Interest-only Puts You On The Ladder, But Will It Bring You Crashing Down?

[The Masked Tulip]

Justin Westcott, a 27-year-old public affairs manager, decided that it was more important to grab the first rung of the housing ladder than to worry about setting aside money to pay for a home in the future.

Two months ago, he bought his first property in Clapham, south London, with an interest-only mortgage from Northern Rock. He is paying a rate of 5.99 per cent and the deal is fixed for three years.

"I am not saving into any investment vehicle at the moment," he says, "but my main concern was getting on the housing ladder.

"The repayments cost me £870 a month, as it is. I've stretched myself to my maximum borrowing capacity - and that was with a 10 per cent deposit from my father."

"I have no grand plan," he says, "but I'm sure the equity in my home will rise by then - and I'm gambling my salary will go up too."

http://money.independent.co.uk/property/mo...ticle330980.ece

[the end is a bit nigher]

http://money.independent.co.uk/property/mo...ticle330980.ece

how did he manage to go interest only and still get such a crap rate? - shows we really are at the bottom of the barrel for buyers

[FrozenOut]

What gets me about interest only mortgages they are by their very nature a calculated risk for the bank as well as the borrower.

I mean did the bank seriously look at this property and go "Yeah in 3 years this place will be worth more"

I know this lender is dumb, but they should BOTH be hung out to dry for making such a pish poor business deceission.

:angry:

[the end is a bit nigher]

What gets me about interest only mortgages they are by their very nature a calculated risk for the bank as well as the borrower.

I mean did the bank seriously look at this property and go "Yeah in 3 years this place will be worth more"

I know this lender is dumb, but they should BOTH be hung out to dry for making such a pish poor business deceission.

:angry:

maybe that is reflected in the higher rate? - maybe they are desperate to lend to anyone now

[Dames]

This was the crucial bit imho;

Ten days ago, Nationwide tightened its lending policy to ensure that applicants for mortgages make proper provision to cover the capital sum in the future. It insists they must now include full details of the repayment vehicle chosen to pay off the loan, one that should generate a large enough sum in the years to come.

The differnce between an I/O and repayment on a £100k at 5.5% is around 34% , so even being conservative this should add at least 20% to monthly payments?

Dames

[zorn]

This was the crucial bit imho;

The differnce between an I/O and repayment on a £100k at 5.5% is around 34% , so even being conservative this should add at least 20% to monthly payments?

You're leaving out the bit that say they'll be happy if you tell them you're planning to pay into an ISA for five years and then switch to repayment, but they'll never check if you're actually doing it. And it's not even fraud -- anyone can change their plans at any time, and to declare an intention is not to make a commitment. So basically, anyone can get round this quite easily and legally.

[Take me to the cleaners]

Where did the phrase "repayment vehicle" come from? Is it a special type of transport to help you get up the housing ladder?

The use of English is getting bizarer, IMHO.

[Jason]

"More than a quarter of homeowners now pay for their property with an interest-only mortgage, according to research from Abbey. Of these, some 37 per cent aren't saving anything towards the capital."

More than a quarter. Wow. It's alot worse than I thought!

[winkie]

People I know who have made the bad decision to buy a property on a interest only mortgage, always have the best intention to either make lumpsum repayments when their financial situation improves, or intend to convert to a repayment a a later date. Does it ever happen?

[IP Newcomer]

"More than a quarter of homeowners now pay for their property with an interest-only mortgage, according to research from Abbey. Of these, some 37 per cent aren't saving anything towards the capital."

More than a quarter. Wow. It's alot worse than I thought!

So just under 10% of home owners are on an interest only mortgage with no savings? That can't be right. It's instant negative equity.

[BuyingBear]

What gets me about interest only mortgages they are by their very nature a calculated risk for the bank as well as the borrower.

I mean did the bank seriously look at this property and go "Yeah in 3 years this place will be worth more"

I know this lender is dumb, but they should BOTH be hung out to dry for making such a pish poor business deceission.

Indeed, but you assume the bank holds the liability or actually has to the find real money to lend out, that's not how the system works, there is a virtually unlimited pool of liquidity so not lending to this poor mug will simply mean lost margins, the liability will also be passed onto the markets in the form of securitised derivatives... which basically means it's held by pension funds (FSA regs means they have to be in bonds instead of equities).

