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

marathonic

Well, regarding a banks funding requirements, a 60% LTV mortgage requires about 7 times more capital reserves than a 90% LTV mortgage. Looking at it from an overly-simplified point of view, a bank could give out 7 interest only mortgages at a 60% LTV as opposed to a single 90% LTV mortgage on a repayment basis. Regarding the argument of falling house prices impacting the mortgage-book, the impact would be more evident with the higher LTV book.

marathonic

Let's look at this from a different perspective - instead of saying "not everyone will do X when they secure this product so let's ban it for everyone", let's say "how can our underwriting process incorporate the risk involved in giving this product to certain categories of people".

For example, I expect that investment returns are going to exceed interest rates on mortgages by 1-2% p/a over the investment years I have between now and retirement. I also expect to be a basic rate tax payer in retirement (or at least, the majority of my income to fall under the basic rate).

In addition to this, through salary sacrifice, I get £113.80 in pension contributions for every £68 in net salary sacrificed.

For the above reasons, I'd prefer to contribute 25%+ to my pension plan and extend my mortgage term out as far as possible. In theory, my mortgage could be paid off by the tax-free lump sum (rules may change but that's an argument for a different topic).

With a blanket withdrawal of I/O mortgages, my funds available for pension contributions is limited. If I were to be offered an I/O mortgage which was reviewable, for example, every 5 years, I would have no problem in providing a mortgage provider with my annual pension statements if they were requested.

Saying that not everyone will provide for retirement when they secure an I/O mortgage isn't a valid argument because you could say the same about a lot of financial products. Not everyone is going to do the sensible thing when they apply for loans, credit cards, etc.

The banks job is to assess the likelihood of people doing the sensible thing and offering the product to them. It's not to decide that a lot of people will abuse the product and, therefore, withdraw it completely.

CLAPTON

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.

Many of the 30% of renters are only temporary renters i.e. young people at UNi or starting out in life so will eventually own.
The total number renting into old age will mainly be people in subsidised social housing.

grizzly1911

marathonic wrote: »

Let's look at this from a different perspective - instead of saying "not everyone will do X when they secure this product so let's ban it for everyone", let's say "how can our underwriting process incorporate the risk involved in giving this product to certain categories of people".

For example, I expect that investment returns are going to exceed interest rates on mortgages by 1-2% p/a over the investment years I have between now and retirement. I also expect to be a basic rate tax payer in retirement (or at least, the majority of my income to fall under the basic rate).

In addition to this, through salary sacrifice, I get £113.80 in pension contributions for every £68 in net salary sacrificed.

For the above reasons, I'd prefer to contribute 25%+ to my pension plan and extend my mortgage term out as far as possible. In theory, my mortgage could be paid off by the tax-free lump sum (rules may change but that's an argument for a different topic).

With a blanket withdrawal of I/O mortgages, my funds available for pension contributions is limited. If I were to be offered an I/O mortgage which was reviewable, for example, every 5 years, I would have no problem in providing a mortgage provider with my annual pension statements if they were requested.

Saying that not everyone will provide for retirement when they secure an I/O mortgage isn't a valid argument because you could say the same about a lot of financial products. Not everyone is going to do the sensible thing when they apply for loans, credit cards, etc.

The banks job is to assess the likelihood of people doing the sensible thing and offering the product to them. It's not to decide that a lot of people will abuse the product and, therefore, withdraw it completely.

The banks job is lend money sensibly to protect their depositors, bondholders and shareholders. In respect of the later it is provide them with a profitable business from which those investors can earn a return. Many shareholders have lost out and those that haven't have seen their returns cut back.

The only reason banks went headlong into daft mortgage propositions is because they were chasing market share. This isn't just restricted to the last feeding frenzy.

If a bank doesn't want to offer a particular range of products it doesn't have to. Nobody makes it manadatory to offer an interest only mortgage.

You point out that people may be prepared to provide evidence of a repayment vehicle and allow it to be reviewed. That would go some way to reducing the risks. How would they feel if that investment vehicle wasn't performing, or for some other reason they could not continue to make the contributions to it and the lender asked you to sell up or steadily increased the rate to recognise increased risk? How would they feel if their retirement hopes were dashed because the investment vehicle doesn't perform.

