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Mr. Miyagi

Cash-Strapped Families Switch £60Bn-Worth Of Mortgages To Interest-Only

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Up to 300,000 cash-strapped households have switched more than £60bn of mortgage debt from repayment into risky interest-only deals over the past three years to help cover their living costs.

With the average UK mortgage at £109,000 and average borrowing costs at 3.5pc, switching from repayment to interest-only saves households roughly £230 a month Photo: Getty Images

Analysis of Financial Services Authority (FSA) data demonstrates just how desperate families have become as they contend with what Mervyn King, the Governor of the Bank of England, has described as the most dramatic squeeze on family finances since the 1920s.

With the average UK mortgage at £109,000 and average borrowing costs at 3.5pc, switching from repayment to interest-only saves households roughly £230 a month. But although the move may help families with their immediate cash-flow problems, concerns have been raised about how the debts will be repaid. Darren Winder, UK economist at Oriel, said: "For someone who's trying to alleviate monthly cash flow pressure, moving to interest-only makes sense. But it does raise questions about how that loan gets repaid."

The trend also runs against the FSA's advice. It has threatened to "constrain future interest-only lending", branding much of it unsustainable.

In its Mortgage Market Review paper last July, the FSA said: "Evidence suggests that interest-only mortgages have often been taken to extend affordability, with no firm plan in place to repay the capital...

"Our current view is that interest-only should be used only where there is a genuine repayment method in place."

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However, it added: "We do not intend to restrict interest-only from being used as a forbearance method for customers in arrears."

The FSA disclosed to The Telegraph that, between the onset of the financial crisis in the third quarter of 2007 and the final three months of last year, the value of interest-only mortgages increased by £99bn and the number of borrowers rose by 369,370.

Some of those will have been new deals, but FSA sources confirmed the bulk were due to "forbearance" – as banks move homeowners on to more affordable payment plans to avoid defaults.

Although the regulator does not break out precise figures on new lending and "forbearance", the data shows that around two-thirds of the increase came from struggling households.

Over the three years, the proportion of loans classified as interest-only rose from 40.04pc to 42.95pc but the proportion of interest-only deals available fell from 49.51pc to 31.41pc as banks cut the supply of higher risk products.

As the total UK mortgage stock in that time increased from £1.13 trillion to £1.21 trillion, the value of interest-only lending should have risen by no more than £35bn as its share of the stock would have been stagnant or declining, Mr Winder said.

He added that the data demonstrated a large number of homeowners are not re-mortgaging but simply changing the terms of their existing deal. An FSA spokesman confirmed revised terms do not show up as "new lending" but the changes are visible in the "stock" numbers.

Mr Winder added: "Non-discretionary spending [such as food, petrol and tax] is rising considerably more quickly than incomes. Therefore, there is a natural incentive to move to interest-only products."

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/8546531/Cash-strapped-families-switch-60bn-worth-of-mortgages-to-interest-only.html

Edited by Mr. Miyagi

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Meanwhile, while renting, we're saving over a grand each month towards a deposit.

I'm a bear, but currently in our area an interest only mortgage on an average 3-bed semi is £300 cheaper a month (therefore allowing for big overpayments) than renting an equivalent home and prices aren't falling.

Edited by exiges

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I'm a bear, but currently in our area an interest only mortgage on an average 3-bed semi is £300 cheaper a month (therefore allowing for big overpayments) than renting an equivalent home and prices aren't falling.

£300 per month cheaper, yet people STILL have to go IO.

Overpayments?...its a myth for many many people.

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£300 per month cheaper, yet people STILL have to go IO.

Overpayments?...its a myth for many many people.

Right but if you can't afford overpayments then you can't afford renting.

Edited by exiges

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I'm a bear, but currently in our area an interest only mortgage on an average 3-bed semi is £300 cheaper a month (therefore allowing for big overpayments) than renting an equivalent home and prices aren't falling.

Can yoou post some links?

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Right but if you can't afford overpayments then you can't afford renting.

I can....I live in a 400K house.

truly spoiled.

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Just the VI and brainwashing of the BBC have lulled everyone into thinking this stagnant/falling market is merely a blip along the way and soon we will return to HPI. Gives them an economic argument which underpins the mindset of the switch.

Bottom line is with the lowest ever interest rates in history if people cannot afford repayment mortgages then they cannot afford to buy a house.

Sooner (with higher interest rates and an accelerating falling market) or later (with a stagnant market and everything bumping along the bottom and the repayment of capital becoming due) there will be something coming along to break the camels back.

Looking at it is this way it is the belief that higher property values are around the corner which is holding up the market, otherwise these people would be reducing to sell and getting out whilst they still could.

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Storing up more problems for the future if or when banks actually start checking that people are also saving to pay off the capital.

