgage holders can just demand £100K plus and they have to give it to them at the prevailing interest rate (as low as 2.5% for a number of them). Many still have 20 odd years on their term and intend to use this as canny method of equity release.

...if so why don't they put the £100k into a 4% savings account? or something else that will pay a return greater than 2.5%? ;)

Share this post


Link to post
Share on other sites

.. people who took out IO mortgages with no plan/intention to pay off the loan knew exactly what they were doing.

Yes they did. It's another approach. As your property rises in value, borrow more and only pay the interest. And in 25 years, well you can sell up to pay it off and throw yourself at the mercy of the state who will be obliged to house you. People look to exploit the products and use them for their own personal gain. After all, the banks do that as well.

Share this post


Link to post
Share on other sites

...if so why don't they put the £100k into a 4% savings account? or something else that will pay a return greater than 2.5%? ;)

If you just pay the bl00dy thing off and have done with it you have less banker in your life.

Share this post


Link to post
Share on other sites

Those in repayment mortgages overpaying makes a lot of sense.

Ok, so you can pay off more when you have more, but you are still only paying off interest.

On the flip side of the arguement, by paying off the interest sooner, you are shortening the term, and therefore have less time to save/invest the principle for the final, big payment.

I still don't understand what you are getting at?

That (AIUI) an interest-only mortgage allowed you to build up the capital for repayment as and when you wanted, only having to regularly make the interest payments, so that it was easier to have an irregular income with an IO mortgage. You can overpay on a normal mortgage but you can't underpay; with an IO mortgage you effectively can some months, apart from the interest.

Share this post


Link to post
Share on other sites

...if so why don't they put the £100k into a 4% savings account? or something else that will pay a return greater than 2.5%? ;)

Tax. If you pay 40% or even 50% tax you have to find something paying over 5% variable rate to match that. If you know of any, let me know. Some ISAs may compete, but they tend to have tie-ins for the higher rates

Share this post


Link to post
Share on other sites

Needs to be a mechanism for linking the nominal loan to the nominal value of the property, such that the bank suffers an automatic writedown of its 'asset' i.e. loan as prices fall.

Alternatively perhaps any balance sheet provisions ought to be at the same time written off the loans.

Current system is bonkers.

Share this post


Link to post
Share on other sites

Thing with negative equity is though, banks want to get paid.

Punitive interest rates, huge arrangement fees, etc...

These people are all fvcked.

Better to take the losses now and restart your life than it is to pretend its going to get better and starve.

I've seen a few shortfall sales lately, agreed by the lenders.

But you are right. Problem for the neg eq people is that the pain now would be so sharp - they can't sell and would have to walk away into other overpriced accomodation. They're simply not going to take that option so long as the lender keeps stringing them along.

Share this post


Link to post
Share on other sites

IO Mortgages are far riskier for the bank because the outstanding amount isn't reduced over time.

They may be less risky for the homeowner, if the homeowner behaves rationally.

Even worse, the typical strategy for paying off the mortgage include:

1. Not to think about it.

2. Sell the house, and rely on HPI.

The first is far more common than realised, in my opinion.

The second makes the mortgage deal even worse than it seems for the banks.

If the mortgage holder can't pay, because their house has fallen in value, then the bank gets the house, which has fallen in value. The collateral becomes less effective automatically.

So the problem then isn't the existence of IO mortgages, it is the underpricing of them.

Edited by (Blizzard)

Share this post


Link to post
Share on other sites

IO Mortgages are far riskier for the bank because the outstanding amount isn't reduced over time.

....

So the problem then isn't the existence of IO mortgages, it is the underpricing of them.

When I was looking for a mortgage last year there was an interest only premium of 0.2%, even with a 30% LTV, so I would have taken the repayment option had I proceeded.

I suspect it all depends on the LTV. At sub 60% LTV, IO is low risk for the bank, but at over 90% LTV, I would be surprised if any bank would even consider it at present.

Share this post


Link to post
Share on other sites

You can model this equity by working out the capital repayments on a 90% £x mortgage from 2006/7 and then reducing the asset price by what say 10%.

Share this post


Link to post
Share on other sites

IO Mortgages are far riskier for the bank because the outstanding amount isn't reduced over time.

They may be less risky for the homeowner, if the homeowner behaves rationally.

Even worse, the typical strategy for paying off the mortgage include:

1. Not to think about it.

2. Sell the house, and rely on HPI.

The first is far more common than realised, in my opinion.

The second makes the mortgage deal even worse than it seems for the banks.

If the mortgage holder can't pay, because their house has fallen in value, then the bank gets the house, which has fallen in value. The collateral becomes less effective automatically.

So the problem then isn't the existence of IO mortgages, it is the underpricing of them.

We discussed this on this forum 3 or 4 years ago. My opinion remains the same - there are a lot of thickos out there who think that somehow paying their IO mortgage every month means they are gradually buying their house. I'd love to see how many have any way of paying off the capital without selling the property when the mortgage matures.

B)

Share this post


Link to post
Share on other sites

...there are a lot of thickos out there who think that somehow paying their IO mortgage every month means they are gradually buying their house. I'd love to see how many have any way of paying off the capital without selling the property when the mortgage matures.

B)

I guess the belief (misguided) is that in 25 years time the £200K borrowed will be little more than pocket money. I expect the mother of all house price crashes in 20 years or so.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 295 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%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.