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Interest Only Mortgages

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Ive read on several web sites that interest only mortgages will soon be withdrawn and borrowers can be switched on to repayment mortgages without any come back, anyone know if this is true ?

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Guest The_Oldie

IO mortgages have been available for many years, but it's only in the last few years that they've been sold without the need for some kind of repayment vehicle.

I would think they'll continue to be available if backed by a suitable life policy or the like.

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Ive read on several web sites that interest only mortgages will soon be withdrawn and borrowers can be switched on to repayment mortgages without any come back, anyone know if this is true ?

if things do change I would imagine the first step would be to stop selling new IO mortgages rather than switching people who may have appropriate savings schemes geared to mature over 25 years.

Edited by starsign

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I've no info, sorry... but something to mention about IO mortgages...

When I looked, back in 2004, at getting a mortgage and buying a place, I did my due diligence and researched my options. I expected that within my medium-term future I would expect greater volatility in income than the average person... i.e. an irregular income seemed plausible. While all around me were looking for 100% IO mortgages with fictional repayment strategies... I had an extremely concrete repayment strategy. My plan was to work very hard and establish reapayment in full within 10 years. I did not, however, want to be held to this plan... since it would have left me with no room for errors or unexpected expenses. I soon discovered that an offset mortgage suited my needs - since, that way, I could maximally benefit from repayments when I was able. For an offset mortgage, interest only makes perfect sense... that way, for example, I'd be free to make a lump-sum repayment in January, say - rather than keep money aside for incremental repayments each month. Similarly, because the mortgage was offset, the most advantageous loan-to-value that I could arrange would be 100% - which would be vaguely similar to agreeing a large overdraft facility... the only circumstances that would see me with less than 30% repaid, for example, would be a serious situation... and if I had access to draw down on over-payments, I could probably have been 40% LTV from the outset.

I ramble...

I think the point that I'm making is that for all the financial innovation that went on with mortgages, it was never to offer the customer something that would help minimise the bank's risks... in fact, it seemed as if every policy at mortgage lenders was solely designed to maximise the likelihood of a default. I guess that's because they'd get paid again if I needed to "re-finance" or take on other short-term borrowing to overcome a "liquidity" problem owing to prior over-payment.

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IO mortgages have been available for many years, but it's only in the last few years that they've been sold without the need for some kind of repayment vehicle.

I would think they'll continue to be available if backed by a suitable life policy or the like.

That's the key point - the repayment vehicle, whether that vehicle is successful or not it has certainly been the situation for a considerable time that the lenders were not bothered if no vehcile was in place, no doubt yet again skewed by the fact that the liability has been sold on and some other mug would find out at some point that living on margin for a prolonged period of time only increases the likelihood of default.

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I have heard that interest-only mortgages will cease to be issued. Those who currently have them will not be offered them again when they re-mortgage and will face much higher monthly bills.

- William Rouse, Exeter

Can you get a margin call on an IO? I would assume so...

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It has long been my opinion that IO mortgages have contributed to HPI and the sooner they are abolished the better.

Really they're just a way of punting the housing market, so it wouldn't be surprising to see banks reduce this option in a downturn.

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Can't see banks stopping interest only mortgages. Makes payments easier for people so less likely to default plus some people will never pay their mortgage off so loads more interest payments to the banks.

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Can't see banks stopping interest only mortgages. Makes payments easier for people so less likely to default plus some people will never pay their mortgage off so loads more interest payments to the banks.

But in a falling market ...

I'd say 100% I/O is a dead duck, but there's good insentives for the banks to do 50% IO/ 50% repayment. Plenty of deals like that around (or there were last year ;) )

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It has long been my opinion that IO mortgages have contributed to HPI and the sooner they are abolished the better.

I don't see why IO mortgages have contributed to HPI. How so?

I wouldn't (and don't) have one on my own house, but for an investment property, it makes perfect sense. You can always sell the place(s) later on, why is better to pay the loan off early if you don't want to?

Any move to force repayment loans on people to me smacks of nannying people. People don't need nannying. They are adults. There seems to be a lot of people on here who are all in favour of some "they" who need to tell us what is good for us. How much we may borrow, at what rate, for what period, and how we must repay it.

I would rather be treated as an adult, who can judge financial risks, than be treated like an overgrown kid, who needs a sensible grown-up to tell him how he must spend his money.

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While IO mortgages have added to HPI, who's to say that they'll get withdrawn. It seems to me that they're one way for people with unaffordable mortgages to keep their house for a few years while trying to improve their situation.

I don't think the banks will withdraw them so long as the mortgages are being paid (an IO mortgage is after all very lucrative for the bank who effectively becomes your landlord). I doubt that things will turn nasty for at least a year so IO will be around for a while. When things get hairy I expect IOs will remain for those with better credit records.

The only thing that might change this forecast is the market crashing very badly and very quickly (30% in 12 months) which I don't think is likely. I this event then legislation might have to be put in just so the politicos can say they've done something.

