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Latest Figures Show 200,000 Took Our Risky Loans Recently

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More bad news for the housing market--no wonder the VIs are pumping their 50% up in a year propaganda today!

http://money.independent.co.uk/property/mo...icle1180141.ece

Sleepwalking into a crisis: borrowers lulled by cheap deals

By Esther Shaw

Published: 16 July 2006

Soaring numbers of borrowers taking out cheap interest-only home loans are in danger of storing up expensive long-term problems, brokers have warned.
For many people on a tight budget, the offer of low monthly repayments is too tempting to turn down - particularly if they are first-time buyers who are having to contend with rising property prices.
New figures from the Council of Mortgage Lenders show that more than 200,000 homebuyers took out an interest-only loan in 2005 - up from 143,700 in 2004 and 123,900 in 2003. Of these, 60,900 were first-time buyers, and none had a recorded repayment vehicle in place for the mortgage itself.
But this option is risky, as borrowers chip away only at the interest owed. To repay the property's capital value, they will usually need to set up a separate savings or investment vehicle, such as an individual savings account (ISA). Failing this, they need to be very confident that they will be in a strong enough financial position later to clear the debt.
But this confidence is often misplaced, brokers warn. Too many buyers are either assuming that higher salaries will enable them to switch to a repayment mortgage (clearing both the interest and capital), or counting on rising property prices so they can sell up years later and release the equity in their home.
In the past, when selling endowment mortgages, lenders at least required confirmation that a separate policy was in place to pay off the loan eventually. This is no longer the case. Today the lender has no legal responsibility with regard to a savings plan; it is up to the borrower.
"You could find that 10 years into the term, people suddenly realise they have made no provision and have to repay a 25-year mortgage in 15 years," warns Nick Gardner of broker Chase de Vere Mortgage Management. "This would mean a potentially unaffordable rise in repayments."
But, he adds, it's easy to see the appeal of these deals. "On a £100,000 mortgage at 5 per cent, say, capital and interest repayments would be £591.27. On an interest-only basis, the repayments fall to just £416.67."
One problem is that borrowers start out with the best intentions and then fail to see them through. "People nowadays are very bad at adjusting their lifestyles," says Mark Chilton at broker Purely Mortgages. "They insist they will switch to repayment when they can afford to, but there is no real trigger forcing them to do so."
However, interest-only can work as long as the borrower is disciplined. "There is a time and a place for it," says Rob Clifford of broker Mortgageforce. "It's a valuable facility in terms of bridging the affordability gap and perfectly appropriate for many" - particularly those who can be sure of salary increases or who have put down a deposit of least 10 per cent.
The key is to ensure you move to a repayment deal as soon as you can afford it, and before the low monthly outgoings get too comfortable. "An interest-only mortgage is a two- to five-year arrangement," says Mr Clifford.
David and Antonietta Lunn, from Mitcham in Surrey, remortgaged from a repayment loan to a £200,000 interest-only flexible mortgage with Nationwide building society. This is a two-year fixed-rate deal at an interest rate of 4.55 per cent and, importantly for the couple, it allows overpayments of up to £500 each month.
"This is helping us to reduce our capital more quickly," says David. "Our monthly mortgage commitments have gone down but we are now in control of how much we pay back each month because we can make overpayments if we want to."

We are at the end of a very dangerous and desperate market. The only thing preventing the market from collapsing on itlsef if the increasing number of risky loans the VIs are being forced to make to keep the plates spinning. There is, indeed, a bumpy road ahead as Merve the Swerve pointed out very recently.

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Another sign of the markets desperation to keep things moving on as if nothings wrong.

It would be interesting to know how many people in 2006 have so far taken IO mortgages. I have a friend who has just taken one out on a flat as a BTL. I tried to talk him out of it, but he is so convinced that he will be seeing 5%-8% growth each year and thinks he will have some nice equity and a higher rents in a few years so he can switch to repayment.

Its this kind of mentality plus the scare tactics of EA's who keep quoting growth in the market that trigger people into feeling they need to get on the gravy train before prices go even higher. The introduction of 35-40 year mortgages also further tips the scales of people not managing risk properly in relation to their futures and the future of the economic cycles on the UK.

Its beggers belief that whilst the FSA has been strengthing overall financial regulation on the UK, there is nothing in place to stop people taking such huge risks with such large sums of money.

AFP

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This topic is close to home for me, since I have just backed-off from signing an IO mortgage at the last minute - I wonder how many going this route will have the financial wherewithal/self-discipline to overpay substantially/often; if you DON'T do this, your interest payments will remain very high - the more I lived with this prospect, the more it stank - it just amounts to taking a huge gamble on rising incomes(possible)/prices(unlikely, IMO) -better to save that money now & get a better deal later..

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This topic is close to home for me, since I have just backed-off from signing an IO mortgage at the last minute - I wonder how many going this route will have the financial wherewithal/self-discipline to overpay substantially/often; if you DON'T do this, your interest payments will remain very high - the more I lived with this prospect, the more it stank - it just amounts to taking a huge gamble on rising incomes(possible)/prices(unlikely, IMO) -better to save that money now & get a better deal later..

