Person of Interest Only

chirpchirp

Personally, I'm quite pleased to see this change and I hope it will mean that policies etc will be assigned to the bank to cover the interest only mortgage.

When I was married we both had peps then isas to cover the mortgage, however, as they were individual names and not assigned to the building society they didn't form the equity of the house. This meant that we were both able to walk away with our ISA's making it more difficult to pay off the mortgage.

Graham_Devon

michaels wrote: »

Surely all sorts of different types of loan have different delinquency rates...which is priced in to the interest rate payable. Unsecured loans have high delinquency rates and high interest rates and banks can still make a profit on them. Why if a loan s asset backed it is suddenly impossible to have a risk rated interest rate and the only option is only to have low risk lending?

If the ltv is low, how is renting from the bank any more or less risky to either the bank or the individual than renting from a landlord. It seems from the conversation that renting from the bank is somehow morally wrong whereas renting from a landlord is entirely acceptable.

Edit:cross post with Viva

I guess it's like everything though....there has to be a one size fits all approach with a range of services offered to fit different circumstances.

I'm not sure how banks could reasonably pass the numerous goalposts if their mortgage risks are tailored on every single borrowers individual circumstances, so doubt that has legs.

All borrowers will need to do is show an acceptable plan, or move to repayment. What we appear to be talking about here is people for whom this doesn't suit, and want to use other plans outside of the acceptable plans.

Agan, as with everything, it's difficult to have the cake and eat it. At the end of the day, the product is still there for the borrower, so long as they can demonstrate they are working with the imposed changes.

I know my credit card for instance would be taken off me if I refused to acknowledge the changes, and I can't see anyone sheding a tear for me in that regard. What we appear to be saying is the credit card companies shouldnt make changes without investigating and tailoring the changes to every single borrowers circumstances....but I'm sure we'd agree that would be overly complicated, overly risky, and overly expensive for the credit card company. Were at danger of looking only at our individual circumstances, rather than the bigger picture when assuming we know what is and isn't risky for banks, whom have millions of individual customers.

Certainly, we could have a situation where different loans with different terms are given to every individual borrower based on their individual circumstances (some call it rationing ). I believe Coutt's bank will do this. But by god, will you pay for it, but people don't want that, they also want the best rates in order to make thier own individual plans profitable for them.

grizzly1911

michaels wrote: »

Surely all sorts of different types of loan have different delinquency rates...which is priced in to the interest rate payable. Unsecured loans have high delinquency rates and high interest rates and banks can still make a profit on them. Why if a loan s asset backed it is suddenly impossible to have a risk rated interest rate and the only option is only to have low risk lending?

If the ltv is low, how is renting from the bank any more or less risky to either the bank or the individual than renting from a landlord. It seems from the conversation that renting from the bank is somehow morally wrong whereas renting from a landlord is entirely acceptable.

Edit:cross post with Viva

It was always possible to have higher risk lending priced higher, self certification, higher LTV etc. People want them both low rates and high risk.

Banks capital costs will be higher for solid debt.

Bridging loans for instance were always priced high relative to mortgage for instance as they were inherently risky especially open bridges where the interest would rapidly gobble up equity.

You don't rent from banks, you borrow from them two different things.

michaels

I'm not suggesting that everyone has their own individual mortgage deal, only that normally if a category of loan is more risky a higher rate is charged to compensate for the extra defaults. However it seems for mortgage lending banks are not being told that they should adjust rates according to risk but that they can only lend on the basis of a single model. Surely this goes against all normal concepts of a market economy where it is up to buyers and sellers what form of contract they enter in to. Lots of people sign long contracts for iphones or sky that financially stretch them but we do not seem to feel the need to regulate such deals.

Graham_Devon

michaels wrote: »

I'm not suggesting that everyone has their own individual mortgage deal, only that normally if a category of loan is more risky a higher rate is charged to compensate for the extra defaults. However it seems for mortgage lending banks are not being told that they should adjust rates according to risk but that they can only lend on the basis of a single model. Surely this goes against all normal concepts of a market economy where it is up to buyers and sellers what form of contract they enter in to. Lots of people sign long contracts for iphones or sky that financially stretch them but we do not seem to feel the need to regulate such deals.

I'm not aiming this at you, but in general, the concensus on here is that higher rates for higher risk is a no no, as it's the banks profiteering.

Just looking at all the anger over the higher level of interest rates applied to FTBs....the anger over "mortgage rationing" (another risk assesment)....and so on.

In all honesty, if the banks turned around and said "ok, you can keep your IO loan and you don't have to show us an agreed repayment vehicle, but your interest rate will be 2% higher to compensate for our risk" the outcome would be the same. We'd be claiming it was unjust, it should be tailored to risk....it's not fair, I was making more in other investments but now they have put my interest charges up on the mortgage etc.

