Interest-Only Mortgage Timebombs Are Ticking...

[eric pebble]

Interest-only mortgage timebombs are ticking....

Do you have an extra £500 a month spare to spend on your mortgage?

That is the kind of the potential rude awakening that awaits millions of homeowners with interest-only mortgages the next time that they want to move home or remortgage.

Many of them will be blissfully unaware that their personal interest-only mortgage timebomb exists.

http://www.thisismoney.co.uk/money/mortgageshome/article-2212941/Interest-mortgage-timebomb-ticking-bad-yours.html

They were moronic idea in the first place...

[jammo]

You get the idea that many people are stupid, mardy selfish consumers (hence my new avatar as a horrid golf goblin) and that they paid over the odds for something and are somehow unaware of what it is they owe is not my issue, it's theirs. Face up to facts sheeple, you got on this boat, now you do have to pay the full fare..

[Herve]

If nothing else, it seems to point to the fact that banks are increasingly uncomfortable with the value of the principal.

In other words, if they want the principal to be paid, its because they are afraid the collateral - value of the house - will drop in price, and the bank will face a potential loss in case the home "owner" goes bankrupt.

The irony is that this could be a self-reinforcing predicament, where a relatively large number of people being literally thrown down the housing "ladder" would spark the time bomb and bust the ponzi housing market.

Am I reading this correctly?

[dances with sheeple]

If nothing else, it seems to point to the fact that banks are increasingly uncomfortable with the value of the principal.

In other words, if they want the principal to be paid, its because they are afraid the collateral - value of the house - will drop in price, and the bank will face a potential loss in case the home "owner" goes bankrupt.

The irony is that this could be a self-reinforcing predicament, where a relatively large number of people being literally thrown down the housing "ladder" would spark the time bomb and bust the ponzi housing market.

Am I reading this correctly?

Yes, the banks won`t get their money back on lots of recent loans, that is why they won`t lend until those who don`t have mortgages, and bought ages ago, take the hit and drop their prices.

[Liquid Goldfish]

If nothing else, it seems to point to the fact that banks are increasingly uncomfortable with the value of the principal.

In other words, if they want the principal to be paid, its because they are afraid the collateral - value of the house - will drop in price, and the bank will face a potential loss in case the home "owner" goes bankrupt.

The irony is that this could be a self-reinforcing predicament, where a relatively large number of people being literally thrown down the housing "ladder" would spark the time bomb and bust the ponzi housing market.

Am I reading this correctly?

or are they being ordered to do this by the FSA?

actually, one explanation I read was that lenders are going to be made responsible in future for checking that the repayment vehicle for any new IO mortgages will actually pay the mortgage off off at the end of the term - so if it turns out it doesn't then they are worried they will get sued - so they've decided not to do any more IO loans

[workingatthepyramid]

BOOM!

I would be surprised if the % of people taking out this type of loan who knew what the term 'repayment vehicle' even meant was > single figures.

[Jail Them All]

or are they being ordered to do this by the FSA?

actually, one explanation I read was that lenders are going to be made responsible in future for checking that the repayment vehicle for any new IO mortgages will actually pay the mortgage off off at the end of the term - so if it turns out it doesn't then they are worried they will get sued - so they've decided not to do any more IO loans

Could be, but more likely they are concerned they are going to be left with an asset worth 50% of the existing capital. They will, however have had the interest over the term. This model does work though even without a repayment vehicle if the asset keeps rising. But at the end of the term the asset must have at least doubled.

Nationwide says 3% of its mortgage book is I/O. That's why they're panicking.

[The Masked Tulip]

Which brings us back to the question: how many people can find an extra £500 a month?

That £500 is what it will cost someone with 15 years left on a £125,000 interest-only mortgage at 4 per cent to switch to a repayment deal.

To put the example in context, this could be one of the many homeowners who bought a home in 2002 with an interest-only mortgage and no repayment plan in place.

So those who bought later are screwed? Or do they just stick their house on for an even more ludicrous asking price?

[spyguy]

If nothing else, it seems to point to the fact that banks are increasingly uncomfortable with the value of the principal.

In other words, if they want the principal to be paid, its because they are afraid the collateral - value of the house - will drop in price, and the bank will face a potential loss in case the home "owner" goes bankrupt.

The irony is that this could be a self-reinforcing predicament, where a relatively large number of people being literally thrown down the housing "ladder" would spark the time bomb and bust the ponzi housing market.

Am I reading this correctly?

Yes. Its connected to this:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=183522

With a repayment vechicle in place, the banks exposure declines , even if the house does not go up in price.