That's why banks like Lloyds don't give really a damn who they lend to.

[homeless]

so a quarter of people still owe the full amount

then prob another quarter have paid some off and then done mew so now they owe a lot as well compared to the value of the house.

guess we all know now where all the money seems to have come from

[BuyingBear]

so a quarter of people still owe the full amount

then prob another quarter have paid some off and then done mew so now they owe a lot as well compared to the value of the house.

guess we all know now where all the money seems to have come from

Do they stop and consider exactly who or what is going to bail them out? By definition they're the last fool and barely able to afford to buy, therefore where are all these new people they're relying on with £500k of liquidity going to come from? Otherwise how can they pay off their entire capital and realise their 'massive gains'. If they can't really afford it then nobody else can, debt can be created out of thin air but it needs to be repaid with real money, and that doesn't come out of thin air.

It's not like inflation is going to bail them out either, not the sort they need anyway, utilities, petrol and council tax rising 20% doesn't help you if wage inflation is still 4% and constrained by a weakening labour market and migrant labour.

This makes the dotcom bubble look sane, and after that collapsed they talked about the evaporating 'wealth effect' when people no longer felt wealthly on the back of their shares, compared to the amount now wagered property the dotcom bubble doesn't even register.

[The Masked Tulip]

Lots of divorces in the next 5 years methinks. A lot of broken families and misery. Increase in suicides. Very sad.

[slapper slater]

Indeed, but you assume the bank holds the liability or actually has to the find real money to lend out, that's not how the system works, there is a virtually unlimited pool of liquidity so not lending to this poor mug will simply mean lost margins, the liability will also be passed onto the markets in the form of securitised derivatives... which basically means it's held by pension funds (FSA regs means they have to be in bonds instead of equities).

That's why banks like Lloyds don't give really a damn who they lend to.

Yes, FRB means they can lend out, say, 10 times what they actually have in reserve... BUT, on the flip side (which is now) it gets nasty very quickly since a write off of £x means they have then have 10x LESS to lend out. So banks end up in a mess just as quickly and start having to foreclose on other loans to remain solvent.

[MrB]

"but my main concern was getting on the housing ladder."

What a nob.

It's one of the main reasons why I think this 'can't go on forever' because for his house to go up in value some mug needs to come along in a few years and pay more, gear themselves up even more on an even more bizarre mortgage arragngement.

Maybe I'm wrong and in 10 years it will be normal for someone to buy 25% of a house on a IO mortage and rent the remainder, or something crazy like that.

Why are people so desparate to get on the ladder??? If they weren't house prices would be much lower.

[Nelly]

Why are people so desparate to get on the ladder???

Cos their all dicks"

I had a cracking argument with a bloke the other day who'd just got an IO mortgage.

I said what do you do at then end of the term?

Get another mortgage......???????????????

Whats the point of paying off a mortgage only to have to get another one.

well ok I'll sell it (its a terraced)

And live where?

It would have gone up in value

What so its the only house in Britain that would have gone up?

NO

So if they all go up what are you gonna buy?

Well I'll pay off the bank and with the rest put a deposit down and get another mortgage!

"F**k me stiff", I said as I walked off.

[apom]

So his salary will go up?

This may be the case if he is on a carear path, and good luck to him.

but if he believes in the release from debt inflation used to bring he is one of the many expossed to the MPC inflationary policy and the massive VI spin to hide this from the masses.

One BBC article to point out that we cannot rely on inflation for this... Well that would be nice....

but does not suit the BBC's hidden agenda..

They either have a hidden agenda or they are dumb.

Where did the phrase "repayment vehicle" come from? Is it a special type of transport to help you get up the housing ladder?

The use of English is getting bizarer, IMHO.

Well a colleague at work is buying.. IO only of course..

Him and his wife are on a good salary.., but they are at the top of their game.

Inflationary payrises are all they can expect unless they relocate..

Hmmmnn..

His repayment vehicle..

He was moaning about that.. Said he had to get an ISA.. only put a quid in.. and showed that ISA to a lender.

The lender accepted that as his repayment vehicle.. after a bunch of promesies about how much he was going to put away.

He has no intention of paying of any until he can afford to..

