End to Interest Only Mortgages????

Thrugelmir

treliac wrote: »

This illustrates our experience and my feelings about our predicament with the Pru: http://www.thisismoney.co.uk/savings-and-banking/article.html?in_article_id=320146&in_page_id=7&in_a_source=Mail%2520on%2520Sunday#

Fortunately the FOS agreed with us but it was a long hard fight to the bitter end before we got some compensation. And it left us permanently disadvantaged from the devastation of paying interest on the whole mortgage loan for many years and then having to start again from scratch - as if we'd never had a mortgage, which is what I meant by 'renting' - when we eventually understood our predicament and changed to a repayment mortgage.

Okay, if some want to gamble and understand what they're doing ... fair enough. But we didn't and I believe fervently that young people need protection from their lack of financial knowledge/understanding and even their own foolishness.

I wish we'd had greater protection. We were easy meat and we've paid for it ever since.

I fully understand where you are coming from. I had the misfortune to save with Equitable Life (pension ) for a number of years. My employer at that time contributed as well. As amongst the "sharks" in the financial services industry I thought EL was a properly run business. How wrong could I be.

What many people fail to understand it is they are in fact the prey. The financial institutions need to be regulated. As in whatever form it takes the customer pays. Whether its higher product fees, higher interest, lower savings, higher management fees, increased FSA levy's etc.

So its great to argue that people should borrow what they want to. But when the defaults hit. People scream that gross bank margins are too high. A competitive environment requires tight control to benefit everyone. As even the good banks have had to contribute to the FSA to bail out out the losses for money paid to depositors.

treliac

Thrugelmir wrote: »

I fully understand where you are coming from. I had the misfortune to save with Equitable Life (pension ) for a number of years. My employer at that time contributed as well. As amongst the "sharks" in the financial services industry I thought EL was a properly run business. How wrong could I be.

What many people fail to understand it is they are in fact the prey. The financial institutions need to be regulated. As in whatever form it takes the customer pays. Whether its higher product fees, higher interest, lower savings, higher management fees, increased FSA levy's etc.

So its great to argue that people should borrow what they want to. But when the defaults hit. People scream that gross bank margins are too high. A competitive environment requires tight control to benefit everyone. As even the good banks have had to contribute to the FSA to bail out out the losses for money paid to depositors.

Thanks Thrugelmir.

Many of us have been ripped off in the past and still bear the scars. I'm wiser now but I still hurt for the way we thought we were doing the right thing but were taken in. Most of us don't understand so much until it's too late! We've survived but family life would have been much easier and more fulfilling if we hadn't come this route.

When the defaults hit, the banks seem able to save themselves (in collusion with a weak and self-seeking government) but heck, we're all paying for the folly and we're going to have to pay for it for how ever long ... it doesn't bear thinking about.

Back to my instinctive premise - greed and foolishness need to be controlled by regulation - in the best interests of all of society.

HAMISH_MCTAVISH

Thrugelmir wrote: »

Explain how banks return a net 3% (bottom line profit) on lending ?

By being greedy....

(and it's not net, it's gross, but the previous average was a gross figure of 1.2%)

The margins on the average two-year fixed rate deal has risen from 1.19 per cent above the two-year swap rate - which is the rate that lenders use to price their fixed rate mortgages – at the beginning of April last year to 2.41 per cent above the rate today, Moneyfacts said.

Despite two-year swap rates dropping by 3.03 per cent since the beginning of last October, the average two year fixed rate mortgage has been reduced by just 1.64 per cent over the same period, it said.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5144438/Banks-accused-of-profiteering-as-they-triple-mortgage-margins.html#

That article was from April.

The swap rate has reduced significantly since then, but mortgages have remained almost as high. The current margin is around 3%.

chucky

Thrugelmir wrote: »

Explain how banks return a net 3% (bottom line profit) on lending ?

i think that Hamish is talking about specifically fixed rates.

the difference between the offered rates to the customers and current swap rates is between 3% and 3.5% at the moment. some of the less harmed banks from the credit crunch have smaller margins - by that i mean HSBC.

michaels

But who decides which options we should have as individuals and which options we shouldn't have because we are too stupid to chose the right one?

Where does a society end up once some group decides they are the arbiteurs of what is best for the citizens and rather than trying to recommend they start to dictate?

In the context of this conversation what is suggested is that 'nanny' knows better than some people which are unsuitable ways to borrow money for them and must therefore impose rules to stop those people doing what is not in their best interest.

I would argue that whilst nanny may be 'correct' for most it should be for us as individuals to make our own mistakes if we want to. The only exception would be if the decisions of individuals imposed some 'externality' on others, in the banking example the externailty is the costs of public support to prevent systemic failure but I would have thought this danger could be handled at the level of the institution rather than by trying to micro-regulate individual transactions?

Thrugelmir wrote: »

You were able to choose because the option was there. Whilst it is suitable for some, it is not for all.

