Interest rates will rise faster and higher than anyone expects

DervProf

chucky wrote: »

i'm happy all the toys are back in the pram now...

sums... it's like explaining something to a 6 year old here...

for each 1% on a £150k mortgage is £1500 in interest - if you can earn just 1% more on your savings it's well worth doing.

switch from repayment to I/O i believe it's very cheap to do or even free.

i await the tangents from the usual suspects...

That is understood.

Now, let's say someone has a £150K mortgage, say a couple of years ago.

The mortgage rate is, what, 3% ?

They have some savings, £12K.

Would it have been worth them switching to IO ? Would thay have done it ?

DervProf

Graham_Devon wrote: »

Indeed, the article stated, specifically, as did the FSA, that they had been switched by their lenders due to payment difficulties. However, we are supposed to ignore that, as the FSA was confused and the journalist was misinformed.

No, the real reason that lots of people switched to IO and started saving the money they're not repaying in savings accounts that earn more than their mortgage interest.

Who do we believe, chucky, or the article ?

I think the article has to be taken with a pinch of salt. chcuky's idea has to be taken with a bucket of the stuff.

RenovationMan

DervProf wrote: »

I think this discussion is based more around people who have not taken out mortgages from "sub-prime" lenders.

May I ask if the mortgage you took with your previous provider was a "normal" mortgage, or was it a product that included the facility to switch between IO and repayment ?

As far as I know, most mortgage products allow you to switch between IO and repayment, at least those from the mainstream lenders. As I said before, I assume that the banks have some sort of criteria (especially these days) that someone has to pass in order to switch.

My missus volunteers at CAB 2 days per week and during a discussion about her clients who were in debt, I mentioned that "the first thing I would recommend would be to go interest only to give them some wriggle room". She told me that many of them are prevented from doing this by the bank. I guess if you have any defaults on your credit record, the bank will decide that they want their debts repaying first rather than to allow the person to go onto IO and repay debts from other financial institutions.

Out of interest I am currently googling Santander's T's & C's to see where they stand on switching between IO and repayment. If I find anything I'll post it on.

DervProf

chucky wrote: »

sums... it's like explaining something to a 6 year old here...

Anyone can work out (well, they don't even need to work it out really) that if you can earn 10% in savings, and borrow at 1%, then the savings will pay for the loan. When the figures are closer, then it might still be that it pays to switch to IO, but is the saving really worth it ? Do lots of people really do this ?

DervProf

RenovationMan wrote: »

As far as I know, most mortgage products allow you to switch between IO and repayment, at least those from the mainstream lenders. As I said before, I assume that the banks have some sort of criteria (especially these days) that someone has to pass in order to switch.

My missus volunteers at CAB 2 days per week and during a discussion about her clients who were in debt, I mentioned that "the first thing I would recommend would be to go interest only to give them some wriggle room". She told me that many of them are prevented from doing this by the bank. I guess if you have any defaults on your credit record, the bank will decide that they want their debts repaying first rather than to allow the person to go onto IO and repay debts from other financial institutions.

Out of interest I am currently googling Santander's T's & C's to see where they stand on switching between IO and repayment. If I find anything I'll post it on.

I'm not so sure that lenders, post credit-crunch, have been so willing to allow switching to IO under normal circumstances. However, times have changed in the past decade or so, and I know that IO has become more widely available and widely taken up.

RenovationMan

DervProf wrote: »

I'm not so sure that lenders, post credit-crunch, have been so willing to allow switching to IO under normal circumstances. However, times have changed in the past decade or so, and I know that IO has become more widely available and widely taken up.

No, you're right with your first statement, post-credit crunch they have tightened up the criteria. From googling Santander's admin charge I saw a lot of info about lenders restricting IO. Santander stated that they would withdraw IO from existing customers who had less than 25% LTV and put them onto repayment mortgages.

With such strict criteria, I can't see how we can see a rise in people moving to IO mortgages because they are in financial strife.

DervProf

Thinking out loud......

