Nationwide Tightens Up On Interest-Only Mortgages

[HouseDog]

The news comes just days after Martin Wheatley, a director of the Financial Services Authority, told the Treasury Select Committee about the "ticking timebomb that exists today": hundreds of thousands of people in their late-50s unable to repay one of the 1.5m interest-only mortgages due to expire in the next 10 years.

I have a feeling that tightening up on the terms of new Internet-only mortgages is just the next step before the margin calls start for existing customers.

[spyguy]

...what is the point in doing that?.....we have today the lowest interest rates in history, pay your debt off as quickly as you can whilst you have the chance to pay it back at the cheapest price.

£200,000 mortgage if interest rate stays at say 5.5%.....a repayment mortgage over 25 years interest payable £168,452.

£200,000 mortgage if interest rate stays at say 5.5%....an Interest only mortgage over 25 years interest payable £275,000.

Too right.

On a similar strand, I went through the repayment costs if someone at work who'd took out a 35 year mortgage.

He was paying about 30% more in repayments to save something like £50 a month.

Banking. How on earth did they manage to go bust? Must have been real doofuses.

[spyguy]

Is this a margin call?

I'm not sure.

What I am sure about is that the last few remaining banks - and there really are very few left standing 0 are running at a rapid rate from any mortgage that is not owner-occupied, high LTV (>80%) and non-repayment.

[Bland Unsight]

Why is everyone so against IO mortgages and what is the banks problem with using isa saving to pay of the actual loan .I see nothing wrong with this so long as you are putting aside enough each month to cover the repayment of the mortgage ,seems easy enough to work out how much this needs to be .But the banks want us to gamble with our money .

The answer to your question needs its own thread under the title, "Reasons why we are in this mess"

There is nothing intrinsically wrong with an IO mortgage.

The things that you need to make them "safe" are:

A significant amount of equity when the are taken out

Certification of income of the borrower

A documented and plausible repayment plan

When, at the end of the bubble, IO's offered the last "affordable" route into the bubble the IO's taken out were:

High loan to value and very high loan to value, (up to 95%) - hence almost no equity cushion

Self-certificated (liar loans to hairdressers making £50k)

Without ANY documented repayment plan, (plausible or otherwise)

The reason that IO lending without these safeguards is toxic is that it requires the property prices keep going up forever at pretty feisty rates, certainly rates above any legitimate asset class, which is impossible.

If prices remain static, an IO becomes a mortgage forever. If prices fall they become a potent machine for a really bad spread bet that you eventually have to make pay up on. In point of fact in a falling market IO's turn houses into a way of pouring huge amounts of money down the drain. BTW have you been watching non-London prices?

Read all about it everywhere at some point in the next 5 years.

[Bland Unsight]

This is a further margin call.

Chain breaks at its weakest link.

High LTV IO's at bubble prices are going to bury people in losses that will crystallise sooner or later. The most criminal thing is the CML's own data suggests that as late a Q2 2008 mortgage brokers were putting 35% of people that they introduced to the lenders onto IO's, (p. 80 of the CML November 2010 response to the FSA's MMR, there is a link to it on the CML's website here)

Whatever happen to those old ideas like knowledge, judgement, trust, caution and shame?

[the_duke_of_hazzard]

Is the 4% tax free?

How long does the 2% last?

If mortgage rates rise when the 2% ends can you exit the 4% to try find a better rate? Any exit penalty fees?

If mortgage rates rose but saving rates lagged (like now) you would need a mortgage that allowed you to overpay using the £30k

Yes.

Linked to BoE base rate, so your guess is as good as mine.

Some, there may be some overlap in time. But savings rates would likely increase too, remember.

True. I think HSBC do allow overpayments though.

I just wanted to make the point that paying down your mortgage isn't always the most rational option, especially now and if you have a good deposit.

[Democorruptcy]

Yes.

Linked to BoE base rate, so your guess is as good as mine.

