Interest-only mortgage borrowers forced on to more expensive repayment plans

Generali

michaels wrote: »

Are there many 25 year periods over which the price of housing (in nominal terms) has not risen by at least 2/3rds thus meaning that at the end of the term the banks are not safely protected by equity even if there was no equity at the start of the loan?

I don't know how far the data go back but I would imagine that there are plenty of examples in the first half of the C20th.

I realize that perpetual debt became the norm but banks expect and price for getting their money back at the end of the term. If the customer can't do that they are in default and by definition high risk.

zzzLazyDaisy

michaels wrote: »

NOW PLEASE one of the many who have stated it as fact. Why is paying less to rent from the bank (IO mortgage) a worse option than paying more to rent from a private landlord? Please use simple words and short sentances as despite you all stating it as a fact many times i still do not understand it.

There's nothing wrong with it - you get security of tenure for 25yrs (or however long the mortgage is) instead of 6 months in the private rented sector. BUT (and it is a big but) the agreement with the lender is that the loan will be repaid at the end of the term. If the borrower can't do that, they must try and get the bank to extend the repayment date, find some other way of paying the debt, or sell up, use the proceeds to pay off the debt and either go into rented or buy something smaller for cash.

But people don't make arrangements to pay the debt and still want to stay in their house.

And lets not even get into what happens when the borrower has borrowed extra against the equity during the term of the mortgage and spent it, and is now sitting on negative equity due to the property crash, so can't even sell the house to pay the debts....

Generali

There seems to be a bit of confusion as to what an interest only mortgage is.

An interest only mortgage is where the whole of the sum borrowed becomes due on a particular date rather than being paid off during the term of the loan. When the 25 years is up you need to find the money to pay back the loan and if you can't then you have defaulted and you have some tough questions to answer if you can't at least come up with the vast majority of the money. As a borrower you agreed to repay on a set date and agreed to have a repayment vehicle in place.

I think that the problem now is that people abused I/O mortgages, often with the tacit approval of banks. As the borrowers never gave any thought to how the mortgage was going to be repaid they now expect that the rules be changed so that they are renting the house off the bank indefinitely. When they retire, if any thought has been given to this, presumably they expect the Government to pay their mortgage for them indefinitely.

This is absolutely not what the bank signed up for as now they are expected to take on a political risk, that the Government will pay mortgage interest. Furthermore, the holders of Mortgage Backed Securities will need to be repaid. Where does that money come from after this default?

michaels

But luckily after 25 years there is a near certainty that the value of the security that the bank holds against the load will be sufficient to repay the advance and given that the UK legal system supports repossession by the lender in this situation there is no risk to the lender that they will not get their money back.

chucknorris

HAMISH_MCTAVISH wrote: »

Because if people keep doing it, they don't get their house price crash.

We finally got to the point of the thread

Graham_Devon

michaels wrote: »

But luckily after 25 years there is a near certainty that the value of the security that the bank holds against the load will be sufficient to repay the advance and given that the UK legal system supports repossession by the lender in this situation there is no risk to the lender that they will not get their money back.

You asked for this to be explained in simple words. So I shall try.....

Banks are not landlords.

Why does anyone expect them to be? Furthermore, we appear to expect them to be landlords, but base the price of the asset at a 25 year price reduction.

Generali

michaels wrote: »

But luckily after 25 years there is a near certainty that the value of the security that the bank holds against the load will be sufficient to repay the advance and given that the UK legal system supports repossession by the lender in this situation there is no risk to the lender that they will not get their money back.

Wasn't part of the current mess with US CDOs down to the assumption that house prices only go up?

Japan has seen house prices fall for 20 years.

That's a very dangerous assumption that you're making and not one that I'd want to be peddling to risk management in a bank in 2012.

In addition, banks don't want to repossess. Repossessions are messy, expensive and unprofitable.

zzzLazyDaisy

michaels wrote: »

But luckily after 25 years there is a near certainty that the value of the security that the bank holds against the load will be sufficient to repay the advance and given that the UK legal system supports repossession by the lender in this situation there is no risk to the lender that they will not get their money back.

And the many people who constantly remortgaged in order to get their hands on the equity thinking that property prices will always rise and are now sitting on a whole heap of debt in the form of negative equity since house prices crashed?

I know someone who bought a house for £130k, sold it some 10+ years later for £450k and only got £75k after sols fees etc.... due to remortgaging to buy fancy cars and fund exotic holidays. That was before the housing crash. They would probably be in negative equity by now. As it happened the reason for sale was divorce and they are both in rented accommodation now, having used the proceeds of sale to pay off other debts. Some people are just a bad risk and the lenders have finally woken up to this.

Generali

zzzLazyDaisy wrote: »

Some people are just a bad risk and the lenders have finally woken up to this.

It's more that the regulators have forced them to rein in lending.

An organization called BIS that, amongst other things, agrees banking rules for most of the rich bits of the world has come up with a new regulatory framework known as Basle III.

This has made high risk lending such as interest only mortgages unprofitable for banks. This speaks to their wallets, the most direct and effective way to speak to bankers so they have simply stopped lending high risk stuff.

ukcarper

The article was about switching people to repayment half way through the term if the contract is to pay the loan off at the end of the term have they broken contract yet. I had an endowment mortgage and the policy was assigned to bank did people taking interest only mortgages have to sign saying they had a repayment vehicle in place.