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

geoffky

The UK’s mortgage and business lending numbers show how broken our monetary policy is



http://www.mindfulmoney.co.uk/wp/shaun-richards/the-uks-mortgage-and-business-lending-numbers-show-how-broken-our-monetary-policy-is/

grizzly1911

HAMISH_MCTAVISH wrote: »

Which can all be helped greatly through an increase in credit availability, leading to an increase in employment, and an increase in economic growth.

Which is all hunky dory if there is a real engine driving that prosperity. Simply chasing ever larger debt, with more debt, without real income to repay will simply end in tears again.

grizzly1911

marathonic wrote: »

Conventional Wisdom:
Only consider leverage as something secured against your home
Pay down your mortgage as quickly as possible

Alternative Wisdom:

Consider leverage as secured against your entire investment portfolio (even if, on paper, it's only secured against your home)
Don't pay down your mortgage - instead, increase your investments on a monthly basis and your total borrowings, over time, become less significant given it's percentage in relation to your overall portfolio


I'm not saying that my alternative is guaranteed to work out better - but, in my opinion, it's highly likely.

What if your investments happen to fall 40% just when you need them and don't recover for perhaps 10/15 years? It happened pretty recently.

grizzly1911

geoffky wrote: »

The UK’s mortgage and business lending numbers show how broken our monetary policy is



http://www.mindfulmoney.co.uk/wp/shaun-richards/the-uks-mortgage-and-business-lending-numbers-show-how-broken-our-monetary-policy-is/

Thanks geoffky.

An interesting final note from that link.

When,when,when will we ever learn?
This not from the UK (thankfully as we have our own problems) but from the United States and I will let the Washington Post take up the story.

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery

What could go wrong? (Google the sub-prime collapse if you are unsure)

LydiaJ

marathonic wrote: »

The 'all your eggs in one basket' doesn't really hold true. My pension can contain bonds, stocks, cash, property funds, etc. from a multitude of geographic regions and multiple sectors.

They may be lots of baskets, but they are all baskets that you can't open and take anything out of until you reach retirement.

marathonic wrote: »

There are many people overpaying their mortgage and leaving very little room for manouevre in the rest of their budget. These people feel that this is financially savvy and, I have to admit, it's more financially savvy than spending all your earnings.

However, if I invest as much as possible into an ISA or Pension Plan whilst they pay down their mortgage, who is in the better position if lending criteria gets even stricter and we both lose or jobs for the long-term?

The person who has paid down their mortgage has a smaller mortgage and has to rely on benefits to pay down that mortgage and meet their cost of living. I have a larger mortgage but investments in Pensions (true, I cannot access these) and ISA's (which I can access). To me, paying down your mortgage frantically rings more true of 'putting all your eggs in the one basket'.

Firstly, all the info about overpaying mortgages advises saving an emergency fund first, unless you have an offset mortgage or a mortgage that offers some kind of flexibility - to borrow back overpayments or take a payment holiday or similar. A person who has followed this advice, saved an emergency fund of a few months' salary, and then overpaid their mortgage is well placed if they lose their job. They can use their emergency fund to live off while they look for a new job. They can remortgage to their original term so as to have much reduced monthly mortgage payments, because their low LTV gives them a lot more choice of mortgage product, and access to lower rates too. If thy can't get a new job in a reasonable time, they can sell their house, downsize, and use the equity that they have built up to buy a smaller place outright.

Somebody who has put the majority of their money into pension investments has much less flexibility. They can withdraw whatever money they have saved and invested in ISAs and any other non-pension products, and then they are stuck with a big mortgage debt and nothing to pay it with. They cannot even improve things significantly by downsizing, since their assets are locked in their pension rather than in equity in their house.

An IO mortgage and alternative investment vehicles make sense in a boom when the investments are probably going to do well, new jobs are comparatively easy to find if you lose yours, and HPI is going to improve your LTV even if your nominal debt remains the same. When the economy is stalling, the employment market is uncertain, and HPI is erratic, there is nothing to beat the security of owning the roof over your head outright.

Thrugelmir

LydiaJ wrote: »

When the economy is stalling, the employment market is uncertain, and HPI is erratic, there is nothing to beat the security of owning the roof over your head outright.

Something that many are far from achieving.

jamesd

dryhat wrote: »

The only reason people take out an IO mortgage is not because they are "savvy", it's because otherwise they could not "afford" the house they are "buying".

Or they may be people who know that investing is likely to be better than using a repayment mortgage, borrowed at 75% LTV with an income multiple of about one and with enough money to clear the mortgage in savings and investments that they didn't want to move out of the tax wrapper.