Some, there may be some overlap in time. But savings rates would likely increase too, remember.

True. I think HSBC do allow overpayments though.

I just wanted to make the point that paying down your mortgage isn't always the most rational option, especially now and if you have a good deposit.

I agree about the point in general but was only pointing out some considerations.

I have said tthe same but using Index Linked Certificates over the last couple of years. It would be pointless withdrawing the cash to put towards a house. It's more profitable being in debt.

[porca misèria]

...what is the point in doing that?.....we have today the lowest interest rates in history, pay your debt off as quickly as you can whilst you have the chance to pay it back at the cheapest price.

£200,000 mortgage if interest rate stays at say 5.5%.....a repayment mortgage over 25 years interest payable £168,452.

£200,000 mortgage if interest rate stays at say 5.5%....an Interest only mortgage over 25 years interest payable £275,000.

For a mortgage that size over a long repayment period you'd go for a much cheaper rate .... and not everyone has 25 years to pay it off!

But even taking your repayment-mortgage-friendly figures, the gap is almost closed by repaying £200k out of taxed income vs £200k saved untaxed in a pension for £120k net after-tax contributions.

Take that over 15 instead of 25 years, and the interest-only wins handsomely.

Take that with HSBC's 2.6% interest rate (or 2.4 if you pay an up-front fee), and you're still gaining £80k on the repayment, but the difference in interest is down below £20k. Which you've made in the pension fund, even if your performance is poor.

[winkie]

The answer to your question needs its own thread under the title, "Reasons why we are in this mess"

There is nothing intrinsically wrong with an IO mortgage.

The things that you need to make them "safe" are:

A significant amount of equity when the are taken out

Certification of income of the borrower

A documented and plausible repayment plan

When, at the end of the bubble, IO's offered the last "affordable" route into the bubble the IO's taken out were:

High loan to value and very high loan to value, (up to 95%) - hence almost no equity cushion

Self-certificated (liar loans to hairdressers making £50k)

Without ANY documented repayment plan, (plausible or otherwise)

The reason that IO lending without these safeguards is toxic is that it requires the property prices keep going up forever at pretty feisty rates, certainly rates above any legitimate asset class, which is impossible.

If prices remain static, an IO becomes a mortgage forever. If prices fall they become a potent machine for a really bad spread bet that you eventually have to make pay up on. In point of fact in a falling market IO's turn houses into a way of pouring huge amounts of money down the drain. BTW have you been watching non-London prices?

Read all about it everywhere at some point in the next 5 years.

Interest-only mortgages and making up an income to fit the debt required to borrow enough to buy, is most definitely the start of the mess we are in and the big reason why house prices are at the levels they are....but that is how both the banks and the governments wanted it....win/win for them, the banks can earn the interest forever and the governments have more living in homes they can't afford to buy, only scraping through because of low interest rates, in theory people should have more in their pocket to spend, there are fewer homeless, inflation can be good mantra because all the indebted get wealthier that way......fine when we have high growth,high employment and rising pay rates .....high,over leveraged debt is the cause of many of our problems....the balance is past the tipping point, too far too fast, it is now payback time.

For a mortgage that size over a long repayment period you'd go for a much cheaper rate .... and not everyone has 25 years to pay it off!

But even taking your repayment-mortgage-friendly figures, the gap is almost closed by repaying £200k out of taxed income vs £200k saved untaxed in a pension for £120k net after-tax contributions.

Take that over 15 instead of 25 years, and the interest-only wins handsomely.

Take that with HSBC's 2.6% interest rate (or 2.4 if you pay an up-front fee), and you're still gaining £80k on the repayment, but the difference in interest is down below £20k. Which you've made in the pension fund, even if your performance is poor.

Most people are not saving into low risk tax advantage savings schemes that are more beneficial to repaying your mortgage as quickly as you can, that was what endowments were invented for...did that work?....once you are debt free, hopefully your wages have increased then you can plow as much as you can afford into all manner of investments to fund your future.

