Is 125% Mortgage an Endowment in Reverse?

MarkyMarkD

All the posts on this thread are well reasoned.

125% "mortgages" (and it's been rightfully pointed out that they are structured as 95% mortgage and 30% personal loan, but that's for banking solvency reasons rather than any other) are clearly high risk. They are very similar in their end result to the old "low start" mortgages, which rolled up part of the interest. They are also similar to the naff "pay interest only for 3 years" loan that some supposedly reputable banks offer.

But, as Martin points out, they can be appropriate for people who have huge debts and are paying OTT rates; they can also be appropriate for FTBs who have high income but no assets and who will feasibly be able to reduce the debt to 95% of the value within a reasonable length of time and remortgage elsewhere.

They are obviously a very attractive product for the lender, because there is a very limited market for them and people are, in the main, going to be tied in to the lender for much of their mortgage-paying lives. And that's why lenders can charge rates like the 6.59% MortgageMamma refers to, and stonking fees to boot.

I've had a 100% mortgage in my lifetime, for one of the reasons referred to above; it was expensive at the time, but it was the right thing to do and I'm no longer with that lender (and indeed, was only with them for 6 years or so - and this was in the dark ages before everyone remortgaged every few years). But then, I wasn't a poorly advised numpty who went out and spent the extra 5% on consumer durables (or new BMWs) which I'm sure is what many of the 125% borrowers get involved with.

stanmoresaver

My personal and professional view is that in the right place there is no reason why these shouldn't be appropriate and why shouldn't a particular scheme not be available when it may well be appropriate for someone.

BUT-

Advice is an absolute must and just taking one so that you can have all the stuff instantly in the house that most will have gardually built up is a nonsense but indicative of todays "must have it now" culture.

In answer to Andy's OP- maybe 125% loans are the next "endowment" waiting to happen- but just as there are people (yes there are some!) who really benefited from having an endowment mortgage, there are people who this sort of arrangement will also be right for.

(But probably a fraction of the number that are actually arranged)

SS

AndrewSmith

Thanks all for your very kind and reasoned responses. It is all pretty much in line with my own thoughts.

Maybe I am old fashioned but when I bought my first house I took a second and third job to save for the deposit and furnished it gradually as we went along.

I accept and agree that in a situation where someone has loans with a high interest rate then maybe it is appropriate, however I agree with your point Martin that these type of loans should be issued with some kind of warning, and should have information showing clearly the implications and effect on future possible mortgage applications.

The problem is that these are now being marketed so heavily now that they have become appealing to potential first time buyers for the fact that they can have this surplus cash lump sum to buy the plasma screen or the leather sofa or the new PC entertainment system, all things that a few years back we would simply either do without or save for (god I sound like my father).

I hope that any potential First Time Buyers will read this carefully and understand that just because 125% mortgages are there as an option, you dont have to immediately take it unless for the right reasons. To reduce current outgoings and consolidate, yes that is a valid reason. To furnish your home with the latest stuff an go on holiday to get over the stress of moving (yes, I have heard this being used as a valid reason for a 125% mortgage!!) definately not.

Rant Over, thanks all of you.

:beer:

:T

stanmoresaver

AndrewSmith wrote:

. I hope that any potential First Time Buyers will read this carefully and understand that just because 125% mortgages are there as an option, you dont have to immediately take it unless for the right reasons. To reduce current outgoings and consolidate, yes that is a valid reason. To furnish your home with the latest stuff an go on holiday to get over the stress of moving (yes, I have heard this being used as a valid reason for a 125% mortgage!!) definately not.

Funny that Andy- i've heard that one too!

But scarily enough- how many times have you been to see a client in their new house and it's kitted out like a Laura Ashley showhouse and they over a coffee ask you if there's any chance you can raise them a "few grand" to pay off their credit cards.

:eek:

david29dpo

i am a little confused, if a 125% mortgage consisted of 95% secured mortgage and 30% unsecured loan, how can it be a 125% mortgage? if you pay the first and not the second, they cant take the house can they?

MortgageMamma

dont get me started on debt consolidation SS or I will bore you to death about it for days!

I believe it would be useful if everyone had lifetime credit limit, i.e. one sum, including a mortgage which is the maximum they could borrow at any one point in time and this could not be exceeded. This should be based on current earnings. I think ridiculous companies with stupid APRs such as 30% + should be shut down or heavily regulated and brought in line, I think the penalties for bancruptcy should be more severe, and I think kids in schools should be given GCSE's in personal financial management as a core element.

But that is in an ideal world. and as you guys know I do tend to daydream a lot!

TangentMan

I think the parallel with endowments is that there will be a temptation for a "communal belief". "ah, well you see house prices are always going up. Look they have been going by x in y so, really this 125% lark will take care of itself". Even if no one states that, there will be people willing to believe it as a safety net.

Should these products exist? Well, in reality they would by the back door and probably at higher separate rates (as in MortgageMomma's example with the credit card debts).

The truth is we as a culture are "buy now pay later", whereas previous generations were "save now buy later".

EdInvestor

I think ridiculous companies with stupid APRs such as 30% + should be shut down or heavily regulated and brought in line...

Have you noticed the rates on mainstream credit cards lately?

Joe_Bloggs

@Edinvestor
Payment protection plans on credit cards can add around 10% to the effective interest rate of a card. typical rates are around 75p in £100 borrowed per month.
J_B.

Eels100

I definitely feel that these crazy 100%+ mortgages are going to end in tears and probably retributions.

I've just completed the purchase of my first property without any deposit and was fortunate to secure the property at less than its valuation, giving me a 98.5% mortgage. I'm lucky to be a professional and so receive favourable treatment from banks, and also on an affordability basis I can manage reasonably well with the repayments. The average person of my age in this area would not be able to afford this property (a 2 bed end terrace), and this is where I think we're going to see problems. Young people don't see renting as an option, they feel that they have to buy - and they'll do anything it takes to achieve that. Obviously renting for a few more years in order to accrue some sort of deposit would save them thousands in the long term, but when you're 25 and your trusted family bank manager is wafting 110% and a home to call your own under your nose, you're going to sign on the dotted line.

Far better that these products aren't available at all, to force these people into saving for a while - I really do fear that these young people are risking their futures by agreeing to such nutty borrowing.