Interest only is fine for those who are financially responsible. It's not fine for those who aren't. Having a repayment strategy in place and monitoring it regularly is one way to tell the difference.

grizzly1911 wrote: »

What if your investments happen to fall 40% just when you need them and don't recover for perhaps 10/15 years? It happened pretty recently.

It happened? Recently? Not to prudent and well-diversified investors if you're thinking of say Japan, just one country. That event would be not very significant as part of a decent portfolio.

A 40% drop is easy enough to handle with the sort of safety margin I'd want, around 100%.

LydiaJ wrote: »

They may be lots of baskets, but they are all baskets that you can't open and take anything out of until you reach retirement.

You don't have to wait until retirement, just until you're 55.

LydiaJ wrote: »

an offset mortgage or a mortgage that offers some kind of flexibility - to borrow back overpayments or take a payment holiday or similar. A person who has followed this advice, saved an emergency fund of a few months' salary, and then overpaid their mortgage is well placed if they lose their job. They can use their emergency fund to live off while they look for a new job.

For the offset mortgage that may be true. For anything that involves increasing the amount in the mortgage account it's not true because as soon as the lender hears that the borrower is unemployed they are likely to ban increasing the amount owed. You have to use an offset or current account mortgage if you want to do this with any reasonable degree of safety.

LydiaJ wrote: »

They can remortgage to their original term so as to have much reduced monthly mortgage payments, because their low LTV gives them a lot more choice of mortgage product

No, they can't. Lenders are not inclined to offer longer borrowing or new mortgages to those who are unemployed.

LydiaJ wrote: »

Somebody who has put the majority of their money into pension investments has much less flexibility. They can withdraw whatever money they have saved and invested in ISAs and any other non-pension products, and then they are stuck with a big mortgage debt and nothing to pay it with.

Unless of course they have enough money in savings and investments in a range of vehicles so they can continue to live normally while paying their mortgage and all other bills, because they have an income from their investments, those investments that they accumulated because they didn't spend their money on clearing a mortgage as fast as possible.

Meanwhile the unemployed overpayer has no ability to remortgage or borrow back overpayments because lenders won't let them do that, so they are stuck living on means tested benefits and when they run out of their emergency fund they are forced to sell their home because they can no longer pay the mortgage.

LydiaJ wrote: »

When the economy is stalling, the employment market is uncertain, and HPI is erratic, there is nothing to beat the security of owning the roof over your head outright.

That can be beaten easily: have a mortgage and sufficient savings and investments to generate enough income to live on for life, instead of having all of your money tied up in a property so you can only get at it by selling your home.

Security for me is not a lack of a mortgage, it's being able to live for the rest of my life on a decent income and pay all of the bills, including clearing the mortgage eventually, even if I became unemployed and never found another job.

HAMISH_MCTAVISH

grizzly1911 wrote: »

Which is all hunky dory if there is a real engine driving that prosperity. Simply chasing ever larger debt, with more debt, without real income to repay will simply end in tears again.

I'll let Stephanie Flanders answer that one for me.....

It's an excellent morality tale, which chimes well with the British tendency towards self-flagellation.

There's just one problem. It's not really true.

http://www.bbc.co.uk/news/business-17398014

marathonic

Well said jamesd..... a lot of people on this forum are so close-minded and not open to alternative ideas. They take the convetional wisdom that may have been given to them by their parents or grandparents and assume that this is the only way forward.

When talking of pensions, they don't understand how the system works and take scandals that happened in the past within pension plans completely different to most of whats available today and use that as an excuse to steer clear.

A well diversified investment portfolio appears to hold no value to these people. As a small example of what I'm getting at, the S&P Dividend Artistocrats index contains 54 shares, each of which has increased it's dividend every year for the past 25 years (or more).

I'm pretty sure some of these people are going to argue that you're better to have a repayment mortgage fully paid off in retirement than you are to have enough invested in these companies to cover a mortgage extending into retirement.

Sure, the cost of the underlying shares will fluctuate - but the income generated will remain relatively stable in comparison.

The 'safe' option is repaying the mortgage quicker, the investment option is likely to see you better off - especially given the tax breaks available.

grizzly1911

marathonic wrote: »

I'm pretty sure some of these people are going to argue that you're better to have a repayment mortgage fully paid off in retirement than you are to have enough invested in these companies to cover a mortgage extending into retirement.

Sure, the cost of the underlying shares will fluctuate - but the income generated will remain relatively stable in comparison.

The 'safe' option is repaying the mortgage quicker, the investment option is likely to see you better off - especially given the tax breaks available.

Perhaps it is nice to have both, clear mortgage and an investment pot even if it isn't quite so large.

When you have been around longer you will appreciate that stuff happens in life. Things don't always go as planned and history has a knack of repeating itself.