Is 125% Mortgage an Endowment in Reverse?

AndrewSmith · 5 June 2006 at 7:01PM

Having been asked many times for my opinion or advice on mortgages of 100%+ recently, I have been giving some thought to the products on offer and have come to the following conclusion.

I think a lot of the problem with these 100% + products is that they are, by some, sold in a similar way to the stories we hear about how Endowment policies were sold in the 80's-90's.

Endowments came with the promise of 'a tax free cash surplus lump sum to buy your boat, have your world cruise' etc etc.

Maybe I am being a bit too cynical here but are these 125% mortgages kind of doing the same thing, except they are working in reverse and are offering you the cash up front under the auspices of 'furnishing your new home or adding that much needed conservatory', then saddling you with a debt for the next 25 years and leaving you with a struggle if the property values do not increase to cover it?

One has to wonder if :

a) Is this really considered to be 'responsible lending'?
b) Is it 'best advice' for a broker/bank to recommend one.
c) Are we looking at the infancy of the next big 'mis-sale', the claims of which we will be witness to 2-3 years down the line when those who took the products are then trying to sell their property to upsize and having problems clearing the debt, and having problems gaining enough mortgage next time due to the large unsecured element of these products?

Mmmm just a though, what do you all think? I would really appreciate other's (constructive) Views on this.

Any views Martin?

meanmachine_2 · 5 June 2006 at 7:14PM

Sadly, the sort of people who'll go for these negative equity mortgages are exactly the ones who'll fail to see why it's a bad thing - potentially.

I don't see how they can be "missold" though. It's a 95% mortgage - yes, understand that - with a 30% unsecured lump sum on top, repayable over the term of the mortgage. Simple.

Also, I suspect that many people who takes these out won't have gone near a broker in the first place, but will have gone straight to the bank in question, since they're such a visible product.

AndrewSmith · 5 June 2006 at 7:23PM

meanmachine wrote:

Sadly, the sort of people who'll go for these negative equity mortgages are exactly the ones who'll fail to see why it's a bad thing - potentially.

I don't see how they can be "missold" though. It's a 95% mortgage - yes, understand that - with a 30% unsecured lump sum on top, repayable over the term of the mortgage. Simple.

Also, I suspect that many people who takes these out won't have gone near a broker in the first place, but will have gone straight to the bank in question, since they're such a visible product.

That's exactly my fear. The fact that the banks will sell them as a 95% mortgage with the 30% bolt on 'Therefore it doesnt matter if your property value doesnt increase dramatically over time as you are not going to be in negative equity'. I can hear the bank's salesmen saying it now.

Re mis-sale: I remember back in the 90's being told by my line manager 'as long as you tell the client that the value could fall as well as rise and nothing is guaranteed, they cannot ever say that the Endowment is being mis-sold' or words to that effect. In reality I would think that a large number of endowment clients were actually told that the value was not guaranteed and that bonus rates could drop as could unit prices, however the point is proving it. It would cost the insurers far more to prove their innocence in most cases than to simply pay up. I am not saying that Endowment claims should not be made, my other half recently got awarded £4,500 from Abbey for hers.

I can just see that in a few years there will be complaints made as the level of unsecured borrowing attached to these mortgages will have a dramatic detramental effect on the clients future borrowing capacity.

Andy

Bernard_Coleslaw · 5 June 2006 at 7:23PM

meanmachine wrote:

Also, I suspect that many people who takes these out won't have gone near a broker in the first place, but will have gone straight to the bank in question, since they're such a visible product.

I think a lot of these are sold by intermediaries (I hesitate to use the term "broker"

) based in Estate Agents, as they're so intrinsically tied into sales to young, pliable first time buyers.

ManAtHome · 5 June 2006 at 8:10PM

Let's not get too tied up with the term 'mortgage' though - these are really just massive consolidation-type loans with a great deal of inertia built in. The bank has some risk coverage as they're likely to get at least 60%+ back whatever happens as opposed to 0-20% fo an unsecured loan. Must also be much more difficult to move to another provider until you've had several years of pay-rises.

Another move towards "of course you can have a loan, we just need you to sign this transfer-of-soul agreement..."

Arch-Angel · 5 June 2006 at 8:22PM

There are valid points being made here, however, in the right circumstances could a 100% mortgage be a good deal?

Take my situation: I can either save for the 5%+ deposit have a 95% mortgage. Or I could have a 100% mortgage and use the deposit (excluding the money for fees etc.) to clear off existing debt. The latter method for me personally would have me debt free (aside from the mortgage) with ease within 6-9 months of taking a 100% mortgage.

