Telegraph: Banks Squeeze Interest-Only Mortgage Borrowers

[rantnrave]

Absolute bear-fest this one (h/t to wdbeast on the news article section)

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10290781/Banks-squeeze-interest-only-mortgage-borrowers.html

Stubborn lenders have frozen millions of borrowers out of the mortgage boom by adopting draconian stances on interest-only lending, a Daily Telegraph investigation reveals.

Half of the property market is buzzing, with cut-price mortgage rates and huge amounts of debt handed to first-time buyers. But the boom has not filtered through to the four million customers with interest-only mortgages, many of whom are over the age of 50.

Instead, lenders are pushing these borrowers on to higher rates when fixed deals end. For example, one lender charges interest-only customers nearly 5pc, while offering nearer 2pc to others. Many are forced to accept these expensive rates because other banks refuse to take on the loan.

If interest rates rise, thousands may be forced to sell their home to cover the debt. In other cases, interest-only customers are forced to start repaying the debt immediately – if they move house, for example.

This newspaper has heard from a number of borrowers who, despite taking a sensible attitude to their debts, feel unfairly penalised. Some are in their seventies and say their carefully crafted retirement plans now lie in tatters.

The disclosures come just two weeks after the Financial Conduct Authority (FCA), the regulator, ordered banks to treat interest-only customers fairly – and "not unfairly charge them a higher rate of interest than other customers" if they are unable to leave.

Jonathan Harris, director of mortgage broker Anderson Harris, said: "Lenders are adopting such a hard-line approach to interest-only that it has started to become ridiculous.

"There now seems to be no logic to it. Interest-only can be an appropriate mortgage structure for some people, but lenders are making blanket decisions that fail to account for each customer's personal circumstances."

Interest-only is a type of mortgage where the debt is repaid at the end of a typical 25-year term, while interest is paid monthly. Monthly bills start much lower and the borrower must save to clear the debt at the end of the term.

This type of lending soared ahead of the 2008 financial crisis, but has almost disappeared.

In the pre-crash boom, customers were able to borrow on an interest-only basis without showing how the debt would be repaid. Then the credit crunch struck. It quickly emerged that hundreds of thousands of interest-only customers would struggle to service their debts.

Estimates suggest there are between 2.5 million and four million interest-only mortgages, with around 150,000 maturing annually. Half of these face a shortfall of about £71,000, while one in 10 of all interest-only borrowers had no repayment plan in place.

The banks' response to fears of a "time bomb" was to rewrite lending criteria. First, lenders demanded borrowers show proof of a savings plan. Then some quit the interest-only market altogether, with the number of lenders offering these loans falling from 82 in 2007 to just 12 today, according to data provider Moneyfacts.

The final blow has been to disregard personal circumstances, with blanket rules applied "without common sense", brokers said. For example, some refuse to acknowledge cash in savings accounts for a repayment plan. Others consider only the current values of investments, ignoring the potential for future growth.

Older customers are being refused loans regardless of their financial situation. Skipton and Newcastle building societies this week became the latest lenders to cut their age limit to 75. Some lenders have a cut-off at 70.

The clampdown has proved disastrous for interest-only customers who reach the end of a fixed-rate period, move home or come to the end of their mortgage term.

Millions are trapped with their existing lender – and if interest-only is no longer offered, customers must move to a repayment basis. Because those over the age of 60 are unable to extend the term, repayments can increase 10 times over.

David Carlyle, 71, has been a Barclays customer for more than 50 years. For the past five, he has held an interest-only mortgage worth £120,000. This month, Mr Carlyle and wife, Anne, 67, moved to a new property in Surbiton, Surrey.

Barclays allowed him to transfer his current 0.68pc tracker-rate mortgage for the second time since 2009. But on this occasion Mr Carlyle was informed that he no longer met interest-only criteria, even though he had set aside £120,000 in savings, Premium Bonds and shares to repay in eight years' time. Instead, Barclays insists that he must start repaying the loan now, increasing his monthly bill from £67 to £1,300.

The retired IT consultant said: "It's wholly unreasonable. Barclays entered into an agreement with me in 2007 and should be prepared to honour it."

Emma Kelly fell foul of Santander's punitive stance on interest-only borrowers. Mrs Kelly, 48, had repayments raised from £825 a month to £1,350 overnight.

Like other interest-only borrowers, she was offered a two-year fix at 4.99pc by Santander when her fixed deal ended. Her only alternative was Santander's standard variable rate of 4.74pc as no other lender would offer her interest-only.

Mrs Kelly said: "It does not seem right to offer 3pc rates to first-time buyers but not interest-only. We are now living on the edge financially. If interest rates rise by even one quarter of a per cent, we may be forced to sell the family home."