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People used to have to have endowments but they didn't work ...

So how do you pay it back? IO must end surely.

It makes more sense to stop these than ask for big deposits.

But I'm in favour of them insisting on real cash deposits. None of that mickey mouse other loan stuff.

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Can't see banks stopping interest only mortgages. Makes payments easier for people so less likely to default plus some people will never pay their mortgage off so loads more interest payments to the banks.

IO mortgages only make any kind of sense to a lender in a rising market. In a falling market the banks would be more secure with the borrowers making a payment contribution towards reducing the capital. This of course increases the monthly repayment so effectively reduces the amount the borrower can borrow.

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I don't see why IO mortgages have contributed to HPI. How so?

As the monthly payments are on IO mortgages are lowe than a repayment mortgage, and the cost of the house people buy is ultimately dictated by how much they can afford per month, they can theoretically afford a more expensive house which applies upward pressure on prices. It has also become common practice to compare rents to IO mortgages as a comparisson between buying and renting.

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A close friend of mine is the Head of Retail Credit Risk Appetite at Barclays. He told me this morning that the Executive Comittee are finally taking action to mitigate the high risk retail credit portfolio ie. BTL, interest only and credit cards. He's putting a report together at the moment and he is actually very risk averse, so I can only see it going one way....they are going to cut back massively on lending in these areas. I'm sure all the other banks will be doing the same thing as well.

Barclays high risk retail credit portfolio is pretty good quality compared to many of the other lenders, because their max LTV has been 90% rather than 100% or 125%. Northern Rock, Bradford & Bingley and Alliance & Leicester obviously have the worst portfolios. Credit standards are only going one way from here and that is a massive tightening, so I would certainly expect most interest only products to be withdrawn over the next few months.

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in fact, it seemed as if every policy at mortgage lenders was solely designed to maximise the likelihood of a default. I guess that's because they'd get paid again if I needed to "re-finance" or take on other short-term borrowing to overcome a "liquidity" problem owing to prior over-payment.

whilst it may be true, IMO, this is the most bizarre conspiracy theory. I don’t imagine the banks count on customers defaulting to sell more products.

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It has long been my opinion that IO mortgages have contributed to HPI and the sooner they are abolished the better.

IO mortgages have been around much longer than the current house price bubble though...

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IO mortgages have been around much longer than the current house price bubble though...

Yes - they were the whole foundation of the endowment debacle. Interest only mortgage plus contributions to a with-profits endowment policy which would pay off your debt in 25 years time PLUS lots of lovely bonuses so you could celebrate by going on a round the world cruise - ah, I remember it well. Unfortunately something went a bit wrong with the business model....

Seriously, I don't think there's anything wrong with them PROVIDED they are only 75% max LTV and preferably not your main home.

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Yes - they were the whole foundation of the endowment debacle. Interest only mortgage plus contributions to a with-profits endowment policy which would pay off your debt in 25 years time PLUS lots of lovely bonuses so you could celebrate by going on a round the world cruise - ah, I remember it well. Unfortunately something went a bit wrong with the business model....

Seriously, I don't think there's anything wrong with them PROVIDED they are only 75% max LTV and preferably not your main home.

Some figures on the % IO mortgages account for, this gives and idea of recent history but does not compare it to the 1980's or 1990's:

http://www.whatprice.co.uk/advice/interest...-mortgages.html

The Council of Mortgage Lenders' figures are showing a growing trend in interest only mortgages. From January to March 2002, 9% of new mortgages were interest only. Now take the period from October to December 2005, and the amount of new interest only mortgages has risen to 23%. In the same timeframe, the number of first time buyers choosing interest only mortgages has increased from 6% to 15%.

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IO mortgages have been around much longer than the current house price bubble though...

When I bought my first house back in the 80s I was offered a repayment or endowment mortgage as the only two options. I know an endowment mortgage is an IO mortgage with the addition of an endowment policy that was intended to pay the mortgage off at the end of the term. So in effect IO mortgages have been aroundfor a long time but they were always coupled with an additional payment policy. The type we are seeing today without the endowment policy must surely be a relatively new idea, probably one of the inventive ways the financial institutions came up with to keep the bubble inflated.

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I had an IO mortgage on my last house. Never paid a penny of capital back in 5 years (couldn't have afforded it, in fact I had a bit of MEW). Last spring I STR - getting 55% more for my house than my neighbour got for his identical one only 3 months previously.

Last summer I bought a larger house that had been on the market 12 months, so was still at the previous summer's price - so cheaper than the one I STR. No mortgage.

Last January I thought I was worth 300k. Come the end of this year - by the time it's been done up - it'll be closer to 2m.

So I guess I can afford a 50% hpc - I'e got to live somewhere. And IO mortgages rock.

Edited by Telometer

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  • 297 Brexit, House prices and Summer 2020

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