In the past mortgage providers offered endowment mortgages where the endowment policy was separately assigned to the lender and they would monitor surrender values to ensure they were increasing in line with projections. It was interlinked to the mortgage terms and conditions. They were typically more expensive to maintain, than a repayment mortgage, but they did offer the potential for some surplus funds in the long run. (hopefully). There were tax incentives made available to make these attractive. Tax incentives were withdrawn and the return on endowment policies began to show weaknesses as long term growth projections were scaled back. During this time low cost unit linked endowments were also introduced in order to reduce the cost which added further to repayment shortfalls.

Who knows what tax relief will be withdrawn in the next 25 - 40 years?

Who knows how investment vehicles and markets will look in the future?

Who knows what the tax implications will be for pensioners?

A repayment mortgage is something you can control from day one and 15 years down the line if circumstances change it will be a baby elephant in the room not a lumbering adult still.

From the posts you make you it looks like you are switched on and planning well for the long term. You are also looking to leverage your investments and know/accept the risks. IME many can't and don't regardless of work/professional status.

mystic_trev

I wouldn't be surprised if the next Government 'Initiative' was to bring back Interest only, by backing them with Tax payers money. They'll shortly follow this by introducing Government backed 125% mortgages, as the hype over Northern rock 'Together mortgages' really has been overdone.;)

purch

Interest only mortgages have a poor history

Low Cost Endowments sold heavily in the 1980's were not fit for purpose.

Other repayment vehicles have had a similar poor performance history.

Lenders want the loan repaid at maturity.

Whether or not the asset secured against the loan has appreciated in value over the term is not particularly relevant to the lender, and does not reduce the risk of the loan.

I don't see why a lack of Interest only deals should be a detriment to the housing market.

If a borrower cannot afford the additional amounts required for a standard repayment mortgage, then it must follow that they cannot afford to set aside/invest the additional amounts required to ensure the loan is repaid at maturity.

Just relying on HPI to allow you to sell-up and repay the mortgage at maturity is plain dumb.

Graham_Devon

HAMISH_MCTAVISH wrote: »

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.

Theres not much they will be able to do about it though. They have shoveled loads of cheap money at mortgages and lending. Bar forcing people to take out products or forcing lenders to often certain products, what can you do?

Thrugelmir

marathonic wrote: »

Looking at it from an overly-simplified point of view, a bank could give out 7 interest only mortgages at a 60% LTV as opposed to a single 90% LTV mortgage on a repayment basis.

To simplify your question even further. Banks need to reduce mortgage exposure as there's insufficient funding to support the market going forward. Offering interest only is not something the major lenders can offer.

Interest only mortgages are still a major issue. In 2012 the average interest only mortgage coming to the end of its term was £52,000. In 2020 and after, it is forecast to rise to £155,000.

HAMISH_MCTAVISH

Graham_Devon wrote: »

Theres not much they will be able to do about it though.

They can do anything they want.

The regulators and government have created much of the current problem, through putting in place badly thought through requirements and restrictions on some types of lending and bank capital requirements.

Those can certainly be changed, and undoubtably will be over time.

The question is to what though?

They have shoveled loads of cheap money at mortgages and lending.

Which hasn't even come close to filling the gap left over after the credit crunch.

They haven't shovelled "loads" of money at it, they've dipped their toe in the water with tiny, ineffective token gesture schemes so far.

Mortgage lending pre crash was at £360bn a year. It's been 5 years now at around 100bn a year.

That's a TRILLION pound shortage over 5 years.

So a few tens of billions for these schemes so far is as far away from "loads of money" as you can imagine.

Bar forcing people to take out products or forcing lenders to often certain products, what can you do?

You can do what regulators and government are supposed to do.

Fix the broken and dysfunctional lending markets.

Whether that be through regulation, incentivisation, provision of wholesale funding, or whatever else. Other countries seem to be using a combination of all three, with promising results. Looks like we're heading down the same path.

Graham_Devon

HAMISH_MCTAVISH wrote: »

Whether that be through regulation, incentivisation, provision of wholesale funding, or whatever else. Other countries seem to be using a combination of all three, with promising results. Looks like we're heading down the same path.

Interesting that you call this "fixing".

Theres 2 meaning to "fix". I'm assuming you mean fixing as in meddling with the market and changing the outcome by force?