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North London Rent Girl

Radio 4 Money Box On Interest-Only Mortgages Saturday Noon

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They have just started discussing interest-only mortgages. Apparently there might be a problem with them...

Oh no, hang on, it's all ok, Ray Boulger says "time-bomb is the wrong word", lots of people will have done very well out of them, it's just the banks [did he say that? might have got that wrong] making mountains out of molehills.

Edited by North London Rent Girl

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This graph is a bit out of date now, taken from the FSA work preparatory to the Mortgage Market Review.

io%2Bredemptions.png

Always worth recapping the bizarre sequence of events

  • Up to 2001 the availability of MIRAS prompts some people to use so-called endowment mortgages (an endowment policy coupled with a interest-only mortgage) as opposed to a repayment mortgage
  • 2001 MIRAS scrapped
  • In the early 2000s the volume of 'naked' interest-only lending to owner-occupiers (i.e. without any provision for repayment) explodes
  • By 2011 it is clear that thee FSA are going to shut down naked interest-only mortgage lending
  • By 2012 the banks are effectively no longer offering such lending
  • In 2014 Mortgage Market Review implementation puts in place rules meaning that it is shut down

The remaining channel of high LTV naked interest-only lending into UK residential property is buy-to-let, and July 2015 the deductibility of mortgage interest for unincorporated BTL caught a bullet.

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A link on this thread to some work by Experian on behalf of the PRA which was published in 2013.

This story comes around every now and again. Remember that outside London and the South East, house prices have been flat since about 2009. Lots of mugs were promised by their mortgage broker that house price inflation at 5% per year would pay off their mortgage.

That proposition is not working out. Hundreds of thousands of people with these dumb as rocks IO loans and a house price which is at 2004 levels in nominal terms, hence in fact not a penny of HPI in over a decade.

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In current parlance I would say Ray Bulger came across as "relaxed" about it :). His solution is to go to a mortgage broker who will sort you out.

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In a world a perpetual hpi where houses can earn more than people they make sense providing you get out before prices collapse.

Magic....free money, no work.....make thousands.....so some of us think we live now in Nirvana?

Edited by winkie

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His solution is to go to a mortgage broker who will sort you out.

Link to the section of the programme on interest-only.

One of the things that is always quite telling is finding out what prompted Moneybox to do a piece on this, which is the ultimate slow-burn mortgage story.

This aired on the 27 February. Google suggests that is has been pretty quiet on this interest-only timebomb front for a while, save this piece in the Express which is essentially an advertorial for an equity release provider, Age Partnership.

Boulger can say interesting things every now and again, but suggesting that small lenders like the Harpenden Building Society are leading the way (loan assets of £190m meaning they have a market share of 0.015% of the CML members' £1.3 trillion loans makes the small with a capital "How f**king small do you like your small lenders?") is ridiculous. That's like saying that the HPC Off-topic forum is leading after dinner conversation at Davos.

Reading between the lines it looks like they'll be some bottom feeding by the equity release industry on anyone kippered with a big interest-only mortgage if they have substantial equity, but the big lenders are not going to solve their customers' problems.

It is worth bearing in mind that this problem is massive. As per this FT Adviser piece from September last year, there are 3.3m interest-only mortgages held by owner-occupiers and some research from the Citizen's Advice Bureau to suggest that 1.7m of them have no repayment plan. Recall that the CML is basically the mortgage market and there are about 11 million mortgages in their members' loan books. About 1.7m of those are BTL so the time-bomb interest only loans to owner-occupiers are about 20% the stock of mortgage lending to owner occupiers - 1 in 5.

Boulger is of course compromised - it was the industry for which he is a go to talking head, mortgage brokers, that were instrumental in convincing less financially astute borrowers that high-LTV interest-only was the only way to go. (Also don't forget that there was a lot of mortgage fraud on these late boom applications via self-certification of earnings and fast-tracking of mortgage applications so that there was no checking of the earnings even on the lending where notionally it could have been certified by the lender.)

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It's like car buy schemes that are "only" £159 a month, eventually there is a balloon payment, or you don't have a car any more.

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It's like car buy schemes that are "only" £159 a month, eventually there is a balloon payment, or you don't have a car any more.

MrPin, if you are here posting on House Prices and the Economy, who is supervising Off-topic? All hell could be breaking loose in your absence. TMT starting threads on buying kettles may be the least of our worries!

That aside, I think that is a big part of it. You can game mug punters' blindness to risks that lie sufficiently distant in the future, and that is what mass market high-LTV interest-only mortgage lending was, or rather is for those on the hook.

Edited by Idlewild

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.....so interest only are mainly tied to one lender who will charge what they feel fit for the borrowing, no repayment plan = higher risk = higher price.......they know they can get their money back if and when they want to from the sale of the property.....

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Yes Mr Idlewild, I am allowed to post here too. :unsure: It was the madness of lending that brought me here.

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.....so interest only are mainly tied to one lender who will charge what they feel fit for the borrowing, no repayment plan = higher risk = higher price.......they know they can get their money back if and when they want to from the sale of the property.....

If their LTV is not good, they are stuck and probably paying the SVR, (though thanks to ZIRP the lending is funded at once in 5,000 year rates so these shitty loans are turning into a real money spinner for the banks, particularly as they aren't being paid off so they just keep generating profits even as they crucify the long-term financial position of the borrowers - this is what happens when you get your financial advice from a mortgage broker who receives procuration fees for sticking you with a massive mortgage).