Welldone dude. Self-discipline is something that seems to be in short supply in relation to money matters with a great number of people. We have MEW ar record levels, total debt at record levels, people committing suicide because of debt, credit card offers coming out of our ears, 0% apr deals on everything available and a nice amount of hidden inflation (things like council tax and petrol). But despite all this people keep spending, borrowing and the 'keep up with the Jones' mentality in well and truly in control and over-riding alot of self-discipline.

Better deals will come and if you can keep saving to increase your deposit when the time comes then you will be in an even better position as the reduced capital amount of the loan will cut the interest you pay over the term of your mortgage substantially.

AFP

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"You could find that 10 years into the term, people suddenly realise they have made no provision and have to repay a 25-year mortgage in 15 years," warns Nick Gardner of broker Chase de Vere Mortgage Management. "This would mean a potentially unaffordable rise in repayments."

David and Antonietta Lunn, from Mitcham in Surrey, remortgaged from a repayment loan to a £200,000 interest-only flexible mortgage with Nationwide building society. This is a two-year fixed-rate deal at an interest rate of 4.55 per cent and, importantly for the couple, it allows overpayments of up to £500 each month.

"This is helping us to reduce our capital more quickly," says David. "Our monthly mortgage commitments have gone down but we are now in control of how much we pay back each month because we can make overpayments if we want to."

[/indent]

We are at the end of a very dangerous and desperate market. The only thing preventing the market from collapsing on itlsef if the increasing number of risky loans the VIs are being forced to make to keep the plates spinning. There is, indeed, a bumpy road ahead as Merve the Swerve pointed out very recently.

Am I wrong here, but isn't this geezer making it harder for himself by accelerating when the capital sum will be repayable.

The lenders are taking the mickey by asking him to overpay on interest only aren't they.

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Am I wrong here, but isn't this geezer making it harder for himself by accelerating when the capital sum will be repayable.

The lenders are taking the mickey by asking him to overpay on interest only aren't they.

These overpayments do actually get deducted from the capital balance of the loan and the next day the interest adjusts to the reduced capital balance. A nice idea, but lets face it, holidays, christmas, new car, new washing machine etc etc will all be excuses to miss 'this months' overpayment.

AFP

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Guest mattsta1964

This topic is close to home for me, since I have just backed-off from signing an IO mortgage at the last minute - I wonder how many going this route will have the financial wherewithal/self-discipline to overpay substantially/often; if you DON'T do this, your interest payments will remain very high - the more I lived with this prospect, the more it stank - it just amounts to taking a huge gamble on rising incomes(possible)/prices(unlikely, IMO) -better to save that money now & get a better deal later..

Well done. You will not regret your wise decision. It might take some time for you to reap the benefits but you did the right thing. Bank whatever money you can save, find somewhere nice to rent, sit back, pipe n slippers, and enjoy! :D

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These overpayments do actually get deducted from the capital balance of the loan and the next day the interest adjusts to the reduced capital balance. A nice idea, but lets face it, holidays, christmas, new car, new washing machine etc etc will all be excuses to miss 'this months' overpayment.

AFP

So there is no need to change to a repayment mortgage, just overpay when possible.

I did not realise that, thanks for the info.

Seems to be a pretty neat idea for those having difficulty paying at present, assuming all goes well of course, but as you say, the lure of good living produces rose tinted blinkers.

IOs are a good tool for the financially disciplined.

All said & done, as property in london is traditionally higher than up north, & property generally rises over a long period, it may be a good move to IO to completion in london with plans to retire up north somewhere substantially cheaper, using the equity to finance a downsized home, maybe even with some spare.

The property divide is certainly fuelling the 'my house is my pension' scenario.

I guess to add to woes are so many more people will be bequeathed houses in parents wills than previously, enabling them to fuel another house price rise in the future with their 'windfalls'.

If anybody is left to buy them of course.

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Let's be honest, interest only loans sound pretty desperate. Inflation is not particularly active in eroding away the capital. I knew people panicking that their endowment was 5k short a few years ago.

It looks as though this house price boom will outperform all of our expectations. You can just see all the signs - the frenzied attempts to get in at any cost, the "last chance ever to buy" mentality. If there hasn't been a crash yet, then it looks like we are headed for an almighty bang when it does go. Panic and fear are emotions that bode ill for a good decision.

I don't believe for one minute that this is sustainable. Remember the dot com boom when everyone was talking about the 'new paradigm'. I'm not saying this is the same, but we seem to be headed for it.

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Let's be honest, interest only loans sound pretty desperate. Inflation is not particularly active in eroding away the capital. I knew people panicking that their endowment was 5k short a few years ago.

It looks as though this house price boom will outperform all of our expectations. You can just see all the signs - the frenzied attempts to get in at any cost, the "last chance ever to buy" mentality. If there hasn't been a crash yet, then it looks like we are headed for an almighty bang when it does go. Panic and fear are emotions that bode ill for a good decision.

I don't believe for one minute that this is sustainable. Remember the dot com boom when everyone was talking about the 'new paradigm'. I'm not saying this is the same, but we seem to be headed for it.

Have to agree, to an extent.

IO being taken as a carefully considered financial decision in anticipation of market movement is one thing,

IO as the only affordable option appears to spell short term heartache, but there is still no reason why as a long term carefully handled prospect it will not pay dividends.

It's just a matter of opinion.

Those buying at the peak of the last boom were considered 'foolish' then, but now they 'bought at the right time'.

Of course, the folk who bought earlier 'bought at the righter time'.

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  • 336 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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