So that would be waiting for inflation would it>???

Morron.

[geranium]

Do you remember the mis-selling "scandal" of endowment mortgages?

The victims were encouraged to pay interest only, while investing in an "endowment" investment. The idea was that this would perform well enough to pay off the mortgage capital at the end of the term. Some were left thousands of pounds short when their endowments failed to grow sufficiently.

It's odd that only a few years later, people seem to be encouraged to borrow IO and make no provision whatsoever to pay off the capital at the end of the term. Surely memories can't be that short?

I suppose that investments linked to the financial markets (like endowments) are treated with the utmost suspicion whereas the housing market is currently seen as a "safe" investment.

The press seems to be picking up on it slowly though... when the truth really "hits home" the fall-out will be massive. Who will get the blame? Government? The banks?

[The Masked Tulip]

I am actually begining to wonder whether IO is not a route to go down. I would not do it now as it is cheaper to rent than to own in any capacity but...

My Mum has just been diagnosed with dementia and early stage alzheimers. She and my Father worked all their lives, saved money for reitrement and purchased a home. Dad died back in 1990 and now Mum, at 79, has got to the point where I can no longer look after her. It has made me very ill juggling a job, care and a relationship. The relationship went by the book last year.

I am now facing the situation where basically Mum, because she has a home and savings, will have to use her savings for care, whether it is in her home or at a home, and then sell the house. In my part of the World nursing home costs cost around £400 per week and many are in the £600 per week area.

A few years ago we looked into having her home signed over to me - a common misconception according to our solicitor - but the reality is that this is almost impossible these days unless you do it a good 10 or 15 years in advance. My solicitor pointed out that his firm, and many others, refuse to do this work as, ultimately and quite rightly, they know how much care costs and there used to be horror stories of parents signing over property to children only for the parent to end up living in poverty, forgotten, in some dingy home.

Now, Mum has a cousin who, throughout my childhood, apparently was a bit of a waster. She and her husband basically partied all their lives, enjoyed living and did not save a bean. That cousin, if a lightbulb goes in her sheltered housing flat needs changing, has a man come round and changes the lightbulb. My Mum, because she has a small pension and savings, is entitled to no benefits, pays full council tax, etc, etc, etc.

In truth, Mum would have been better off if she had never saved a penny or bothered to buy a home. Yes, the house will provide towards her care but, re the above costs, that will not last long. Her and Dad's hope of passing on a legacy mean nothing as the State has queered the pitch in terms of care. I am not alone in this, Mum is not alone in this - tens of thousands of families become aware of this each and every year.

So, why buy a house at any time, let alone now when prices are ridiculous, if it means that you will eventually lose it, and perhaps be no better off than someone who has rented all their lives, when you read old age. Yes, you can argue that you will have a home to sell in order to give you some choice in your future care but... doesn't that argument only hold up for today. Twenty or thirty years from now, re demographic changes, you might not be able to sell your home for anywhere near what is needed for long-term care.

I wonder whether long-term renting or IO is actually the way to go. If IO eventually becomes cheaper than renting then... who knows...

[JBFTB]

I find this quite fascinating because this very weekend I met up with two old friends who both bought right at the top because they "didn't want to miss the boat."

One of them has an interest-only mortgage. He has no interest in keeping the house, just in buying it, doing it up a bit, and then selling it for a profit. No provision to ever pay it off at all. And if he can't get anyone to buy it for the asking price, because, oh, for example maybe prices are dropping or there's a recession or for some reason people aren't willing to pay such an insane amount of money? Erm...well...not really any answer to that. Worse, he somehow succeeded in doing this with his last place (I was astonished), and now thinks he can do this forever more, in some kind of infinitely-growing upward curve or something. Even worse still, the other friend has seen all this happen and is now planning on doing the same thing himself with his own place.

What really scared me was that the pair of them were constantly on and on about houses, like they had been completely brainwashed. They barely talked about anything else, I was getting quite bored listening to it. Amongst all this were two assumptions: 1) Houses always go up in value 2) Nothing can ever go wrong. From what I gathered, both of them were consistently overdrawn and in the red, with loans left, right and centre, not including their enormous mortgages. Both of them began to admit that their personal lives were suffering because they were spending so much time working to support all this, and the rest of the time frantically doing up houses.