This "crash" is going to take a long time at this rate, we'll be in the doldrums for years... How will the VIs survive such a long slump? Maybe it is better to remove the plaster in one quick rip than to drag it out?

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£300 per month cheaper, yet people STILL have to go IO.

Overpayments?...its a myth for many many people.

Quite...somehow after working hard all year that family holiday seems somewhat more alluring.... ;)

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I would have thought changing to IO would have been harder over the last couple of years...

From a mortgage company's perspective, having a mortgagee continue to service the interest on a interest-only-mortgage is more profitable than having the mortgagee default on a repayment-mortage and then having to sell the property at a knock-down price.

Of course, the above strategy has no long-term sustainability to it for the mortagee. However, when eventually the mortgagee comes to the end of the term and is still not able to clear the debt, the mortgage company can then repossess and sell the property. Even if it is at a knock-down price, the mortgage company has still managed to obtain all of the interest payments up to that point. Also, by that point, the property price might have stabilised and so it becomes less necessary to sell so cheap as if they had sold it as a distressed property earlier on in the term of the mortage.

Edited by tallguy

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TBH if I could change my mortgage to interest only and have the term extended till death I would. There is no way of taking the house with you into the after life as far as I know. and I would rather pay less than £50 a month for life than over £400 for the next 18 years. I know interest rates will probably go up but I still think I would be better off in the long run.

edit to add my mortgage finishes when I'm 65 I may not live that long. a lot of people don't

Edited by gf3

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From a mortgage company's perspective, having a mortgagee continue to service the interest on a interest-only-mortgage is more profitable than having the mortgagee defualt on a repayment-mortage and then having to sell the property at a knock down price.

My thoughts as well, the banks get to avoid taking a loss on the property, the gamble is the home owner will somehow many to avoid repossession. Just kicking the can a bit further down the road. Imagine how bad the sales figures would look with 300,000 more properties on the market plus with all the bank holidays.

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Sure.

This is for sale at £165k http://www.rightmove...l?premiumA=true

At 3.5% the interest on £165k is £485

In the next street an equivalent house is for rent at £800pm http://www.rightmove...y-18936429.html

plus £32K deposit, moving fees and all the rest.

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plus £32K deposit, moving fees and all the rest.

Well, if you're putting a £32k deposit down then your monthly repayments are going to be even lower. £380 a month in fact, compared to £800 renting.

And regardless of renting or buying you'll have moving fees.

Renting isn't without its pitfalls, like having to move every 6 months (happened twice to us) and then paying extortionate "reference checking fees" etc.

Like I said, I'm a bear and I'm renting, but as far as this area is concerned renting is more expensive than buying, especially as ZIRP and SMI and all that crap are confounding any HPC in nominal terms.. and rents are rising.

Edited by exiges

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Well, if you're putting a £32k deposit down then your monthly repayments are going to be even lower. £380 a month in fact, compared to £800 renting.

And regardless of renting or buying you'll have moving fees.

Renting isn't without its pitfalls, like having to move every 6 months (happened twice to us) and then paying extortionate "reference checking fees" etc.

Like I said, I'm a bear and I'm renting, but as far as this area is concerned renting is more expensive than buying, especially as ZIRP and SMI and all that crap are confounding any HPC in nominal terms.. and rents are rising.

My point was that to get THAT rate, you would appear to need a 20% deposit and impeccable references, as well as 30K salary.

And of course, asking rents are the same as asking prices...NEVER pay the asking price for renting.

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My point was that to get THAT rate, you would appear to need a 20% deposit and impeccable references, as well as 30K salary.

Agreed.. and my point still stands.

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Agreed.. and my point still stands.

then again, trying to get a reference for a rental these days is like going through a TSA "enhanced" patdown in the US.

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Agreed.. and my point still stands.

Same for me where i am. Renting costs far outweigh the cost of buying assuming you have access to being able to buy. But keeping it on topic without inserting all the "and if this, "and if that's" bloo loo seems to be doing it says those that have bought are switching to basically renting but with their name on the deeds.

.... and there 'rent' is half of what it is to those who are actually renting.

A two tier market has existed for over 2years those that have, and those that haven't. It doesn't look like changing any time soon.

Edited by sympatex

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I can....I live in a 400K house.

truly spoiled.

It just went down to 380k :D

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Same for me where i am. Renting costs far outweigh the cost of buying assuming you have access to being able to buy. But keeping it on topic without inserting all the "and if this, "and if that's" bloo loo seems to be doing it says those that have bought are switching to basically renting but with their name on the deeds.

.... and there 'rent' is half of what it is to those who are actually renting.

A two tier market has existed for over 2years those that have, and those that haven't. It doesn't look like changing any time soon.

well, you forget the £533 per month "overpayment" you have to make.

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And of course, asking rents are the same as asking prices...NEVER pay the asking price for renting.

Try that in London, and you'll be kipping on your mate's sofa.

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  • 277 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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