Home Equity increases by 2.7% in 2011

DervProf

The only way to make sure the banks are responsible is to set out a (very) strict framework for them to work in. When it comes to money, humans are greedy (some more than others). People in the banking industry, and their customers, will always be looking to make as much money as possible. Not that there's much wrong with that, but it is because of this behaviour that we end up with financial crashes. People get too greedy, and push the boundaries too far. When the gate is shut after the horse is long gone, these boundaries are pulled back in, then people complain that things areen't as good as they used to be. Look at the state of the property market, it can't function because of the lack of funds being provided by the banks. All because of the "binge" we had a few years ago.

We need a simple and level playing field when it comes to mortgages. No hocus pocus products, just strict but fair criteria.

I think that although there may be a place for IO mortgages, they shouldn't be granted unless the borrower can provide strong evidence that they have a repayment plan. I don't that it's good enough just to say "well, the property will be worth a lot more in 25 years time, I'll just sell up and pay back the capital".

RenovationMan

DervProf wrote: »

I think that although there may be a place for IO mortgages, they shouldn't be granted unless the borrower can provide strong evidence that they have a repayment plan. I don't that it's good enough just to say "well, the property will be worth a lot more in 25 years time, I'll just sell up and pay back the capital".

Why not? Surely if an adult enters into this sort of financial transaction with his eyes open, why should anyone stop him?

I'm a good example for this. I now have a 5 bed farmhouse, 6 bed if you count the self-contained apartment we have added. I'm never going to need all that space when I retire, so I will definitely be downsizing and unlike many people who think about downsizing but have a 3 bed Semi, I actually do have something to downsize from. The mortgage is on interest only and I have no repayment vehicle. I am making overpayments but I may reach the stage where I feel that my mortgage is at a reasonable level and I want to concentrate, say, on my pension.

So imagine if I hit my 50% LTV figure in 18 months time. I'll have a house worth approx £450k, a mortgage of £225k and equity of approx. £225k. I could stop paying anything towards my mortgage and sell up in 20 years time with more than enough equity to allow me to buy a 2 bed terraced house outright.

I don't even need to say "Well the house will be worth a lot more in 25 years time" (though it will, and proportionally higher than a terraced house over the same period) because the equity is already there. Why then should I be stopped from having an IO mortgage just because a very few (according to figures from the CML) people get into difficulties?

EDIT: According to the CML, a decent percentage of IO mortgage holders are planning on downsizing from their exisitng homes when they retire. Just like myself, they just need to keep an eye on the price of the house they are wanting to downsize to and making sure that their current equity covers it. If it doesn't then they can make overpayments until it does. Personally, my current equity won't cover my retirement home as it stands because I really want a character cottage. I'll therefore keep making overpayments until it does cover it (perhaps when my equity reaches £300k I can stop OPing and leave the mortgage until we sell up).

DervProf

RenovationMan wrote: »

Why not? Surely if an adult enters into this sort of financial transaction with his eyes open, why should anyone stop him?

I'm a good example for this. I now have a 5 be.....

:rotfl:

Nice one.

But seriously, I see what you are saying, but unlike yourself (and myself - please don't mock, I assure you that I do have my financial head screwed on, but I won't spell out the details), there's a large proportion of the population that aren't quite so "clued up" on these matters. Yes, the majority of those people will not get into any serious financial bother, despite their slight ignorance. However, there will surely be cases where uninformed people get sold the wrong product, or their own greed takes over and they overstretch themselves (because the bloke down the pub said that there's money to be made from property etc). Let's face it, people like yourelf are unlikely to cause the lender a problem, but I'm sure there are those (and I do know at least one person) who "filled their boots" a few years ago, and are now seriously struggling to keep up with their monthly payments. As we have seen, it is often the taxpayer/other customers of the lender who have to pick up the pieces.

Just because the product works for you, doesn't mean that it should be available to everyone, if at all. I have a credit card that pays me to use it. I think it's great, but I know where the money comes from to give me my cashback. I happen to think that credit cards are a great financial product in the right hands, but can cause all sorts of problems in the wrong hands. Do I want credit cards banned ? No. Do I think that there should be much tighter controls on the availability and useage of credit cards ? Yes. Even if that means that my credit card company can't afford to pay me to use my card.

shortchanged_2

If you had a repayment mortgage RenoMan you would have £450,000 to downsize with and leave you plenty of change to retire with.

RenovationMan

shortchanged wrote: »

If you had a repayment mortgage RenoMan you would have £450,000 to downsize with and leave you plenty of change to retire with.

But then I wouldn't have as much in my pension, so perhaps I would have less money to retire with? That's my point. We have a finite mount of money and so we prioritise. I can either put the money into a house or I could put the money into shares. Who knows which investment will give the better return over the 20 years or so I have until retirement?

RenovationMan

DervProf wrote: »

:rotfl:

Nice one.

But seriously, .

Fair enough. I took on board your moan to Jonny Bravo and engaged you in sensible debate but you just so can't stop yourself can you? Oh well, I'm vindicated again....

shortchanged_2

RenovationMan wrote: »

But then I wouldn't have as much in my pension, so perhaps I would have less money to retire with? That's my point. We have a finite mount of money and so we prioritise. I can either put the money into a house or I could put the money into shares. Who knows which investment will give the better return over the 20 years or so I have until retirement?

To be honest RenoMan I wasn't having a specific go at your plans because you seem to have your financial head fairly well screwed on. I think you've also benefitted from the circumstances such as rampant HPI (which intitially gave you a large amount of equity) and the current situation with the very low interest rates.

