FCA: Interest-only mortgage crackdown "gone too far"

HAMISH_MCTAVISH

Interest-only mortgage crackdown may have gone too far, regulator warns

As many major lenders pull out, the FCA fears it may become impossible for ordinary people to get an interest-only mortgage

So many major lenders have pulled out of interest-only mortgages that the regulator is worried consumers could suffer. The exodus from these loans, which allow home buyers to only repay the interest each month, has been sparked by a crackdown on affordability checks, due to come into force next year.

However, the new Financial Conduct Authority (FCA) is concerned that too many lenders have abandoned them, or made them impossible for ordinary people to get.

In his first comment last week, the head of the FCA, Martin Wheatley, said: "There are two sides to the risk equation – consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products."

http://www.guardian.co.uk/money/2013/apr/07/interest-only-mortgage-crackdown

Very interesting.

The push towards greater mortgage availability now seems to be opening on more and more fronts within the government, regulator, and BOE.

It does seem clear they've learned their lesson and realised the baby has been thrown out with the bathwater when it comes to mortgage lending.

the_flying_pig

HAMISH_MCTAVISH wrote: »

...It does seem clear they've learned their lesson and realised the baby has been thrown out with the bathwater when it comes to mortgage lending.

sorry, who has "learned their lesson"?

you seem to be implying that some regulator somewhere did something to curb the number or type of IO mortgages. but of course no such thing happened.

what did happen is that many banks voluntarily, in their own interests, cut back or withdrew.

the idea that , as i think you're implying, a new financial services regulator would impose some kind of requirement for banks to offer lots of IO, well, as a suggestion t's exceptionally fanciful, exceptionally. best left to the back pages of Estate Agent Weekly, the ones that print lots of 0898 phone numbers that EAs can call to hear breathless female voices reading out scripts from decade-old episodes of Location Location Location.

marathonic

It's something I've been wondering lately - why are people so anxious to pay off mortgages early and so on. There are many countries where 'renting for life' is the done thing. In these countries, pensioners must continue to pay rent into retirement and until death.

With this in mind, and assuming a retired person had ample equity in their property, where is the risk to the bank? By not paying down their mortgage, one could assume that a retired person had more resources to throw towards retirement planning. This should see them well able to continue to service the interest-only mortgage into retirement.

Now, lets say someone gets a mortgage of 4 times salary at the age of 25 on an interest only basis. If inflation (RPI and wage) were to run at 2.5% until that persons retirement, which you could expect to be at age 70, then the final mortgage balance would represent 1.35 times final salary.

With this in mind, I think that it would make sense for the banks to offer interest-only mortgages of, for example, 80% LTV - but to include a condition that, should the LTV go above 90%, the bank reserves the right to switch them to a repayment basis.

You just have to look at current pensioners living in £500,000 houses. Chances are, they paid less than £100,000. If they were on an interest only basis, they would still owe that £100,000 - but how many pensioners in a £500,000 house are unable to service the interest on a £100,000 mortgage? Also, for those that are unable to do so, would it be unreasonable for the bank to request that they downsize to a £400,000 house in order to repay the capital?

grizzly1911

HAMISH_MCTAVISH wrote: »

http://www.guardian.co.uk/money/2013/apr/07/interest-only-mortgage-crackdown

Very interesting.

The push towards greater mortgage availability now seems to be opening on more and more fronts within the government, regulator, and BOE.

It does seem clear they've learned their lesson and realised the baby has been thrown out with the bathwater when it comes to mortgage lending.

Sounds like Wheatley hasn't learned any lessons and is choosing to ignore what has gone before- on more than one occasion.

You kind of hoped reincarnating the FSA into whatever it is now would actually make it better not worse.

marathonic

But, again, why are interest-only mortgages risky?

I can see why high-LTV mortgages were risky and, even then, the mortgages themselves weren't the root cause of the problems - it was the packaging of them up into securities that were traded among financial institutions at prices vastly in excess of what they were worth.

I mean, why tar all interest-only mortgages with the one brush and withdraw them completely? Is a 75% LTV interest-only mortgage really more risky than a 90% LTV repayment mortgage?

HAMISH_MCTAVISH

grizzly1911 wrote: »

Sounds like Wheatley hasn't learned any lessons and is choosing to ignore what has gone before-

Actually it sounds like they have learned that while the pendulum may have swung too far towards abnormally easy credit by 2007, it has swung too far towards abnormally tight credit today.

A happy medium is what is required.

Looser than today, but tighter than 2007.