Derek Gair, who runs GDC financial advisers, has seen dozens of similar cases stemming from the Santander branch next to his office.

He said: "It's appalling – these are good borrowers, whose riskiness has not changed. The rate should not depend on what type of mortgage you take."

A spokesman for Santander said: "Our retention rates [the mortgage rates offered to customers that the lender is retaining] are based on the customer's individual circumstances."

Many lenders have abandoned interest-only lending altogether. The list includes Nationwide, NatWest, Co-operative Bank and the Coventry and Yorkshire building societies.

Woolwich, the mortgage arm of Barclays, will only lend to customers with £75,000 of annual income, or £100,000 including a partner. HSBC requires an income of more than £100,000 (or £50,000 on deposit in cash). Virgin only considers a minimum loan size of £300,000.

Santander will only lend interest-only if you have a 50pc equity in your home. Lenders that accept 25pc deposits take hardline stances on repayment plans.

Banks are searching for ways to cater for borrowers who reach the end of their term with a shortfall. The Daily Telegraph understands that two major banks are considering offering so-called “interest payment plans”.

This is a specific type of equity release: customers continue to pay the interest until the customer dies or moves into long-term care. At that stage, the property must be sold to repay the debts.

This week insurer Hodge Lifetime launched one of these deals at 4.75pc, fixed for five years. Customers can borrow up to 50pc of the property value.

The only lenders to launch a new interest-only mortgage are Clydesdale and Yorkshire banks – part of National Australia Bank. However, the interest-only period lasts just three years at 2.69pc for 40pc equity. Borrowers must then start repaying the debt. The deal, called “Low-Start”, is available on loans with a 20pc equity or more.

[The Masked Tulip]

It perhaps explains why there hasn't be a flood of properties coming on the market in some areas - IO mortgagees forced to repay their loan as soon as they sell. I heard it said that 81 perecent of mortgages in Swansea SA3 are IO.

[porca misèria]

It perhaps explains why there hasn't be a flood of properties coming on the market in some areas - IO mortgagees forced to repay their loan as soon as they sell. I heard it said that 81 perecent of mortgages in Swansea SA3 are IO.

Is SA3 your local boom-and-bust area? Or some unusual characteristics?

How's the tidal lagoon affecting property? Boosting prices 'cos of all the benefits they're promising?

[The Masked Tulip]

SA3 is Swansea West/Gower - fur coat and no knickers.

Tidal lagoon is by the docks so doubt it will any impact on anything.

[Venger]

Emma Kelly fell foul of Santander's punitive stance on interest-only borrowers. Mrs Kelly, 48, had repayments raised from £825 a month to £1,350 overnight.

Like other interest-only borrowers, she was offered a two-year fix at 4.99pc by Santander when her fixed deal ended. Her only alternative was Santander's standard variable rate of 4.74pc as no other lender would offer her interest-only.

Mrs Kelly said: "It does not seem right to offer 3pc rates to first-time buyers but not interest-only. We are now living on the edge financially. If interest rates rise by even one quarter of a per cent, we may be forced to sell the family home."

Confused by this one. They're not 'old' as can be seen in the pic. Can interest only mortgages be fixed term (eg just a few years)? If so, I didn't know that.

Probably I'm wrong and the journo is correct, but seems more likely to me their current sweet rate deal ran out on a non-interest only mortgage, and now they're on a higher SVR, with not enough equity to remortgage for a lower rate. If so, perhaps that's what maybe gets their goat about lower rates available to new buyers/other customers. Or perhaps lender has allowed them to go interest only temporarily after a more standard mortgage ended.

Fact I'm looking at what appears to be the house on streetview reinforces my view, and can see it was bought for £410K in May 2008. Can't see the problem. Good chance it would still sell at the 2008 purchase price, going from more recent sale, and possibly a lot more, going from one under offer on the same row. The good ole 'family home' line. Not been able to buy one myself for my family, given others happily taking on epic mortgages for so many years. Ouch 4.74%. Who could see that ever coming before they paid Four Hundred and Ten Thousand pounds for houses such as these, all around the UK? Even in the forever up-and-coming areas.

Edited September 9, 2013 by Venger

[spyguy]

Confused by this one. They're not 'old' as can be seen in the pic. Can interest only mortgages be fixed term (eg just a few years)? If so, I didn't know that.

Probably I'm wrong and the journo is correct, but seems more likely to me their current sweet rate deal ran out on a non-interest only mortgage, and now they're on a higher SVR, with not enough equity to remortgage for a lower rate. If so, perhaps that's what maybe gets their goat about lower rates available to new buyers/other customers. Or perhaps lender has allowed them to go interest only temporarily after a more standard mortgage ended.

