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Banks Slash Another 300,000 Interest-Only Mortgages

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http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11883281/Banks-slash-another-300000-interest-only-mortgages.html

Banks and building societies cut another 300,000 interest-only loans from their books last year, industry figures show, as the sector acts to calm regulators' fears that there are too many customers who do not know how they will pay back the loans at the end of the term.

A total of 1.9m people still have the loans, and banks are contacting them to ask what kind of repayment plan the borrowers have in place according to industry body the Council of Mortgage Lenders.

Interest-only mortgages charge customers the interest on the loan every month rather than a combination of interest plus capital. As a result, when the borrower gets to the end of the loan's lifetime, they still have to pay back the money they borrowed to buy the property.

This might be suitable for customers with variable incomes, such as sales staff who work on commission, who want to pay back the capital as an when they have the money available, or for landlords who want to gain income from the property but can sell it to pay off the loan.

However, regulators fear some normal home buyers have taken out interest only loans as they are attracted by the low monthly payments, but do not understand the full implications when the loan expires - thinking that they own the house outright, but in fact ending up with a large debt.

1.9m is a large number, it would be useful to know what the outstanding debt is. The bankers starting to panic that this number is too large?

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However, regulators fear some normal home buyers have taken out interest only loans as they are attracted by the low monthly payments, but do not understand the full implications when the loan expires - thinking that they own the house outright, but in fact ending up with a large debt.

normal - not very if they cannot understand that 'interest only' means just that

there should be an IQ test for borrowers and get them to sign that what has been described to them in words of one syllable is understood and they are not going to plead 'mis-selling' :huh:

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Lenders culled 15% of outstanding IO mortgages in 12 months without bringing house prices down. That is quite an achievement. Another few years of that and the IO mortgage bomb will have been safely diffused.

Edited by rantnrave

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Colleague at work. One London flat bought on I/O. 12 yrs left on loan, still no repayment plan in place. Has a 2nd home that he bought in the shires, leveraging from the price increase on the first. Again, I/O with no repayment plan.

I expect this whole I/O loan thing to go boom.....

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What about all those who made their wage fit the amount they needed to borrow, they had no other option but to pay IO.....the savings towards the repayment vehicle was duly cancelled shortly afterwards.....the lenders turned a blind eye......not that long ago before the designed and intended credit expansion the lenders would closely monitor the savings plan......now no longer.

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How long until we see articles about those who took out the HTB part II loans struggling to pay them?

Funnily enough, I was thinking that yesterday.

I don't think we'll see any sob stories for some time. The timescale is:

1 April 2013 - scheme launched

Loan of 24% of purchase price is interest free for five years.

In year 6 (so from 2nd quarter 2018 for the earliest loans) the interest is 1.75%.

Year 7 (from 2nd quarter 2019) 2.75% plus any increase in inflation as measured by RPI.

Year 8 (from 2nd quarter 2020) 3.75% plus any inflation increase.

And so forth.

The wailing and gnashing of teeth may start in 2018, in cases where even 1.75% interest on 25% of, say, £525,000 (price of average London house, according to the FT) puts a sudden strain on household finances. Particularly if the household has an added infants, or more than one, and therefore has less disposable income (drop in one parent's income and/or childcare costs + expenses of said infants). You can't rely on the old expectations of increasing salaries / promotions any more, either.

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http://www.bbc.co.uk/news/business-34325751

'At the end of 2014, there were about 2.4 million outstanding home loans of this type, the Council of Mortgage Lenders (CML) said.

This was 460,000 fewer compared with a year earlier.

About a quarter of these had come to the end of their term, but others have seen borrowers moving on to "safer" deals.

However, at the end of the year, a total of 16,000 loans had matured but not been repaid. The CML said that in many cases homeowners would be in the process of paying the lump sum, so not all would be in difficulty.'

Balls. Term ends, repayment happens. If not than the person has not the money to pay.

Bare in mind the IO maturing will be the endowments of circa 1989/1990.

Not a snowballs of IO mortgages of 2000-2012 being paid off.