When house prices are not rising, equity is not growing...your interest only bod will always be paying the highest interest rate on the market, that is if they can swap....the repayment man will have the best choices and the choices get better the further down the line they get......ideally, best to repay debt but also save some tax effectively.

[Tonkers]

Might it finally dawn on some what no equity interest only means?

[Harry Monk]

Is this a bit unclear? An existing customer who wants to remortgage an IO at over 50% LTV will be ok, but an existing customer who has an IO with current LTV of 45% who wants to remortgage and take it to 55% will be swapped to repayment? Maybe I've read it wrong.

My friend Grant is a lodger with a couple who have had an IO mortgage for many years, he told me last week that he is going to have to move because the building society have just written to the people he lodges with telling them that they cannot have another IO mortgage when their fixed term ends this year, only a repayment mortgage, and that their monthly payments will increase from around £300 to £1,100.

[GeordieAndy]

...their monthly payments will increase from around £300 to £1,100.

Ouch

[The Knimbies who say No]

My friend Grant is a lodger with a couple who have had an IO mortgage for many years, he told me last week that he is going to have to move because the building society have just written to the people he lodges with telling them that they cannot have another IO mortgage when their fixed term ends this year, only a repayment mortgage, and that their monthly payments will increase from around £300 to £1,100.

Beggars belief. Peppercorn mortgage, income from a lodger, and yet... they're screwed.

[Tonkers]

Beggars belief. Peppercorn mortgage, income from a lodger, and yet... they're screwed.

Imagine if they could simply sell and bank a profit though, it's ideal. Are those days gone?

[porca misèria]

Interest-only mortgages and making up an income to fit the debt required to borrow enough to buy, is most definitely the start of the mess we are in and the big reason why house prices are at the levels they are....

No, they're just one step on the road. Or perhaps I should say one brick in the wall.

Most people

People are different. What's best for you may not work for me, and vice versa.

that was what endowments were invented for...did that work?

AIUI, endowments worked nicely in the early days. Went bad when the market hotted up into a race to the bottom.

In any case, the only tax-efficiency in an endowment was MIRAS, which is now long-gone.

....once you are debt free, hopefully your wages have increased then you can plow as much as you can afford into all manner of investments to fund your future.

That's the expectation of the twentysomething with a career ahead. If you're a 50-year-old housebuyer you probably don't have an expectation of rising income. As ever, horses for courses.

[The Knimbies who say No]

Imagine if they could simply sell and bank a profit though, it's ideal. Are those days gone?

Seems like it, the sheer numbers of IO taken out have sealed their fate.

[Gigantic Purple Slug]

No, they're just one step on the road. Or perhaps I should say one brick in the wall.

People are different. What's best for you may not work for me, and vice versa.

AIUI, endowments worked nicely in the early days. Went bad when the market hotted up into a race to the bottom.

In any case, the only tax-efficiency in an endowment was MIRAS, which is now long-gone.

That's the expectation of the twentysomething with a career ahead. If you're a 50-year-old housebuyer you probably don't have an expectation of rising income. As ever, horses for courses.

A relative of mine had an endowment mortgage and paid off just before the dotcom crash. 10K cash paid on top of clearing the outstanding. Kerching.

The issue with the endowment is that is a lot of money for most people to be gambling with. In the case of IO there are a lot of people who aren't even gambling, but aren't doing anything full stop, which is of course worse. At least if you are putting some money aside you are in a position to pay off some of the capital and maybe remortgage the rest if the investment goes bad.

Methinks all this is due to a strengthening of the banks positions. Those with weak hands are starting to be weeded out.

[winkie]

No, they're just one step on the road. Or perhaps I should say one brick in the wall.

Well tell me what the other steps were, the other bricks in the wall?

People are different. What's best for you may not work for me, and vice versa.