Fact I'm looking at what appears to be the house on streetview reinforces my view, and can see it was bought for £410K in May 2008. Can't see the problem. Good chance it would still sell at the 2008 purchase price, going from more recent sale, and possibly a lot more, going from one under offer on the same row. The good ole 'family home' line. Not been able to buy one myself for my family, given others happily taking on epic mortgages for so many years. Ouch 4.74%. Who could see that ever coming before they paid Four Hundred and Ten Thousand pounds for houses such as these, all around the UK? Even in the forever up-and-coming areas.

I would guess they have an IO with something like 0.5% over BoE.

They probably had a 5 yr fix.

That's ended and they've been put on the SVR, which is probably ~5%.

Their payments have probably doubled.

If they move to a repayment then their payments will quadruple.

Still their not not renter scum. Give them more money.

The 71 yo make sense - but he's pushing his luck on the contract. You move house, you get a new mortgage.

There's something in his story that does not add up - the article implies that he's moved 3 times in the last 5 years.

That's pretty unusual at that age.

[winkie]

So people cashed in the savings plan that was supposed to repay their IO loan years ago (or never had one)....the 25 years is up, say ~£100k or possibly more if mew was involved is still outstanding, there is no way they can pay it back, no longer in work, or not in the same job, or two wages are now one, or other outstanding debts etc....no other lender will take them because of the high risk, be it not enough income to service the repayment of the debt/s or the property is high loan to value...so they have to pay the going wonga rate or sell repay and start again.....all debt has to eventually be repaid when secured with something worth the same or more than that debt....better to pay as you go and go without other things......what you don't owe won't worry you....whether it is paid back gradually over time or in one lump sum later.....gradually comes as less of a shock

[Bruce Banner]

Usual sob story. Using their house as a cash machine and calling it their home when it goes wrong.

[GinAndPlatonic]

even though he had set aside £120,000 in savings, Premium Bonds and shares to repay in eight years' time. Instead, Barclays insists that he must start repaying the loan now, increasing his monthly bill from £670 to £1,300.

Maybe Barclays are worried he will need care soon and have to sell the house to pay for it....then they will be competing with the NHS for the monies...so better get in first...the games up and banks know it..Interest only mortgages are a risk for all concerned now, it just depends who wants to be in the firing line.

Edited September 9, 2013 by GinAndPlatonic

[olliegog]

even though he had set aside £120,000 in savings, Premium Bonds and shares to repay in eight years' time. Instead, Barclays insists that he must start repaying the loan now, increasing his monthly bill from £670 to £1,300.

Maybe Barclays are worried he will need care soon and have to sell the house to pay for it....then they will be competing with the NHS for the monies...so better get in first...the games up and banks know it..Interest only mortgages are a risk for all concerned now, it just depends who wants to be in the firing line.

I don't understand this - if he has 'access to' pay mortgage off in 8 years time why does he not pay off half of it now - still leaves him with savings etc - reduce his mortgage payment back to the £650 as the amount owed is less and he will probably be able to remortgage to a better rate

[SHERWICK]

I don't understand this - if he has 'access to' pay mortgage off in 8 years time why does he not pay off half of it now - still leaves him with savings etc - reduce his mortgage payment back to the £650 as the amount owed is less and he will probably be able to remortgage to a better rate

Because he prefers to complain that it's everyone else's fault except his own sorry, dumb self.

[ReggiePerrin]

I don't understand this - if he has 'access to' pay mortgage off in 8 years time why does he not pay off half of it now - still leaves him with savings etc - reduce his mortgage payment back to the £650 as the amount owed is less and he will probably be able to remortgage to a better rate

If they have an investment plan in place that will cover the cost of house, then raiding the pot early will cost them £1000's, increase the time to repay the mortgage etc... it's all about compound interest and all the jazz, which is great for savers, but kills 9 out of 10 borrowers.. the housemarket is a real mess

edit to give example:- £120,000 @5% apr after 8 years = £177,000, that's with no further contributions and interest reinvested, so they 'lose' £57,000 if they raid the pot now.

Edited September 9, 2013 by ReggiePerrin

[dances with sheeple]

Usual sob story. Using their house as a cash machine and calling it their home when it goes wrong.

Well put.

[koala_bear]

http://www.telegraph...-borrowers.html

Derek Gair, who runs GDC financial advisers, has seen dozens of similar cases stemming from the Santander branch next to his office.

He said: "It's appalling – these are good borrowers, whose riskiness has not changed. The rate should not depend on what type of mortgage you take."