£200K repayment mortgage @ 3%

£50K in savings @ 4%

Switch to IO and the mortgage payments go down. The money not being paid can be put into the savings account. That, in theory, makes the idea seem good. I think I`ve been a bit generous with the savings rate there, as to get that kind of rate you have to take an NS&I cert*, which only allows up to £15K per issue, and you have to keep your money in there for at least a year before you earn any interest. You could invest in funds, but they carry risk. Cash ISAs only allow just over £5K per year, and unless you tie your money up, you will struggle to get much over 3% in reality.

If the above example were my situation, I don't see much reason to switch to IO.

If the above example showed savings of £3K, and my income had dropped due to lack of overtime at work. And given that the cost of living (food, petrol etc) had increased a fair bit over the past couple of years, would a switch to IO be because I am struggling financially, or would it be because I can earn more on my savings ?

Far fetched, or reasonable examples ?

* Not forgetting that the return on NS&I index linked certificates is variable. Good returns today might well turn into poor returns in the not too distant future, should RPI fall.

Graham_Devon

RenovationMan wrote: »

With such strict criteria, I can't see how we can see a rise in people moving to IO mortgages because they are in financial strife.

There is a difference here though. You are talking about someone with a mortgage simply opting for IO, through choice. Which, someone can still do if they have 25% equity.

The article talking about the 300,000, were BEING switched. Not because they wanted to. Because it allowed for the mortgage to be serviced, instead of defaulted on.

Don't take too much notice of the savings aco!!!! argument. We were just trying to get chucky to actually give proof of his assertions, or even just the sums to prove it could work....as we believed he was simply making things up, which, I have to say, is still my beleif. 3 pages later and were still no further forward with any proof, or a set of sums.

RenovationMan

Graham_Devon wrote: »

There is a difference here though. You are talking about someone with a mortgage simply opting for IO, through choice. Which, someone can still do if they have 25% equity.

The article talking about the 300,000, were BEING switched. Not because they wanted to. Because it allowed for the mortgage to be serviced, instead of defaulted on.

Don't take too much notice of the savings aco!!!! argument. We were just trying to get chucky to actually give proof of his assertions, or even just the sums to prove it could work....as we believed he was simply making things up, which, I have to say, is still my beleif. 3 pages later and were still no further forward with any proof, or a set of sums.

I drifted onto here and saw the ISA discussion and joined in. With the IO stuff, I haven't read the report, I was just following on from what had been posted previously by Derv. Its difficult to understand how so many people are being moved to IO because of their debts when so many providers are putting restrictions on doing this very thing?

As my current deal has a further 2 years to go I have not been keeping up with the latest news on mortgages, but what I read while googling just now bears out what my missus was saying about switching to IO mortgages for people in financial trouble. There are so many VI's within these reports that it's difficult to know what the truth is these days.

wotsthat

DervProf wrote: »

I'm not so sure that lenders, post credit-crunch, have been so willing to allow switching to IO under normal circumstances. However, times have changed in the past decade or so, and I know that IO has become more widely available and widely taken up.

I have normal circumstances (up to date payments etc.).

I don't know about IO but Nationwide will allow me (for £20) to extend my repayment mortgage to my normal retirement age. I'm seriously considering this and withdrawing my overpayments to take advantage of the differential between mortgage rate and savings rate.

Without even shopping around I can get a differential of 0.6% between mortgage and savings. It's not much but worth £150 - £200 risk free in my pocket as opposed to someone else's and with 10 minutes work involved.

I'm not sure that everyone is as motivated as me to save money but I believe that lots of normal people are using IO in the same way.

Some people are clearly struggling with mortgage payments and moving to IO but it doesn't take much digging to find that headlines of "300,000 struggling with mortgage payments" are lazy journalism.

I posted a link earlier in the thread showing current mortgage average is £109,000 at an average of 3.25%. That's a monthly interest payment of £295 with an additional £90.83 interest required for each 1% rise in mortgage rates.

To me this all looks pretty affordable. If there were really as many people struggling as the headlines would lead us to believe then people would make sacrifices to make mortgage payments. I'd find it incredible if 300,000 were so strapped that they were moving to IO without first, for example, cancelling their Sky package. Sky don't seem worried.