I know someone wih an IO mrotgage who cannot afford just the IO bit.

The capital repayment would double his mortgage outgoings from 600ish to 12000ish.

He's had the house since 2007 (yes, I know). 5 tears and the bank is still on the hook for the whole whack.

With a repayment mortgage you would have expected him to have paid back about 20%

[interestrateripoff]

BOOM!

I would be surprised if the % of people taking out this type of loan who knew what the term 'repayment vehicle' even meant was > single figures.

The repayment plan for many was quite simple, the value of the house was to go up, this means when they moved they repaid the loan off plus had a deposit for the new house. The second part of the plan will have been to get a better job paying more money allowing them to repay the principle off.

Clearly the first part now has a few issues and the second part also now has a few issues.

However in the boom I'm sure this plan worked for some, although I'll bet some decided not to get off the IO plan.

IO mortgage is a way to "rent" and "own" the property... Unfortunately when it comes to loss time this will hang around your neck until you are declared bankrupt or you repay the bank.

Ultimately a very stupid idea which risk management of the banks should have stopped but that would affect bonuses and no one was going to spoil that party.

[interestrateripoff]

Yes. Its connected to this:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=183522

With a repayment vechicle in place, the banks exposure declines , even if the house does not go up in price.

I know someone wih an IO mrotgage who cannot afford just the IO bit.

The capital repayment would double his mortgage outgoings from 600ish to 12000ish.

He's had the house since 2007 (yes, I know). 5 tears and the bank is still on the hook for the whole whack.

With a repayment mortgage you would have expected him to have paid back about 20%

Is that due to circumstances or was that the case at the beginning?

[Lord Lister]

What's the betting that there will be another big mis-selling scandal and for years to come you will be getting "were you mis-sold an iom" phone calls.

Everyone gets to sue the banks. Some paper adjustments are made and some cash handed out. (Obviously the banks have time to adjust and borrow the required sums from the BOE) and the system is saved. HPC off again.

God I ve become a cynic!

[Bloo Loo]

snip

Nationwide says 3% of its mortgage book is I/O. That's why they're panicking.

meanwhile, in other news, 3% are underwater and 10% are LIAR loans where no declarations were ever checked.

[deflation]

What's the betting that there will be another big mis-selling scandal and for years to come you will be getting "were you mis-sold an iom" phone calls.

Everyone gets to sue the banks. Some paper adjustments are made and some cash handed out. (Obviously the banks have time to adjust and borrow the required sums from the BOE) and the system is saved. HPC off again.

God I ve become a cynic!

As far back as 1998, when I had an I/O mortgage (covered by an endowment policy ), I had to sign a declaration that I was aware that the principle would need repaying and that I had a 'vehicle' in place. They didn't check however! That was the Coventry BS.

I suppose there's a chance that the lenders will be unable to locate the signed declarations after 25 years, but if they can, there's no comeback. It wasn't 'hidden' like many of the PPI policies.

[The Masked Tulip]

Moneyweek's take on it.

How the interest-only timebomb could hit the housing market

At the very least, these people will be ‘mortgage prisoners’ – unable to move, and making the market even more sluggish than it currently is. At worst, these people may lose their homes down the line, helping to push down prices overall.

http://www.moneyweek.com/investments/property/uk/house-prices-timebomb-and-interest-only-mortgages-60900

[Bloo Loo]

In addition, a persons equity is being created or destroyed solely at the whim of the market price.

for example, a person 10 years into his mortgage might consider moving..Bad enough the small amount you have repaid on a repayment mortgage, but the shock of having paid nothing at all.

This may well come as a shock to people who left such planning to the spouse.

[Freeholder]

I had an interest only mortgage. The great thing about a lot of IO deals was that there was no penalty for early repayment. I overpaid mine from day one and paid it off eight years early. The interest rate was quite good as well.

[Bloo Loo]

I had an interest only mortgage. The great thing about a lot of IO deals was that there was no penalty for early repayment. I overpaid mine from day one and paid it off eight years early. The interest rate was quite good as well.

at least one banker needs the sack...failed to maximise your loan potential.

[gf3]

As far back as 1998, when I had an I/O mortgage (covered by an endowment policy ), I had to sign a declaration that I was aware that the principle would need repaying and that I had a 'vehicle' in place. They didn't check however! That was the Coventry BS.

I suppose there's a chance that the lenders will be unable to locate the signed declarations after 25 years, but if they can, there's no comeback. It wasn't 'hidden' like many of the PPI policies.

I can't see anyone doing the banks for miss selling on this either.

