Person of Interest Only

Generali

Can't deny, you're implicated
In the mayhem in my mind

From the FT:

http://www.ft.com/intl/cms/s/0/f269df52-251d-11e2-86fb-00144feabdc0.html#axzz2BOxvZDNc

Remember that from 2014, the FSA requires banks to ensure that customers have a repayment vehicle in place to repay any new or existing interest only mortgages.

Moody’s Investors Service looked at the loans associated with mortgage-backed securities to assess the effect tougher mortgage rules would have on outstanding loans. It found that 52.6 per cent of existing loans in London were to borrowers who were not making any repayments of principal. In the southwest and southeast, the proportion of outstanding loans of this type were 51.2 per cent and 52.4 per cent respectively.


Large concentrations of unsafe loans in geographic areas can increase the risk for lenders because forced or distressed property sales can undermine resale values for others nearby. Moody’s has estimated that an interest-only mortgage is about 1.5 times more likely to fall into arrears than a loan where the principal is being repaid.

[IMG]http://im.ft-static.com/content/images/bd772daa-26d9-11e2-9295-00144feabdc0.img?width=334&height=452&title=&desc=Proportion of home buyers not paying back principal[/IMG]

This is unlikely to result in higher house prices in the South East. It is also unlikely to result in more houses being built in the South East which is very bad news.

wymondham

wow, this looks like big changes are coming. I can't see the link as it's subscription, but what happens here, do these people without any current repayment method get forced to take out a policy etc?

Generali

wymondham wrote: »

wow, this looks like big changes are coming. I can't see the link as it's subscription, but what happens here, do these people without any current repayment method get forced to take out a policy etc?

Basically yes. The FSA has said that there are to be no more new interest only mortgages without a suitable means of repayment.

Increasingly banks are seeing the writing on the wall and are insisting that current borrowers come good on promises that they have already made about having a repayment vehicle in place.

You know all that stuff that people have been banging on about for the last 5 years about how disgusting it was that banks forced loans on people that can't afford them? I think the UK is about to find out what happens when the process goes into reverse. The British People don't want banks taking risks so politicians have prevented banks taking risks. The result will be an interesting social and economic experiment.

chucknorris

Hmm not too happy about this unless they call having the cash available to pay off the loans as a suitable repayment vehicle, I really don't want to be forced to take out some hopeless investment products or have to switch to a repayment loan from my tracker mortgage (but I can see that some lending institutions might use this to dump the low margin trackers that they are stuck with). I'm happy enough to just pay the mortgages off eventually, but not until interest rates go back up (at the moment my mortgage interest is less than my 'net' savings interest).

Generali

chucknorris wrote: »

Hmm not too happy about this unless they call having the cash available to pay off the loans as a suitable repayment vehicle, I really don't want to be forced to take out some hopeless investment products or have to switch to a repayment loan from my tracker mortgage (but I can see that some lending institutions might use this to dump the low margin trackers that they are stuck with). I'm happy enough to just pay the mortgages off eventually, but not until interest rates go back up (at the moment my mortgage interest is less than my 'net' savings interest).

AIUI, any reasonable means of repaying the mortgage is fine. I don't see why an investment fund would be seen as reasonable when cash savings wouldn't.

shortchanged_2

Well unless you're one of life chancers then it shouldn't be a problem.


Is that..........ticking I hear?

MacMickster

I think that the split of interest-only loans is interesting. It seems that there are far more in areas of higher house prices, suggesting that more were taken out in these areas by people who couldn't afford a repayment mortgage.

If everybody had made a simple decision based upon alternative investment vehicles, then I wouldn't expect to see such large regional variations. As Generali says, this is likely to be particularly bad news for the South East.

Pimperne1

Or to put it another way anyone who bought the average house in 1986 for £40k will only have £120k equity this year when their 25 years ownership arrives. Whereas anyone who has been renting since 1986 will only have nothing in equity, will have been paying much more in rent. This type of article is going to lead us down the same road as PPI and Endowment Shortfalls - for goodness sake is no-one going to be held to account for decision they have made in the past.

wotsthat

Generali wrote: »

AIUI, any reasonable means of repaying the mortgage is fine. I don't see why an investment fund would be seen as reasonable when cash savings wouldn't.

What about selling the house?

I don't know if that would be acceptable to a lender but I'm sure it would focus some borrowers minds if they sat down and thought about the choice between getting a repayment vehicle set up or selling up.

One reason the 'ticking time bomb' will never go off is because the number of people without IO will just get smaller over time. For a start they'll never be able to move house again after 2014 without a repayment vehicle.

Generali

wotsthat wrote: »

What about selling the house?

It's not deemed an acceptable way to plan to repay the mortgage for fairly obvious reasons:
1. What if the house is worth less than the mortgage?
2. What if a load of borrowers in the same area had the same idea?

MacMickster

Pimperne1 wrote: »

Or to put it another way anyone who bought the average house in 1986 for £40k will only have £120k equity this year when their 25 years ownership arrives.

So in 1989 the average house price in the south-east was roughly £100K but is now around £225K.

Now the average house isn’t usually bought by younger first-time buyers. Typically the average house would be bought by someone in their mid-30s, who would be approaching 60 at the end of a 25 year term.

Good luck to those “homewowners” approaching retirement who, in 2014, may be forced to sell to repay their interest-only loan then, after selling costs etc find another home to buy with their £120K equity.

No problems at all.