I truly believe we want it all, and this doesn't just go for mortgages. It's everything when it comes to the banks. The banks at the moment are damned if they do and damned if they don't.

For those who choose IO mortgages for monetry advantages, this is just an inconvinience. There are far bigger fish to fry, and we have to sort those fish.

As for iphones, it doesn't really have the same effect on the economy or the taxpayer.

grizzly1911

Graham_Devon wrote: »

I'm not aiming this at you, but in general, the concensus on here is that higher rates for higher risk is a no no, as it's the banks profiteering.

.

It isn't profiteering if they genuinely experience higher defaults and it costs them more to provide the capital to finance them. Unfortunately J Punter doesn't understand that.

Part of the problem with I/O is that providing the interest is covered the Banks aren't alerted to difficulty until it is perhaps too late to correct. At least with repayment, even allowing for missed payments, they can track progress more easily.

grizzly1911

michaels wrote: »

However it seems for mortgage lending banks are not being told that they should adjust rates according to risk but that they can only lend on the basis of a single model. Surely this goes against all normal concepts of a market economy where it is up to buyers and sellers what form of contract they enter in to. Lots of people sign long contracts for iphones or sky that financially stretch them but we do not seem to feel the need to regulate such deals.

Are you sure they are only being told they can only offer one model?

I am sure that money is always available for a price.

Essentially with phones you are really effectively entering into a finance agreement to buy the package, not sure about SKY. I am sure that many don't appreciate that. Like you it am surprised there isn't greater regulation surrounding their products.

Generali

michaels wrote: »

If the ltv is low, how is renting from the bank any more or less risky to either the bank or the individual than renting from a landlord. It seems from the conversation that renting from the bank is somehow morally wrong whereas renting from a landlord is entirely acceptable

Because there are risks inherent in repossessing.

If we go back to 2008, if there were wide-scale repossessions, who would the banks be able to sell to? Credit simply wasn't available so large-scale repossessions would have led to catestophic losses.

Ideas like this presuppose a functioning housing market. That problem remains very real: the house prices are only able to stay roughly stable at present because volumes are tiny. If volumes had to be pushed up because banks had to insist on properties being sold so mortgages can be repaid then it would be a metaphorical bloodbath.

The bank doesn't want to rent to people. The bank wants to lend people money under contracted conditions and they reasonably expect that the contract is honoured. If I lend you some money until next week I want the money back next week, I don't want some never ending flow of 10p coins in lieu of repayment.

wotsthat

Generali wrote: »

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?

http://www.thisismoney.co.uk/money/mortgageshome/article-2221985/UKFI-fears-mortgages-mis-selling-scandal.html

According to thisismoney (who have been closely following the ticking time bomb). There are north of 2.5m IO loans outstanding and, strangely for a Oct 2012 article, point out that 1.5m will be due for repayment between 2011 and 2021.

Assuming that they bought 25 years previous logic dictates that the mortgage holders are sat on a chunk of equity. Would 1.5m houses coming to market over 10 years cause sufficient downwards price pressure to wipe that out?

Interesting data would be know what happened to the IO loans that came up for repayment in 2011 & 2012 specifically those where the bank was unaware of a repayment vehicle. Were they paid off by selling or other means or rolled over into another mortgage?

Other than restricting people who use IO loans sensibly I don't think there will be that big a problem. Looks like mortgage deleveraging is going to continue at pace though.

C_Mababejive

Generali wrote: »

Because there are risks inherent in repossessing.

If we go back to 2008, if there were wide-scale repossessions, who would the banks be able to sell to? Credit simply wasn't available so large-scale repossessions would have led to catestophic losses.

Ideas like this presuppose a functioning housing market. That problem remains very real: the house prices are only able to stay roughly stable at present because volumes are tiny. If volumes had to be pushed up because banks had to insist on properties being sold so mortgages can be repaid then it would be a metaphorical bloodbath.

The bank doesn't want to rent to people. The bank wants to lend people money under contracted conditions and they reasonably expect that the contract is honoured. If I lend you some money until next week I want the money back next week, I don't want some never ending flow of 10p coins in lieu of repayment.

OTOH a full term interest only deal would seem to be a good deal for the banks.

They get the interest rate on their money every month

They benefit from any house price inflation

At the end of the term the resident either pays up or gets out

The bank markets the property in a controlled manner,hopefully to realise a profit.

Of course where it will all go wrong is when the wholesale repossessions kick in as these products mature.

No doubt HM Government will step in and steal the money from savers/pension funds/taxes to limit the loss and preserve some element of the status quo.