As argued before, the extent to which these so-called mortgage prisoners are being made to lie in the bed they've made (despite the fact this was regulated lending) ought to give the BTL crowd a heads up on what may come their way in due course (given that BTL lending was not regulated during the boom and is still not regulated at time of writing).

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Yes Mr Idlewild, I am allowed to post here too. :unsure: It was the madness of lending that brought me here.

MrPin, no criticism or mockery was intended! Quite the opposite. I apologise without reservation for posting something which was read as suggesting the opposite of what was intended. What House Prices and the Economy wants is as much MrPin as possible!

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It was the madness of lending that brought me here.

You're not spending that money here are you? You know very well it came with strict terms: only to be used on off-topic.

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You're not spending that money here are you? You know very well it came with strict terms: only to be used on off-topic.

It's not magic free money. It was a tax rebate. I now want a Saxophone. Won't be on tick though. :mellow:

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Guest eight

Boulger can say interesting things every now and again, but suggesting that small lenders like the Harpenden Building Society are leading the way (loan assets of £190m meaning they have a market share of 0.015% of the CML members' £1.3 trillion loans makes the small with a capital "How f**king small do you like your small lenders?") is ridiculous. That's like saying that the HPC Off-topic forum is leading after dinner conversation at Davos.

That was nothing more than a coincidence.

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Thanks for that graph, Idlewild - so there's a bump this year but the risk only really starts to eventuate big-time midway through the 2020s. It's too far away, I'm going to be N London Rent Old Lady by then, will just have to hope that some of the other chickens they keep shooing away come home to roost before that. Or they'll keep doing crazy shit to keep it all up in the air, the carnage will continue to be confined to my savings accounts and I'll keep sleeping up me tree, what's a bear to do?

Edit: more cheerful after reading your subsequent posts. How on earth did that many people end up with this kind of mortgage? It's positively evil - but cheers me up nonetheless.

Edited by North London Rent Girl

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Thanks for that graph, Idlewild - so there's a bump this year but the risk only really starts to eventuate big-time midway through the 2020s. It's too far away, I'm going to be N London Rent Old Lady by then, will just have to hope that some of the other chickens they keep shooing away come home to roost before that.

As suggested this is the ultimate slow burn story, but we're definitely in the game already. This is from the 2013 Experian report for the FCA (I incorrectly said PRA earlier).

Experian+Resi+IO+page+24+graph.png

What we are looking at is quite material. Land Registry monthly transactions are about 70,000 to 80,000 each month for the whole of England and Wales, hence even at present levels, the number of interest-only mortgages reaching term is material relative to market transaction volumes. I am dubious regarding the Experian commentary that the 2017-18 peak is dominated by endowment policy backed lending. The FSA graph already given shows 50,000 loans maturing each year over the same span with no repayment vehicle.

The next spicy meatball is that this lending is over-represented in the London market, again from the Experian report:

article-0-1992FEE6000005DC-440_634x693.j

The London market is leveraged to the eye-balls, (also as we've discussed on the Understanding Landlords thread, BTL landlords tend to be more heavily leveraged on their own home and more likely to have their own home financed interest-only, and BTL is a bigger share of the market in London and the South East than nationally). The whole thing is much more fragile than it looks. Bubbles burst.

Edited by Idlewild

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So what you are saying is, not only are some highly leveraged BTL landlords relying on tenants to service their BTL mortgages IO, they are also relying on them to help repay their own home that was remortgaged to buy extra property to provide that service....is not now the time to cash in and pay up?

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This graph is a bit out of date now, taken from the FSA work preparatory to the Mortgage Market Review.

io%2Bredemptions.png

Always worth recapping the bizarre sequence of events

  • Up to 2001 the availability of MIRAS prompts some people to use so-called endowment mortgages (an endowment policy coupled with a interest-only mortgage) as opposed to a repayment mortgage
  • 2001 MIRAS scrapped
  • In the early 2000s the volume of 'naked' interest-only lending to owner-occupiers (i.e. without any provision for repayment) explodes
  • By 2011 it is clear that thee FSA are going to shut down naked interest-only mortgage lending
  • By 2012 the banks are effectively no longer offering such lending
  • In 2014 Mortgage Market Review implementation puts in place rules meaning that it is shut down

The remaining channel of high LTV naked interest-only lending into UK residential property is buy-to-let, and July 2015 the deductibility of mortgage interest for unincorporated BTL caught a bullet.

that compounds with boomers dying off to tell me the bottom in the current property supercycle will be in the early 2030s approx, rather japanesey

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They have just started discussing interest-only mortgages. Apparently there might be a problem with them...

Oh no, hang on, it's all ok, Ray Boulger says "time-bomb is the wrong word", lots of people will have done very well out of them, it's just the banks [did he say that? might have got that wrong] making mountains out of molehills.

Can i just say...? I know what a rent BOY is. So you're a rent GIRL eh?

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this is telling - if only to emphasise how askew the housing market is

this was written when a certain G Brown abolished Miras which had been less helpful for struggling mortgagees by 1999

Halifax figures for a £60,000 interest-only borrower show that while Miras is now in 1999 worth £17.37 a month, in the early 1990s it was worth £85 a month. This had fallen to £41 by the start of 1995.

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this is telling - if only to emphasise how askew the housing market is

this was written when a certain G Brown abolished Miras which had been less helpful for struggling mortgagees by 1999

Halifax figures for a £60,000 interest-only borrower show that while Miras is now in 1999 worth £17.37 a month, in the early 1990s it was worth £85 a month. This had fallen to £41 by the start of 1995.

Telling?

The only thing that tells of is falling interest rates and tax rates over the 1990s. 1999 was before the bubble!

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