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

brit1234

shortchanged wrote: »

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

2007 Get a interest only mortgage, house prices can only go up.

2013 Don't get a interest only mortgage.

adamc260

I personally have no sympathy.

You bought a house, you've only paid back the interest knowing the monthly payment would be lower. If you can't afford to pay back the capital that tells me one of two things:

a) You haven't saved any money
b) Your living in a house that you simply cannot afford to live in

Blunt but just about sums it up.

Depth_Charge

Hi

This was just another financial disaster / mess that was going to hit the headlines sooner or later.

Many knew it was coming just like they did with the credit crunch and the sub prime lending disaster that we kept watching develop with those stomach churning TV adverts.

The pieces will have to be picked up again

The tragedy for some is that it is likely that they do not fully understand the potential implications of what may be waiting ahead.

It could be argued where the blame lies I suppose, like always.

My opinions

jamesd

brit1234 wrote: »

I don't believe that for one moment.

So you have done as the FCA's researchers at GfK did and taken the answers given by the consumers and then plugged their numbers into your own model to check their beliefs?

The FCA didn't just pick random numbers and theories out of the air. It went and checked the numbers for the primary repayment strategy, using three different scenarios, pessimistic, normal and optimistic, with the description of these in more detail starting on page 83 and actual formulas on page 93.

As an example of the projection, the values for cash ISA use were projected at 1.5% under the cautious assumptions, 3% under normal and 4.5% under optimistic. All of those are pessimistic given the history of actual cash ISA rates but are OK for those who have to repay within the next five years or so.

For equity ISAs the projected growth was 3.5% cautious, 5% normal and 6.5% optimistic. Outside an ISA, including within a pension, 0.5% lower. All of those are very cautious, given that the historic return on equities has been more like 5% plus inflation over the long run, some 9-11% depending on the period involved. They are also well below the values the FCA says should be used for similar purposes in investment growth projections.

The study noted that its projections were more accurate short term than long. Correctly so IMO. Even the most optimistic assumptions are really quite cautious for investment-backed mortgages and the error from using such cautious assumptions increases with time. Though it's considerably better than pretending that any growth is "speculative" and must be ignored.

Thrugelmir wrote: »

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

You mean you've done so little reading about this that you didn't even know that little before you started in with more scaremongering?

The FCA paid for two studies to be done as part of its work. It mentioned those at the very start of its own paper, so you seem not to have even got that far. One of those was the one Consumer Strategies for Repaying the Loan at the End of the Mortgage Term whose author the story and I quoted. It's the one Wywth posted a link to earlier. The other was an Experian study of when mortgages finish.

Thrugelmir wrote: »

The article misquotes the FCA entirely.

Hardly. It's a quote from the author of one of the FCA's studies into the subject, the one that looked at the possible shortfalls and the plans and money that consumers had for dealing with them.

Thrugelmir wrote: »

As what the FCA said is

Which is a reference to what was written in his report, which he summarised as I wrote. If you'd taken the trouble to read this stuff you might also know that that number is an average for the loans with maturities from now through 25 years from now, with the ones far in the future contributing the high value part and those who may have a shortfall within the next few years also expected to have other ways to use to pay the shortfall.

GhIFA

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.

I don't need to, there are around 15 different definitions given in the report - have you read the report?

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

Around 75% believe their plans are on track to make repayment at the end of the term.

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

A high percentage check regularly, and 90% have a repayment strategy in place, so it would appear that a large number are acting. There will always be those that don't, but if they get to the end of the term with no means of repaying the capital owing then they must also take the lion's share of the responsibility for that.

I don't believe that for one moment.

That's your prerogative, but the research suggests you are wrong.

Very few will make the full repayment through investments.

And at no point has the suggestion been made that the only method of making full repayment will be through investments.

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

And this is relevant to this particular thread because?

I am no "HPI Nutter" as some choose to describe others on this board. The housing market is by no means perfect, however, this report clearly shows that the situation is not as dire with interest only mortgages as is often made out. For some reason the FCA has taken a more negative tone in its publication of the report than is actually suggested through the report itself.

GhIFA

Thrugelmir wrote: »

At a guess an inheritance one would suggest.

9% say inheritance forms part of their repayment plans, so that guess would not be correct.

roddydogs

YOU took out an IOM, Endowmwnt Mge, or PPI,, YOUR fault if you didnt read the small print, or more likely ignored it.

GhIFA

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

I'm not sure I understand the point you're making here - You seem to imply that "Consumer Research" is the name of an organisation, whereas it is merely part of the title of the report which forms the basis of the FCA's thematic review.

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.

This is based on "balance sheet" modelled data. Within the report what it actually says is:

However, given that the model assumes no change
in either consumer behaviour or the wider economy, longer
term estimates are naturally less accurate. If we restrict the analysis to those who have a mortgage due for repayment up to and including 2022, we expect 49% to have a shortfall, but the average shortfall drops to £56,200.

The report also states that those whose mortgages are due to reach term in the next three years are only expecting an average shortfall of £10,000. It also states that only 6% of those whose mortgages end in the shorter term expect to have to sell their house to repay the capital.

Again, it's all about context, and the overall tone of this report is that there is no "timebomb" - in the vast majority of cases there is a plan in place.

jamesd

brit1234 wrote: »

Define repayment strategy? Anything can be a repayment strategy, its a very loose term.

Sure, page 52, components of the repayment strategies used:

32% Endowment policy
28% Other savings
21% Downsizing
20% ISA, either type
18% Overpayments
14% Change to repayment
11% Pension (lump sum)
10% Investments outside ISA
9% Inheritance
9% Selling and not buying elsewhere
8% Selling other property
8% Change mortgage type
5% Cannot afford to pay off
3% Selling other assets (land, gold etc)
1% Selling business
3% Other
7% Don't know

brit1234 wrote: »

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

21% of borrowers have done this. 78% of those with an endowment mortgage who changed their plans did so after being contacted by their endowment policy provider in some way (shortfall letter or other), with other reasons also featured (pages 55 and 56). Borrowers generally do not have their heads in the sand, they are, according to the data, generally monitoring and acting on what they see. Page 54 gives the other methods also used by those who have endowment policies.

brit1234 wrote: »

Endowments were a failure, interest rates on cash saving are less efficient than repayment mortgages, stocks have weak over the last 5 years

Each of those claims is wrong. So perhaps part of the reason you seem not to like interest only is that you don't know much about how the repayment strategies really perform.

brit1234 wrote: »

Very few will make the full repayment through investments.

That is the most popular way of doing it, including savings as investments. Savings accounts are a popular way for those whose mortgages end soon (page 53) as you'd expect from those doing prudent planning and knowing that they have a fixed time need for that bit of money.

jamesd

GhIFA wrote: »

For some reason the FCA has taken a more negative tone in its publication of the report than is actually suggested through the report itself.

The FCA needs to justify its regulatory actions and ensure that there is support for its actions in getting lenders to contact and deal properly with those who don't have appropriate plans in place.

It being able to do that successfully will reduce the number who do end up reaching the end of their mortgage term without a plan and relying on the lender putting an alternative in place at that time.

But now it also need to go back and look at much of the silliness that's happening in the market for new repayment mortgages, like lenders:

Assuming no investment growth at all, presumably classing investment growth as speculative and banned.
Ignoring almost the safest repayment strategy there is, cash savings accounts, including cash ISAs.

Such things greatly harm consumers, who can benefit from things like integrated planning using a combination of pension and other investments in conjunction with a mortgage to meet both retirement and housing needs, more efficiently than doing each individually.