The short term gains - by working this way - however, are offset by the fact that the interest rate for the mortgage will be higher; in the long run I'll be worse off. But, if I made overpayments (I'm now debt free remember?) this may not be such a big issue.

If this is too simplistic, sorry - I've got enough things to understand as a FTB as it is!!

AndrewSmith · 5 June 2006 at 8:23PM

ManAtHome wrote:

Let's not get too tied up with the term 'mortgage' though - these are really just massive consolidation-type loans with a great deal of inertia built in. The bank has some risk coverage as they're likely to get at least 60%+ back whatever happens as opposed to 0-20% fo an unsecured loan. Must also be much more difficult to move to another provider until you've had several years of pay-rises.

Another move towards "of course you can have a loan, we just need you to sign this transfer-of-soul agreement..."

Again I am in complete agreement with you. One of my main points is that although these are marketed as 95% mortgage with 30% unsecured loan, it will dramatically reduce your future borrowing power on a mortgage unless you can raise sufficient on sale to repay the whole debt.

I am deeply frustrated by the fact that lenders are allowed to subject first time buyers to this. What ever happened to responsible lending?

Thaks so far for all your thoughts everyone. Keep them coming

Andy

AndrewSmith · 5 June 2006 at 8:26PM

Arch-Angel wrote:

There are valid points being made here, however, in the right circumstances could a 100% mortgage be a good deal?

Take my situation: I can either save for the 5%+ deposit have a 95% mortgage. Or I could have a 100% mortgage and use the deposit (excluding the money for fees etc.) to clear off existing debt. The latter method for me personally would have me debt free (aside from the mortgage) with ease within 6-9 months of taking a 100% mortgage.

The short term gains - by working this way - however, are offset by the fact that the interest rate for the mortgage will be higher; in the long run I'll be worse off. But, if I made overpayments (I'm now debt free remember?) this may not be such a big issue.

If this is too simplistic, sorry - I've got enough things to understand as a FTB as it is!!

Borrowing up to 100% is, although not ideal, far less harmful than beginning your mortgage life owing more than your property is worth. The ones that really get me are these 125% 'mortgages'.

At least by borrowing 100% you do leaveyourself a fair chance of being able to completely cover the mortgage on subsequent future sale.

Andy

Arch-Angel · 5 June 2006 at 8:40PM

AndrewSmith wrote:

Borrowing up to 100% is, although not ideal, far less harmful than beginning your mortgage life owing more than your property is worth. The ones that really get me are these 125% 'mortgages'.

At least by borrowing 100% you do leaveyourself a fair chance of being able to completely cover the mortgage on subsequent future sale.

Andy

Andy

To be fair we'd probably (OH and me) not get what we need at 100% - 3.25 x our joint income is just short of what we'd really need (we'd need the 5% deposit as well to make the "selection" better!).

However, 125% sounds like madness to me! House prices in a number of areas (including the area we're relocating to) have been stagnant for 12 months; if that stayed the same then it would take some people years to get out of negative equity!

MortgageMamma · 5 June 2006 at 10:51PM

whilst I think there is a place for every mortgage product in todays market, I do actually agree with what you are saying andy, I do think its borderline on responsible lending - I dont want to appear as if I am sitting on the fence, BUT as long as the product is explained properly and compliantly, and the client knows what they are getting into, and you can document it, and they sign to say they have understood it, then there's not much chance of a mis sale.

Also have you seen one particular lenders new rate for these, 6.39% - extortionate and the fee's are sickening

MSE_Martin · 5 June 2006 at 11:42PM

I have huge worries about the 125% type mortgages. Much like I do of secured loans. Of course in the right circumstances (i won't go on here about them - i recognise the people in this discussion are aware of the issues) utilising a 125% mortgage at the mortgage rate to lower the rate of existing debts, and repay it earlier, especially if there are flexible conditions, could be a boon.

Yet it rarely is that, they're simply an envelope pushing form of borrowing, where many young and financially illeterate people are sold into long term debt and negative equity. Should they be banned? No. Should they come with a health warning? Yes sirree!

I would hope most reputable brokers would warn of the dangers of over-extending and caution their clients. Sadly though the majoirty of people taking out these loans aren't going to reputable brokers!

Martin

Is 125% Mortgage an Endowment in Reverse?

Comments

Categories

Get our FREE Weekly email full of deals & guides - and it’s spam-free