Saturday, Jul 22, 2006

Guess the next financial scandal

guardian: Interest-only mortgage crisis looms

Whether house prices drop or not, there's going to be a lot of knackered people in the future.

"There are worrying signs of irresponsible lending by mortgage companies happy to push loans without properly explaining the consequences of taking the interest-only route"

marvellous.

Posted by inbreda @ 08:45 AM (578 views)
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9 Comments

1. Sambino said...

Well Well you mean to tell me all the people with 100% interest only mortages who are struggling just to make the payments are not putting money away to pay the capital at the end of the loan well theres a surprise!! Very irrisponsible by the borrowers and the banks to let this happen but ive suspected this would happen for a while

Saturday, July 22, 2006 09:27AM Report Comment
 

2. Mrmickey said...

I was on a flight recently and got chatting to a women in her mid 50's. She had meet somebody on another flight who had recommended a financial advisor to her. He got her to extent her current mortgage of 27K to 80K use this as a deposit on two BTL's then borrow an additional 250K of interest only morgages to buy the properties. She's single and works part time in MFI oh and paid 1000 for the se pearls of wisdom. When I asked her if the financial advisor had explained the risks involved all she said was had I ever known house prices to crash, at this point I gave up the will to live.

Saturday, July 22, 2006 10:33AM Report Comment
 

3. Jolo said...

The trouble is a lot of young FTB's don't understand what a mortgage is or what types there are. With interest only all they hear is they can save 150+ a month. they don't hear the fact interest only last's for just the early part of the morgage. i think advisors should go out of their way to fully break down what it means. i`m sure some do, But i'm also sure most don't. I truly feel for a lot of young people who were just too desperate and couldn't wait a bit longer. Tears? the country will be flooded.

Saturday, July 22, 2006 11:11AM Report Comment
 

4. sebastian said...

I have spoken to friends about how they intend to pay of the capital at the end the response is usually that they plan to take out another mortgage...

Saturday, July 22, 2006 11:51AM Report Comment
 

5. Surfgatinho said...

I really can't see that much difference between an I/O mortgage and renting. Except renting is better value for money and has no risk attached

Saturday, July 22, 2006 12:02PM Report Comment
 

6. Dave Lammi said...

My sister was told: The price of the house will increase, so you sell it in five years and use the money to put a deposit on a smaller house!

It didn't make sense to me either.


I advised to stay put and save the cash difference between her rent and what an IOM would be.

Saturday, July 22, 2006 12:04PM Report Comment
 

7. Paolo88888 said...

The slant behind this article is a bit over dramatic. Buying a house with an interest-only mortgage is basically renting - the mortgage will have to continue until they die, as would monthly rental payments. Borrowers are directly exposed to variations in house prices, but this doesn't matter if they only ever sell to move to a similar property elsewhere. One difference is that the borrowers have more control and responsibility over maintenance of the property.

Suppose that this borrower/renter also saves. This saving could be "pension contribution", "investment", "mortgage repayment" or "endowment policy". One can argue all day about which one is best - pensions have best tax relief, studies have shown that shares are the best form of investment, repayment mortgages are simple and low-cost, (can't think of any arguments for the endowment policy). But they are called "interest only", "interest only", "repayment mortgage" and "endowment mortgage". Renters only have the first two options. I think the article is wrong to blame interest-only mortgages for peoples financial problems. These come only from a basic shortage of money.

Saturday, July 22, 2006 01:58PM Report Comment
 

8. sirgoogle said...

Even at the peak of the boom in the late 80s/ early 90s we had to have some vehicle to pay off the capital!! Unfortunately because endowments suffered so much in the last stock market crash, nobody trusts this as a mechanism to repay the capital.

The expectation illustrated by Dave L above however that the increasing house price will effectively pay off the capital is crass stupidity as this is pure oxygen for a bubble.

If people fall for this one then the education system is truly failing us as we obviously have a population of morons being churned out from the schools.

Saturday, July 22, 2006 06:24PM Report Comment
 

9. bidin'matime said...

But SirG - this is what underpins almost everyone's logic these days. Forget schools - the same argument can be heard from people closer to retirement than school days (inlcuding, or possibly mainly, the BTL brigade who are approaching retirement and havent put enough away and think that the property will not only pay off the mortage, but will give them an income and a big lump sum as well!).

Sunday, July 23, 2006 08:54PM Report Comment
 

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