What I am saying is that nobody knows what the future holds. Yes it is pretty certain that house prices will rise over a 25 year period but by how much, nobody knows. For all we know they may only rise by on average only 2.5% a year of that period which means possibly it would give no better return than a savings account.

In which case if someone bought a house at near peak prices on an IO mortgage with no repayment plan to pay any capital off at the end of the loan, then that person would have a potentially small amount of equity (possibly no more than if they set up a savings plan and rented). The bottom line being some people may not release enough equity to downsize and therefore may have to rent after their mortgage term anyway.

I think that is one of the main issues of an IO mortgage is that it is dependent in many cases on a high rate of HPI and therefore the reason why many lenders will now not accept selling the property as a repayment vehicle.

Also possibly, are the banks also saying something by doing this, in that mortgage lending may well remain strict over many years so there is much less chance of rampant HPI in the future.

RenovationMan

shortchanged wrote: »

To be honest RenoMan I wasn't having a specific go at your plans because you seem to have your financial head fairly well screwed on. I think you've also benefitted from the circumstances such as rampant HPI (which intitially gave you a large amount of equity) and the current situation with the very low interest rates.

What I am saying is that nobody knows what the future holds. Yes it is pretty certain that house prices will rise over a 25 year period but by how much, nobody knows. For all we know they may only rise by on average only 2.5% a year of that period which means possibly it would give no better return than a savings account.

In which case if someone bought a house at near peak prices on an IO mortgage with no repayment plan to pay any capital off at the end of the loan, then that person would have a potentially small amount of equity (possibly no more than if they set up a savings plan and rented). The bottom line being some people may not release enough equity to downsize and therefore may have to rent after their mortgage term anyway.

I think that is one of the main issues of an IO mortgage is that it is dependent in many cases on a high rate of HPI and therefore the reason why many lenders will now not accept selling the property as a repayment vehicle.

Also possibly, are the banks also saying something by doing this, in that mortgage lending may well remain strict over many years so there is much less chance of rampant HPI in the future.

Thanks for your kind comments. FWIW, I didn't think you were having a 'go', I thought you were just making an observation.

I generally think that people should diversify their savings in a variety of investments and I'm often horrified when people are piling money into their mortgages at the expense of other investments such as emergency savings, pensions, etc. Better to put a little bit in each 'pot' than to concentrate on a single one.

As far as IO mortgages, I think we'll just have to agree to disagree on this one. While I understand your concerns, according to the CML the number of people who get to the end of their IO mortgage and have no way of paying off their mortgages is extremely low.

Most mortgages these days may have a 25 year term, but only really last an average of 8 years(?), perhaps less before the borrower remortgages with a new lender on a better deal. This means that even though a FTB may get an IO mortgage when he first buys a house (usually to allow him a bit of breathing space while he kits the house out with furniture, settles into his mortgage payments, etc.) he doesn't necessarily stay on an IO mortgage for life. He could be on a 3 Yr discounted IO tracker and then remortgage onto a 10 year fixed rate repayment mortgage. Similarly, if someone was thinking of relying on HPI to pay off their IO mortgage but then saw that HP weren;t moving, they could make some overpayments or switch to a repayment mortgage.

My own plans are to remain on IO and continue with overpayments, but as I said earlier I could just as easily make no overpayments and instead save the money in higher interest accounts, invest it in shares or put it into a pension plan. I could also give up overpaying and just get a repayment mortgage. Not everything is as black and white, nor as fixed in stone as people seem to think it is on this forum.

shortchanged_2

RenovationMan wrote: »

Most mortgages these days may have a 25 year term, but only really last an average of 8 years(?), perhaps less before the borrower remortgages with a new lender on a better deal. This means that even though a FTB may get an IO mortgage when he first buys a house (usually to allow him a bit of breathing space while he kits the house out with furniture, settles into his mortgage payments, etc.) he doesn't necessarily stay on an IO mortgage for life. He could be on a 3 Yr discounted IO tracker and then remortgage onto a 10 year fixed rate repayment mortgage. Similarly, if someone was thinking of relying on HPI to pay off their IO mortgage but then saw that HP weren;t moving, they could make some overpayments or switch to a repayment mortgage.

But I think this is now a real problem with house prices as high as they are in that they have become very unaffordable for many particularly on a repayment mortgage, which in my eyes means they are realistically unaffordable or too expensive. It was well known that there was a large proportion of IO mortgages taken out during the boom years because that was all the repayments some people could manage. Could these type of people have afforded to buy the same house on a repayment mortgage, I very much doubt it. Therefore essentially they are living beyond their means but that was due to rampant HPI and the after effects it has now caused.

RenovationMan

shortchanged wrote: »

But I think this is now a real problem with house prices as high as they are in that they have become very unaffordable for many particularly on a repayment mortgage, which in my eyes means they are realistically unaffordable or too expensive. It was well known that there was a large proportion of IO mortgages taken out during the boom years because that was all the repayments some people could manage. Could these type of people have afforded to buy the same house on a repayment mortgage, I very much doubt it. Therefore essentially they are living beyond their means but that was due to rampant HPI and the after effects it has now caused.

Well, we are where we are with house prices. If it's true that people could only buy a house with an IO mortgage (I'm not convinced because the banks have the same lending criteria regardless of whether the mortgage is IO or repayment), then we're back to my original point where you have to ask yourself whether it's better to 'rent' a house from the bank with an IO mortgage or rent a house from a landlord.