CLAPTON

marathonic wrote: »

It's something I've been wondering lately - why are people so anxious to pay off mortgages early and so on. There are many countries where 'renting for life' is the done thing. In these countries, pensioners must continue to pay rent into retirement and until death.

which countries are these?

the EU average is about 70% owner occupier
UK is about 68%

even Germany where 'everyone rents' actually has over 50% owner occupiers and rising.

marathonic

CLAPTON wrote: »

which countries are these?

the EU average is about 70% owner occupier
UK is about 68%

even Germany where 'everyone rents' actually has over 50% owner occupiers and rising.

Okay, assuming those figures are correct, the point still stands. It's possible to do it. The Germans done it for years - and look where it's got them

And my suggestion isn't that people rent - it's that people should be able to own using and interest-only mortgage. The fact that they have to continue paying interest into retirement puts them in no worse a position as the 30% EU, 32% UK or 50% German population that rents.

grizzly1911

marathonic wrote: »

I

With this in mind, and assuming a retired person had ample equity in their property, where is the risk to the bank? By not paying down their mortgage, one could assume that a retired person had more resources to throw towards retirement planning. This should see them well able to continue to service the interest-only mortgage into retirement

You make the assumption that interest rates are going to stay low for the next 40/50 years. You make the assumption that in having only an interest only mortgage people will make provision for their future and or eventual repayment. You make the assumption that they willl be able to keep this level of contribution going throughout their working life.

It doesn't seem very cost effective to continue to pay outgoing interest in full, then pay into a vehicle that will cost you, to provide, with no guarantee of future worth. (Clerical Medical).

This may just be to a fund manager and "IFA" but may be through some life and pension house creaming off far more. Not everyone is switched on to these things.

You will also have to make additional provision to finance that I/O mortgage and as yet an unknown rate (even if it can be fixed closer to retirement for something longer than 5 years). Against this there is also the cost of re-mortgaing to be factored in as their is no guarantee that a lender would be happy to extend terms indefinitely or that it could be done at cheap rates.

marathonic wrote: »

Now, lets say someone gets a mortgage of 4 times salary at the age of 25 on an interest only basis. If inflation (RPI and wage) were to run at 2.5% until that persons retirement, which you could expect to be at age 70, then the final mortgage balance would represent 1.35 times final salary.

What final salary? There is absolutely no guarantee that that someone is going to continue earning throughout that 40/50 years at full capacity or that the final salary isn't going to provide the purchasing power it did.

Final pensions at best used to be 60% under current conditions I would be surprised if they were half that without much higher contribution levels.

marathonic wrote: »

I


You just have to look at current pensioners living in £500,000 houses. Chances are, they paid less than £100,000. If they were on an interest only basis, they would still owe that £100,000 - but how many pensioners in £500,000 are unable to service the interest on a £100,000 house? Also, for those that are unable to do so, would it be unreasonable for the bank to request that they downsize to a £400,000 house in order to repay the capital?

Yes pensioner will have benefited form HPI but there aren't many that would be able to service a £100KI/O mortgage form pension, which are relatively fixed against ever increasing necessary outgoings.

I don't dispute that there are some people for whom an arrangement like this would work but IMO it isn't a sensible route for the masses.

IME those that have retained mortgages and loans into pensionable age are usually those that have had difficulties in life or have been very well heeled and know exactly what they are doing. Those in the former camp have led increasingly difficult lives and faced some less than happy choices at an advanced age.

In your example you wouldn't be downsizing form 500 - 400 it would probably require a more sizeable down shift as unpaid interest,(hence the forced sale), sale, removal and set up costs are taken into account.

There is an awful lot to be said to being mortgage and rent free.

grizzly1911

marathonic wrote: »

Okay, assuming those figures are correct, the point still stands. It's possible to do it. The Germans done it for years - and look where it's got them

And my suggestion isn't that people rent - it's that people should be able to own using and interest-only mortgage. The fact that they have to continue paying interest into retirement puts them in no worse a position as the 30% EU, 32% UK or 50% German population that rents.

Who subsidises those rents, in old age, either directly or indirectly?

grizzly1911

marathonic wrote: »

But, again, why are interest-only mortgages risky?

I mean, why tar all interest-only mortgages with the one brush and withdraw them completely? Is a 75% LTV interest-only mortgage really more risky than a 90% LTV repayment mortgage?

You are right it isn't the mortgage that risky it is the mind set of those that take them out that causes the longer term problems. For some people the will work fine.

I don't know but from a financing prospective a an essentially fixed, solid mortgage book, would be more costly for the banks to provide. and would potentially restrict the amount of mortgages that could be granted.. With a repayment mortgage book the banks position will improve over time protecting them form market problems. With I/O mortgage books a downturn becomes a direct impact across the whole book..

With the vast majority of the book on a repayment basis it gives scope for turnover in mortgages and new mortgages being drawn as old one s are repaid. It also allows for the current position where lower amounts of mortgages are being advanced whilst in the background repayments continue improving the banks position.