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Slowly but surely the means to pay back a tipical house loan have been eradicated..... 2% inflation, low/no interest rates, two full time earners,tax credits,an acheiveable way to save a 10% deposit before the age of 30......30 years left to pay.

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Funnily enough, I was thinking that yesterday.

I don't think we'll see any sob stories for some time. The timescale is:

1 April 2013 - scheme launched

Loan of 24% of purchase price is interest free for five years.

In year 6 (so from 2nd quarter 2018 for the earliest loans) the interest is 1.75%.

Year 7 (from 2nd quarter 2019) 2.75% plus any increase in inflation as measured by RPI.

Year 8 (from 2nd quarter 2020) 3.75% plus any inflation increase.

And so forth.

The wailing and gnashing of teeth may start in 2018, in cases where even 1.75% interest on 25% of, say, £525,000 (price of average London house, according to the FT) puts a sudden strain on household finances. Particularly if the household has an added infants, or more than one, and therefore has less disposable income (drop in one parent's income and/or childcare costs + expenses of said infants). You can't rely on the old expectations of increasing salaries / promotions any more, either.

FLS ends 2020

HTB ends 2020

HTB higher loan rate doesn't kick in until 2020

Landlords subject to increased tax rates from 2020

It's almost as if an election was planned for that year...

Edited by rantnrave

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How long until we see articles about those who took out the HTB part II loans struggling to pay them?

I heard from a HTB 1 future victim about how he's had his driveway done and bought a new car on finance. Has plans to upsize into a bigger house in a few years time. Delusional comes to mind, yet he's not stupid in the slightest.

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FLS ends 2020

HTB ends 2020

HTB higher loan rate doesn't kick in until 2020

Landlords subject to increased tax rates from 2020

It's almost as if an election was planned for that year...

the HTB ISA matures a year or so before 2020 too doesn't it, just in time to inflate house prices for that feel-good factor for the 2020 election?

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There was a news article posted recently about the growth of 1% Part and Part mortgages (99% interest only and 1% repayment) apparently to get around the rules and recommendation for mortgages officially known as Interest Only (100% Interest Only). It would be interesting to know how much that claimed growth in 1% Part and Part mortgages balances the claimed decline in pure Interest Only mortgages.

During the 80s/90s recession/depression they were full of claims about what they'd done and were going to do to repair things and ultimately little or nothing had changed - except for the worse. Maybe it is different this time but one has to suspect that given time it will turn out that nothing much will have changed - again. Although in the meantime they pretend that the rules changes mean something to be seen to be doing something.

Edited by billybong

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There was a news article posted recently about the growth of 1% Part and Part mortgages (99% interest only and 1% repayment) apparently to get around the rules and recommendation for mortgages officially known as Interest Only (100% Interest Only). It would be interesting to know how much that claimed growth in Part and Part mortgages balances the claimed decline in pure Interest Only mortgages.

During the 80s/90s recession/depression they were full of claims about what they'd done and were going to do to repair things and ultimately little or nothing had changed - except for the worse. Maybe it is different this time but one has to suspect that given time it will turn out that nothing much will have changed - again. Although in the meantime they pretend that the rules changes mean something to be seen to be doing something.

if that's true then a soft landing is unlikely

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if that's true then a soft landing is unlikely

The facts I mentioned are true and any opinion is an honest opinion - just to be clear.

I agree a soft landing is unlikely although it's the timing of events that aren't known. Having said that they've managed to stealthily reduce UK living standards for some decades now and some would say that's been at least partly in exchange for a full on hard landing that should have happened some time ago (reduced living standards like the house price situation, two incomes at least needed to buy small flats, widespread temporary, short term, relatively unskilled and insecure work, massive debt - and so on) and that would have ultimately been more beneficial to the UK economy than what the UK has now. Although it's also fair to say that the 90s seem pretty hard landingish to some but likely the next one will be even worse.

Edited by billybong

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Lenders culled 15% of outstanding IO mortgages in 12 months without bringing house prices down. That is quite an achievement. Another few years of that and the IO mortgage bomb will have been safely diffused.

Hmm, I wonder if that includes UKAR and the MEx BTL loans?

(i.e. the easy part of reducing the numbers...)

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