I fail to see what your comments have to do with a properly regulated banking system.

silvercar

HAMISH_MCTAVISH wrote: »

Ummmm not quite.:rolleyes:

Banks today are averaging closer to 3% margins on mortgage lending.

So to cover that loss of £26,000, they now have to issue just £860,000 in lending... or only around 5 or 6 average size mortgages.

And lets not forget that modest amount of lending would cover the loss of £26K in the first year alone.... Leaving the returns for the next 24 years as profit.;)

Even in repossession, the bank stands a reasonable chance of getting all the money back and an excellent chance of getting some of the money back. Even a property wrecked by the owner before repo will be worth something.

chucky wrote: »

i think that Hamish is talking about specifically fixed rates.

the difference between the offered rates to the customers and current swap rates is between 3% and 3.5% at the moment. some of the less harmed banks from the credit crunch have smaller margins - by that i mean HSBC.

Lenders also look to their current lending book where some have loads of money lent on trackers at or near base rate.

treliac

michaels wrote: »

But who decides which options we should have as individuals and which options we shouldn't have because we are too stupid to chose the right one?

Where does a society end up once some group decides they are the arbiteurs of what is best for the citizens and rather than trying to recommend they start to dictate?

In the context of this conversation what is suggested is that 'nanny' knows better than some people which are unsuitable ways to borrow money for them and must therefore impose rules to stop those people doing what is not in their best interest.

I would argue that whilst nanny may be 'correct' for most it should be for us as individuals to make our own mistakes if we want to. The only exception would be if the decisions of individuals imposed some 'externality' on others, in the banking example the externailty is the costs of public support to prevent systemic failure but I would have thought this danger could be handled at the level of the institution rather than by trying to micro-regulate individual transactions?

Good argument and a very difficult call to make. There has to be a balance struck somewhere. We haven't had it right in recent years, hence the correction we're now going through.

There will always be a tension between free rein and protection of the vulnerable. Ethical business has been thin on the ground though.

Those who govern us decide and ultimately they're answerable to the electorate.

Thrugelmir

michaels wrote: »

But who decides which options we should have as individuals and which options we shouldn't have because we are too stupid to chose the right one?

Where does a society end up once some group decides they are the arbiteurs of what is best for the citizens and rather than trying to recommend they start to dictate?

In the context of this conversation what is suggested is that 'nanny' knows better than some people which are unsuitable ways to borrow money for them and must therefore impose rules to stop those people doing what is not in their best interest.

I would argue that whilst nanny may be 'correct' for most it should be for us as individuals to make our own mistakes if we want to. The only exception would be if the decisions of individuals imposed some 'externality' on others, in the banking example the externailty is the costs of public support to prevent systemic failure but I would have thought this danger could be handled at the level of the institution rather than by trying to micro-regulate individual transactions?

So as a consumer would you prepared to pay 1/2% to 1% more interest per annum to have the flexibility you desire? In that there is addition risk for the lender which has to be factored into the product.

julieq

There is pretty much zero risk for the lender Thrugelmir. The very best you've come up with is that there is risk for the borrower if they haven't figured out at some point there is a need to repay the capital amount, but even then they'll have had the benefit of a house for 25 years at substantially less than the cost of rental.

As I said, these are not interest only loans anyway, the deal is you pay the interest for 25 years and then you pay off the capital amount, rather than staging repayments over time - that agreement is written into the deal and understood by both parties. Before the end of the term the lender is not in significantly more risk via default than they would have been on a staged repayment mortgage, because the amount actually paid off is peanuts.

There are plenty of reasons why a borrower might choose to take the "risk" of an interest only mortgage, not least the calculation that they will be hardest pressed for affordability early in the term before wage inflation has worked to reduce the amount. It's really between the borrower and the lender as to whether this is a worthwhile deal, not the FSA.

As far as endowments go, the shortfalls were announced something like 10 years ago. Again, if people haven't figured out they have to deal with a shortfall that's hardly because no-one has mentioned it, and in 10 years it's pretty easy to cope with a 20K shortfall (hint, stick £150 under the bed every month, take the money from the savings between what you're paying for your mortgage and what an FTB on an equivalent house or a renter is paying).

Some people will still manage to be surprised by the unsurprising, sadly that's a fact of life. But there's no reason why the rest of us shouldn't be allowed to run our finances as we wish, is there?

fc123

Thrugelmir wrote: »

What many people fail to understand it is they are in fact the prey.

I love that ...it's so how I feel too. I think I may have to edit my sig. and add it.

Gen posted something a while back that said something along those lines. Don't trust them as ordinary Joe is just income to them...in the form of fees etc.

OH was always suspicious of those types of investment companies that occupy luxe, glass towers saying...so who/what pays for those?

The internet is changing the balance of power though. I will manage our own pension pot when the rtime comes.
Don't have it sorted now as still got other expenses to pay out (education...yay...8 months to go:D) but the last person on earth I would give it to is a pension fund......I would rather waste it on plasmas, lottery tickets and fags before I did that.