Even more peculiar was that they recognised, despite the VI spin, that house prices were no longer rising like mad, and that also the economy was faltering and heading into reverse. They still seemed to think they would have no problems in making a huge amount of money anyway. It was quite freaky, like suddenly discovering two old friends had been brainwashed by Scientologists or something...

[Guest magnoliawalls]

Indeed, but you assume the bank holds the liability or actually has to the find real money to lend out, that's not how the system works, there is a virtually unlimited pool of liquidity so not lending to this poor mug will simply mean lost margins, the liability will also be passed onto the markets in the form of securitised derivatives... which basically means it's held by pension funds (FSA regs means they have to be in bonds instead of equities).

That's why banks like Lloyds don't give really a damn who they lend to.

That supports the bulls' argument that BTL is a better pension investment than a conventional pension fund.

If you invest in BTL and have the mortgage payed off by the time you retire you will have a steady rental stream to supplement your income. Even if rents fall or you do need to sell at a loss the property is a tangible asset which is unlikely to dissapear.

On the other hand investing in a pension means that you trust that these institutional investors know what they are doing with the funds money and will make sensible long term decisions as they move up the career ladder. If the securitised derivatives they invest in turn out to be worthless because of a house price crash and the collapse of major corporations, you could be left with nothing but worthless bits of paper.

Maybe some STRs are more exposed to the property market than they think?

[S P]

What really scared me was that the pair of them were constantly on and on about houses, like they had been completely brainwashed..... It was quite freaky, like suddenly discovering two old friends had been brainwashed by Scientologists or something...

Morpheus : The Matrix is a system, Neo. That system is our enemy. But

when you're inside, you look around. What do you see?

Business people, teachers, lawyers, carpenters. The very minds

of the people we are trying to save. But until we do, these

people are still a part of that system, and that makes them

our enemy.

A woman walks by, standing out from all the people in suits, as she is wearing a bright red dress, and bright red lipstick. Neo stares.

Morpheus : You have to understand, most of these people are not ready to

be unplugged. And many of them are so inert, so hopelessly

dependant on the system, that they will fight to protect it.

Were you listening to me, Neo? Or were you looking at the

woman in the red dress?

Quite scary isn't it - but if they choose not to engage their brains, then more fool them.

[IPOD]

securitised derivatives

Err, can anyone give me an example of a "securitised derivative"? To my knowledge derivatives are options, futures, swaps, swaptions, forward-rate agreements, warrants, CFD's, etc. It would be quite hard to securitise these as they do not produce an income. Common examples of securitised assets include collateralized debt obligations, mortgage-backed securities, asset-backed securities, etc.

EDIT: OK, sorry, found one:

http://www.credit-deriv.com/creprime.htm

Credit linked notes:

Credit linked notes are a securitized form of credit derivatives. The technology of securitisation here has been borrowed from the catastrophe bonds or risk securitization instruments - click here to get more details. Here, the protection buyer issues notes. The investor who buys the notes has to suffer either a delay in repayment or has to forego interest, if a specified credit event, say, default or bankruptcy, takes place. This device also transfers merely the credit risk and not other risks involved with the credit asset.

I think it would be quite unlikely that your average pension fund would hold these. More likely to be big banks and hedge funds.

[BoredTrainBuilder]

That supports the bulls' argument that BTL is a better pension investment than a conventional pension fund.

If you invest in BTL and have the mortgage payed off by the time you retire you will have a steady rental stream to supplement your income. Even if rents fall or you do need to sell at a loss the property is a tangible asset which is unlikely to dissapear.

On the other hand investing in a pension means that you trust that these institutional investors know what they are doing with the funds money and will make sensible long term decisions as they move up the career ladder. If the securitised derivatives they invest in turn out to be worthless because of a house price crash and the collapse of major corporations, you could be left with nothing but worthless bits of paper.

Maybe some STRs are more exposed to the property market than they think?

But you can make the pension investment decisions yourself. You don't need institutions. You can open a SIPP using etrade or similar and fill it with trackers, ETFs, shares in companies you fancy, bonds, whatever, from many different countries. You don't need institutional investors. You are the investor.

Edited December 5, 2005 by BoredTrainBuilder