Cash-strapped families switch £60bn-worth of mortgages to interest-only

geneer

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/8546531/Cash-strapped-families-switch-60bn-worth-of-mortgages-to-interest-only.html

Whoops....what happened to all the clever bulls paying down their mortgages?

Be warned. Theres a fair bit about the wider economy in the article, and as we know, property bulls would rather not talk about that part of the economic equation.

Analysis of Financial Services Authority (FSA) data demonstrates just how desperate families have become as they contend with what Mervyn King, the Governor of the Bank of England, has described as the most dramatic squeeze on family finances since the 1920s.
With the average UK mortgage at £109,000 and average borrowing costs at 3.5pc, switching from repayment to interest-only saves households roughly £230 a month. But although the move may help families with their immediate cash-flow problems, concerns have been raised about how the debts will be repaid. Darren Winder, UK economist at Oriel, said: "For someone who's trying to alleviate monthly cash flow pressure, moving to interest-only makes sense. But it does raise questions about how that loan gets repaid."

The trend also runs against the FSA's advice. It has threatened to "constrain future interest-only lending", branding much of it unsustainable.

In its Mortgage Market Reviewpaper last July, the FSA said: "Evidence suggests that interest-only mortgages have often been taken to extend affordability, with no firm plan in place to repay the capital...

"Our current view is that interest-only should be used only where there is a genuine repayment method in place."

However, it added: "We do not intend to restrict interest-only from being used as a forbearance method for customers in arrears."
The FSA disclosed to The Telegraph that, between the onset of the financial crisis in the third quarter of 2007 and the final three months of last year, the value of interest-only mortgages increased by £99bn and the number of borrowers rose by 369,370.
Some of those will have been new deals, but FSA sources confirmed the bulk were due to "forbearance" – as banks move homeowners on to more affordable payment plans to avoid defaults.
Although the regulator does not break out precise figures on new lending and "forbearance", the data shows that around two-thirds of the increase came from struggling households.
Over the three years, the proportion of loans classified as interest-only rose from 40.04pc to 42.95pc but the proportion of interest-only deals available fell from 49.51pc to 31.41pc as banks cut the supply of higher risk products.
As the total UK mortgage stock in that time increased from £1.13 trillion to £1.21 trillion, the value of interest-only lending should have risen by no more than £35bn as its share of the stock would have been stagnant or declining, Mr Winder said.
He added that the data demonstrated a large number of homeowners are not re-mortgaging but simply changing the terms of their existing deal. An FSA spokesman confirmed revised terms do not show up as "new lending" but the changes are visible in the "stock" numbers.
Mr Winder added: "Non-discretionary spending [such as food, petrol and tax] is rising considerably more quickly than incomes. Therefore, there is a natural incentive to move to interest-only products."

michaels

'Sensible borrowers paying less on their mortgage than they can earn on their savings maximise their borrowings and profit' - doesn't make such a good headline but is closer to the truth.

Graham_Devon

While interest only has been clamped down on for new buyers, it's been one of the first reccomended avenues for anyone struggling with repayments, and there will be no need to provide any evidence at all at this point to show you have a vehicle in place. It's a way to keep a person in a house.

It does show the problems people are facing though.

michaels wrote: »

'Sensible borrowers paying less on their mortgage than they can earn on their savings maximise their borrowings and profit' - doesn't make such a good headline but is closer to the truth.

Well it's not. The article states the truth. Two thirds were switched due to owners struggling.

Kennyboy66

geneer wrote: »

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/8546531/Cash-strapped-families-switch-60bn-worth-of-mortgages-to-interest-only.html

Whoops....what happened to all the clever bulls paying down their mortgages?

Be warned. Theres a fair bit about the wider economy in the article, and as we know, property bulls would rather not talk about that part of the economic equation.

Perhaps they're the ones overpaying by £23bn per year - and at a rate that is actually increasing ?

http://www.bankofengland.co.uk/statistics/hew/2010/dec/index.htm

All this bulls and bears nonsense does mask the idiocy of allowing huge numbers of people to take out interest only mortgages when they are really appropriate for a minority.

Just another example of the UK haves and have nots.

chucky

michaels wrote: »

'Sensible borrowers paying less on their mortgage than they can earn on their savings maximise their borrowings and profit' - doesn't make such a good headline but is closer to the truth.

offset mortgages and tracker mortgages really do have a lot to answer for...

Really2

chucky wrote: »

offset mortgages and tracker mortgages really do have a lot to answer for...

Yes I converted from Fixed rate repayment to an offset tracker (classed as IO) in 2008.
I have never repaid so much.

Another statistic that is lost in the "IO means you can't afford your house" debate on here.

Graham_Devon

I'm not sure how you guys have managed to twist what is up in black and white...

Although the regulator does not break out precise figures on new lending and "forbearance", the data shows that around two-thirds of the increase came from struggling households.

But well done. That's pretty good going. Turning what's actually said into "actually, most people have switched to IO to maximise their borrowings and profit".

Really2

Graham_Devon wrote: »

I'm not sure how you guys have managed to twist what is up in black and white...



But well done. That's pretty good going. Turning what's actually said into "actually, most people have switched to IO to maximise their borrowings and profit".

oops, perhaps it was this statement.

geneer wrote: »

Whoops....what happened to all the clever bulls paying down their mortgages?

just a thought.

Really2

Well on the news today they are saying it is wise to do if inflation is higher than your IR rate.

They also said the amount of Interest

Only mortgages in trouble (arrears) are 0.7% of all mortgages.

chucky

Really2 wrote: »

Well on the news today they are saying it is wise to do if inflation is higher than your IR rate.

They also said the amount of Interest

Only mortgages in trouble (arrears) are 0.7% of all mortgages.

jeeesus is that Devon bloke trying to twist things completely round from what is actually happening and people are paying back more mortgage debt than ever. now there is a surprise he never does that... no wait.

diable

Such a fascination in doom and gloom. I wonder if the burst bubble will go up in flames and then sink.