Really? and he calls him self a financial adviser?

(Zero appreciation of risk)

The Santander comment is interesting as there have been several other threads about their lending as they seemed to over index on IO lending in the boom. IO also effectively erodes the ability of lender to do new borrowing when credit markets are constrained.

[dances with sheeple]

http://www.telegraph...-borrowers.html

Really? and he calls him self a financial adviser?

(Zero appreciation of risk)

The Santander comment is interesting as there have been several other threads about their lending as they seemed to over index on IO lending in the boom. IO also effectively erodes the ability of lender to do new borrowing when credit markets are constrained.

Sounds more like a clown to me.

[dances with sheeple]

If they have an investment plan in place that will cover the cost of house, then raiding the pot early will cost them £1000's, increase the time to repay the mortgage etc... it's all about compound interest and all the jazz, which is great for savers, but kills 9 out of 10 borrowers.. the housemarket is a real mess

edit to give example:- £120,000 @5% apr after 8 years = £177,000, that's with no further contributions and interest reinvested, so they 'lose' £57,000 if they raid the pot now.

Isn`t that balanced out by having substantially less mortgage to pay? Isn`t it the case that many older idiots have got used to the idea that they are "well off", but have conveniently forgotten the incontinent elephant that is taking a crap on the roof of their house, the I.O Jumbo (Dumbo?) mortgage

[LC1]

Some are in their seventies and say their carefully crafted retirement plans now lie in tatters.

Surely not so carefully crafted after all, or am I missing something?

Or would visiting the casino on payday and putting it all on black be considered 'carefully crafting a pension plan' too?

[dances with sheeple]

Surely not so carefully crafted after all, or am I missing something?

Or would visiting the casino on payday and putting it all on black be considered 'carefully crafting a pension plan' too?

They were probably told what to do by "financial advisors" and just swallowed it all without much/any thought?

[koala_bear]

Surely not so carefully crafted after all, or am I missing something?

Or would visiting the casino on payday and putting it all on black be considered 'carefully crafting a pension plan' too?

They carefully crafted Plan A. They have no plan B, C, D... because that would have involved making unpalatable choices either in the past, present or future.

Plan A is the most beneficial to them provided everything goes right...

The blind faith of so many only in their plan A worries me a lot.

[19 year mortgage 8itch]

They carefully crafted Plan A. They have no plan B, C, D... because that would have involved making unpalatable choices either in the past, present or future.

Plan A is the most beneficial to them provided everything goes right...

The blind faith of so many only in their plan A worries me a lot.

Plan A has worked perfectly for 40 years apart from the periods in the 70s, 80s and 90s when there was a mix of crippling inflation, high interest rates and house price falls

Why should they not have blind faith in it?

[The Masked Tulip]

Moneyweek has an interesting article this morning about Zoopla Foxtons, etc, trying to IPO before IRs rise and the markets crash. Zoopla's IPO valuation is about 50 times its earnings just like, um, ARM.

[koala_bear]

They were probably told what to do by "financial advisors" and just swallowed it all without much/any thought?

The more crafting i.e. the bigger the investment and (mortgage) debts involved the bigger the commissions for advisers?

[koala_bear]

Moneyweek has an interesting article this morning about Zoopla Foxtons, etc, trying to IPO before IRs rise and the markets crash. Zoopla's IPO valuation is about 50 times its earnings just like, um, ARM.

What could possibly go wrong?

Why not wait till there is new boom post HTB phase 2 in January, as they will obviously be doing more business then?

Or do some of the bankers arranging the IPOs think like HPCers behind closed doors?

[Spork of Damocles]

What could possibly go wrong?

Why not wait till there is new boom post HTB phase 2 in January, as they will obviously be doing more business then?

Or do some of the bankers arranging the IPOs think like HPCers behind closed doors?

The stock market is all about the expectation of future earnings. You want to IPO when people think the boom is only going to get better. This is also the first point at which Zoopla's got a chance of doing it and so will have VCs pushing the company (I'm assuming it's got VC money) into taking the money now. If they miss the window, they'll have to wait a very, very long time.

[koala_bear]

The stock market is all about the expectation of future earnings. You want to IPO when people think the boom is only going to get better. This is also the first point at which Zoopla's got a chance of doing it and so will have VCs pushing the company (I'm assuming it's got VC money) into taking the money now. If they miss the window, they'll have to wait a very, very long time.

My point (which may not have come across well - sarcasm mode) was that they have to go now because those future predicted earning won't materialise so there is a urgent need to cash out for the investors before the good news fails to materialise.

Edited September 9, 2013 by koala_bear