Well most people will tell you the best way is the cheapest way today....tomorrow is another day, will worry about how much paying as little as possible ends up costing.

AIUI, endowments worked nicely in the early days. Went bad when the market hotted up into a race to the bottom.

In any case, the only tax-efficiency in an endowment was MIRAS, which is now long-gone.

Tax free, lump sum and enough to repay the IO mortgage in full....another promise that failed to materialise.

That's the expectation of the twentysomething with a career ahead. If you're a 50-year-old housebuyer you probably don't have an expectation of rising income. As ever, horses for courses.

The big problem with repayment of mortgage debt is the affordability of being able to do it now.....in education for longer, in debt with student debt, saving a deposit, high rents, the high expense of a growing family, high house prices, low pay rises......life seems to have now all become back to front, topsy turvey.....a lifetime of perpetual debt the norm.

[Bear Monger]

Yes.

Linked to BoE base rate, so your guess is as good as mine.

Some, there may be some overlap in time. But savings rates would likely increase too, remember.

True. I think HSBC do allow overpayments though.

I just wanted to make the point that paying down your mortgage isn't always the most rational option, especially now and if you have a good deposit.

Where are you getting 4% after tax? I'd like a piece of that if it exists.

[porca misèria]

Where are you getting 4% after tax? I'd like a piece of that if it exists.

That's easy enough. Plenty of pibs, prefs and bonds will pay that or more. Even some equities.

[porca misèria]

Well tell me what the other steps were, the other bricks in the wall?

I rather suspect the startingpoint was the change to pensions taxation in 1997. A whole lot of money looking for other investments, and at time when house prices were at a historic low and interest rates low and falling.

Bubble money followed later when bubble-sentiment was rife.

[Bear Monger]

That's easy enough. Plenty of pibs, prefs and bonds will pay that or more. Even some equities.

Any specific examples? The best I can do is 3.75% before tax...

[winkie]

I rather suspect the startingpoint was the change to pensions taxation in 1997. A whole lot of money looking for other investments, and at time when house prices were at a historic low and interest rates low and falling.

Bubble money followed later when bubble-sentiment was rife.

...the pensions were raided, trust in financial advisers and their recommendations lost, money invested in products where the fees highest in some cases to benefit the adviser not the customer, a whole lot of borrowed money was used to buy houses by borrowing against one property to leverage up to buy another IO, the demutualisation of the building societies, lax due diligence and regulation.......the bubble-sentiment no longer rife, there is not enough liquidity for it to grow any bigger until we get more growth and a whole lot of deleverage.....

[porca misèria]

Any specific examples? The best I can do is 3.75% before tax...

Some lists at http://www.collinsstewarthawkpoint.com/en/Europe-Securities/Europe-Services/London/

Though FWIW, these being income-bearing investments benefit from being held in an ISA or SIPP.

[Bland Unsight]

If the lenders think the crash is on, isn't it best for them to take the hit early...

I was looking for Terms and Conditions for IO mortgages on-line, and I could only find this for The Mortgage Bank, but presumably the relevant clause is fairly typical:

If you do not keep to the terms of the interest-only arrangement, or if we reasonably believe that the provisions you have made to repay the capital covered by the interest-only arrangement are inadequate, or if any of the things in condition 16 happen, we may write and tell you:

• that we have cancelled the interest only arrangement; and
  
• that you must increase the monthly payments so that you pay off the debt in full by the end of the repayment period.
  

Condition 16 looks boiler plate too and includes missed payments and having given false information, (perhaps to self-certify income...). You're also breaching the condition if the lenders

reasonably consider that those of you who remain in the property do not have adequate financial resources to continue paying the monthly payment on your own.

Is there going to come a point when lenders are going to start pressing the auto-destruct button on these IO's by reviewing files, looking for proof of income in the hope of forcing sales as an attempt to limit the lenders losses? Has anyone seen any sign of it?