MSE News: Interest-only mortgage timebomb warning: act now

Thrugelmir

elseychelsea wrote: »

I have an interest only mortgage, and they won't let me change my mortgage, so what do i do apart from sell-up?

There's nothing to stop you overpaying your mortgage.

No main stream lender will offer you a new mortgage whilst you remain in a DMP.

Suggest you visit the Debt Free Wannabe board for support and advice.

Thrugelmir

Gizmo247 wrote: »

I read this as a softening of the FCA on their position for interest-only mortgages and hopefully we will see a return but in a managed way.

Very unlikely. There's no benefit to the lenders in allowing borrowers to take risk.

GhIFA

To put it in some context, the report also found that:
- 90% of IO customers had a repayment strategy in place
- Most regularly check that their plans are on track (70% doing it at least once per year)
- 75% of IO customers are confident that their plans are on track to meet the required mortgage at the end of the term.

The author of the report has also said that the "interest-only time bomb" would fail to materialise.

dtsazza

elseychelsea wrote: »

I have an interest only mortgage, and they won't let me change my mortgage, so what do i do apart from sell-up?

There's nothing inherently wrong with interest-only mortgages - the news is only about those who took them out and weren't aware (or more likely, forgot) what they meant.

The intention of an interest-only mortgage is that instead of paying the capital back to the lender each month, you accumulate it some other way (savings/investments, basically). So you can just carry on doing this - putting some money aside every month into savings, so that by the end of your mortgage you have saved up the whole amount.

Alternatively, most mortgage lenders accept some amount of overpayments without extra charges. By making overpayments you can "convert" your IO mortgage into a repayment one. Asume your payments are e.g. £600/month but they would have been £960 on a 25-year repayment mortgage. Then by making consistent overpayments of £360/month you're repaying exactly the same as you would on a repayment mortgage; and after 25 years you'll owe nothing.

Don't be scared by the news into thinking that IO mortgages are bad, and you need to switch away from them. The news is simply a reminder that at the end of the mortgage term you'll still owe the bank hundreds of thousands of pounds. And that you need to put away the money you're saving through lower monthly payments, in order to afford the single huge payment at the end.

jamesd

Meg Gay, author of the 140-page report Interest-Only Mortgages: Consumer Research _ Consumer Strategies for Repaying the Loan at the End of the Mortgage Term, said the ‘interest-only time bomb’ would fail to materialise.

So maybe now we can have an end to the scaremongering stories about a ticking time bomb for the banks and mortgage market and concentrate on sensible planning for the very small percentage of borrowers who don't have a repayment strategy in place?

brit1234

GhIFA wrote: »

To put it in some context, the report also found that:
- 90% of IO customers had a repayment strategy in place

Define repayment strategy? Anything can be a repayment strategy, its a very loose term. For many it was relying on never ending house price rises, others were selling the property, many lied and had none as it was used to stretch themselves to the max to be able to buy.

Just to say they have a repayment plan does not mean it is sufficient.

GhIFA wrote: »

- Most regularly check that their plans are on track (70% doing it at least once per year)

That is meaningless, what counts is the % who act if they discover a shortfall.

GhIFA wrote: »

- 75% of IO customers are confident that their plans are on track to meet the required mortgage at the end of the term.

I don't believe that for one moment. Endowments were a failure, interest rates on cash saving are less efficient than repayment mortgaes, stocks have weak over the last 5 years, portfolio holders are at great risk from higher mortgage rates like BOI have done.

Very few will make the full repayment through investments.

GhIFA wrote: »

The author of the report has also said that the "interest-only time bomb" would fail to materialise.

Just like the shared equity (Firstbuy, Homebuy, & Newbuy) time bomb going off in 2013?

Thrugelmir

GhIFA wrote: »

- 75% of IO customers are confident that their plans are on track to meet the required mortgage at the end of the term.

At a guess an inheritance one would suggest.

Thrugelmir

jamesd wrote: »

Meg Gay, author of the 140-page report Interest-Only Mortgages: Consumer Research _ Consumer Strategies for Repaying the Loan at the End of the Mortgage Term, said the ‘interest-only time bomb’ would fail to materialise.

What connection does Consumer Research have with the banks, BOE or FCA?

The article misquotes the FCA entirely.

As what the FCA said is

Nearly half of the loans, which only pay off the interest on the loan and not the capital, face a shortfall averaging 71,850 pounds, with customers "over-optimistic" about their ability to pay, the watchdog said.

magpiecottage

Thrugelmir wrote: »

There's nothing to stop you overpaying your mortgage.

In principle, I agree with that. On the other hand, the interest on the other lending will be higher so I think the lender is acting in the borrower's interest by saying they should sort out the other debts first.

They may also have a right to set overpayments off against other debts.


As far as most interest only mortgages are concerned, since 31 October 2004, every new one has had an illustration before it is applied for which makes the need to have repayment vehicle very clear.

It has also had a mortgage offer which says it again.

And all interest-only mortgages, regardless of whether they were in force at that date or not, have annual statement issued which gives the same warning again.

In all cases the warning is in a format specified by the regulator, so it is difficult to see how borrowers can argue that they are not at fault if they did not know.

shortchanged_2

What does mortgage expert Ray Boulger have to say about all this?