I am hoping to change my repayment mortgage to an IO mortgage in a couple of years. I should by then have enough to pay the mortgage off but due to the low interest rates it doesn't pay me to do so.

[fluffy666]

I had an interest only mortgage. The great thing about a lot of IO deals was that there was no penalty for early repayment. I overpaid mine from day one and paid it off eight years early. The interest rate was quite good as well.

The problem is, what proportion of IO mortgages are held by financially savvy people who have a lumpy income and hence can make good use of the flexibility, and what proportion are held by those who just wanted to borrow as much as possible based on a given payment?

[Freeholder]

The problem is, what proportion of IO mortgages are held by financially savvy people who have a lumpy income and hence can make good use of the flexibility, and what proportion are held by those who just wanted to borrow as much as possible based on a given payment?

There doesn't seem to be much information available, just a lot of speculation. The number maturing between now and 2020 appears to be between 131,000 and 158,000 annually. We wont have long to wait before the Daily Flail alerts us to sob stories of people who can't do arithmetic.

Here is where I found the numbers.

http://citywire.co.uk/money/interest-only-mortgages-what-will-lenders-do/a580145

[Sour Mash]

Could be, but more likely they are concerned they are going to be left with an asset worth 50% of the existing capital. They will, however have had the interest over the term. This model does work though even without a repayment vehicle if the asset keeps rising. But at the end of the term the asset must have at least doubled.

Nationwide says 3% of its mortgage book is I/O. That's why they're panicking.

I think it's pretty unlikely that the nominal value of the asset is going to be less than the principal once repayment time comes after 25 years, even if the property was bought at the peak of a bubble.

I suspect it's more the case of what happens if people can't make payments in the near future - they are likely to be left with an asset worth less than the loan.

That and the fact that some frankly pretty barmy loan deals were being made at the height of the bubble madness - like long term or even lifetime IO trackers at fractions of a percent above BoE base rates. Those deals have got to be losing the lenders money in an environment of below inflation base rates.

[Tankus]

I wonder how many 125% loan IO mortgages were taken out in 2007 ?

hmmm........ letter from the above link

I took out an interest only Mortgage in January 2007 for £128,000.00. The property today would not attract a value higher than £35,000.00. I now owe more on the Mortgage than when i started. Any thoughts on this other than that i was very naive to have taken a Mortgage out that i couldn't afford? I recently requested a copy of the Mortgage application as evidence that the Lender knew i couldn't afford the Mortgage at the time it was provided to me. The Lender asserts they do not hold the application as it was processed by a broker online. The Ombudsman upheld that the Lender did not breach the Law. It seems i am destined to a life of slavery...

Edited October 8, 2012 by Tankus

[The Knimbies who say No]

I think it's pretty unlikely that the nominal value of the asset is going to be less than the principal once repayment time comes after 25 years, even if the property was bought at the peak of a bubble.

I suspect it's more the case of what happens if people can't make payments in the near future - they are likely to be left with an asset worth less than the loan.

That and the fact that some frankly pretty barmy loan deals were being made at the height of the bubble madness - like long term or even lifetime IO trackers at fractions of a percent above BoE base rates. Those deals have got to be losing the lenders money in an environment of below inflation base rates.

Interesting, I would agree with that statement, but at the same time I don't think it is a 'no-brainer' for some who bought near peak in particular areas. Five years later, they are typically 20% down, more in some places (eg Northern Ireland).

Mug's game trying to predict the future, but I suspect that the risk is greater than many realise, hence why some lenders are forcing people onto repayment deals, although that's probably also linked to the political difficulty in turfing oldies into the street.

[koala_bear]

There doesn't seem to be much information available, just a lot of speculation. The number maturing between now and 2020 appears to be between 131,000 and 158,000 annually. We wont have long to wait before the Daily Flail alerts us to sob stories of people who can't do arithmetic.

Here is where I found the numbers.

http://citywire.co.u...ders-do/a580145

Some quality optimism in the citywire article:

With at least eight years to go, the vast majority of these borrowers have time to put in place some sort of repayment plan if one doesn’t exist already – though they must get on with it and not bury their heads in the sand.

What evidence do they have that the borrowers of those 1.3m loans have the spare money (left at the end of each month) to put aside to make a repayment vehicle?

Many will have been using IO because they couldn't afford repayment.

IO mortgages allowed people to possibility over extend themselves and drive up prices too (marginal pricing theory). Hopefully pricing will evolve to being based on repayment style mortgage pricing models.

Repayment mortgages also potential allow bank to use a lower risk weight capital than IO...