Shortfall fears for over 1m interest only mortgage holders

grizzly1911

Cornucopia wrote: »

Hmmm....

I'm not sure it is unknown - it's fundamentally based on tracking inflation vs. mortgage debt.

And weren't Endowments meant to be cheaper than Repayments - wasn't that the point?

I just think that ordinary housebuyers ought to be able to benefit from different approaches to financing in the same way that many BTL owners do.

If anything, the focus on Repayment mortgages is all about safety and predictability from the Banks' POV, whilst allowing for virtually no creative accountancy at all on the part of buyers.

Originally endowment mortgages "worked" because of MIRAS and Tax Relief on the life policy premium. The endowment policies were typically with profits policies which locked in profits in the good years and hopefully paid a terminal bonus which could provide a lumps sum over and above the the actual mortgage.

The actual life policies could be expensive dependent on risk factors but the combined cost was usually more than a straightforward repayment.

The tax relief was withdrawn on the policy and on the mortgage interest.

Low cost endowments were introduced to to try and make them remain competitive products. The underlying investment was open to the volatility of the market and the costs of unit linked management. It is this type of policy that largely was responsible for shortfalls arising partly due to enthusiastic forecasts of future performance and then by actual performance.

Both types of policy were usually assigned (mortgaged) to the lender who would then be entitled to periodically check on the performance of the possibility to ensure it was broadly on track with repayment.

The newer BTL mortgages were much more freestyle arrangements left to the borrower to confirm (sometimes not even that) they were actually doing something to make the capital repayment. there was no real policing of that commitment.

To provide some form of insurance to cover potential shortfalls would be so complex to cover all the possible options and risks with regular monitoring etc. building up to a very costly product. Providers would need to either build an investment pool themselves to provide for shortfalls or increase premiums regularly to compensate for adverse risk periods.

Arguably this is what the interest margin on lending should price in - the potential cost of default. The reason why few people will now offer them or if they do price them realistically with onerous conditions.

A residential home owner mortgage is a different beast to a BTL which is really a commercial risk decision with principal repayment coming from rental income not personal day to day salary.

Lenders are not pawnbrokers. Affordability and repayment should always be the key driver, LTVs /security are really insurance for them not the repayment vehicle.

There will always be a need for niche products for niche clients that need specialist help and pay accordingly they are not mainstream products.


EDIT:- Not to mention that nice commissions were payable on endowment plans which made them attractive to the introducer, typically the lender.

OffGridLiving

Graham_Devon wrote: »

I've removed the rest of your quote, simply because I wanted to highlight this.

Can you see the issue with what you have posted?

This is something I was trying to put across on the other thread about windfalls. It's OK suggesting the term runs for 25 years, but how many people stay in the same one house for 25 years and finish paying down their mortgage? The absolute minority.

All these calculations and theories simply don't match reality. As laid out above in the start of your post.

They have 15 years to sort it, but straight away you have said they are unlikely to stay there for another 15 years. Therefore, they haven't got 15 years at all. If they ever want to move....as most people do, they have to sort it out much quicker or they become trapped. Being trapped and having no choice is no solution.

I'm actually not talking about 'windfalls' and I haven't made any calculations or exposed any theories. You seem to be mixing me up with other posters. I'm talking about your average Joe sorting out his finances and having the time to do it in. The vast majority of people will be like myself - they will receive this sort of a warning about IO mortgages (just as I received a warning about my endowment) and they will do something about it, either immediately or when their finances allow, such as when the economy picks up. A minority of people will bury their heads in the sand and hope it all goes away, these are the ones who get into financial difficulties. They always have and they always will.

Getting back to my posts, it's a shame you edited it because it addressed exactly the points you're raising. I've highlighted the points in bold.

OffGridLiving wrote: »

First time buyers buying in 2003 would have 15 years to sort themselves out. That's a very reasonable time frame to sort out personal finances.

It's very unlikely that they would remain in the same house for those 25 years and so when they move to their next home, typically afer 5 to 7 years they will be compelled to finance it with a repayment mortgage. For those who can't afford to move house because a repayment mortgage would be too expensive, they will have to stay put and either increase their savings or decrease their mortgage balance, just as they would if they were in negative equity. They would have at least 15 years to do this. The other option would be to buy a home they could afford on repayment.

It's even more unlikely that they would remain on the same mortgage deal for those 25 years and so when they remortgage, they will be compelled to finance it with a repayment. For those who cannot afford to move their mortgages to repayment will have to stay on SVR and either increase their savings or reduce their mortgage balance. In the unlikely event that they spend the next 15 years unable to save a penny, then towards the end of their mortgage term they will have to sell their houses and rent.

Those people who mismanage their finances will get in to financial difficulties, just as they always have. Everyone else will adapt and move on. I honestly don't see any sort of timebomb now that interest only mortgages have been withdrawn.

The problem we are discussing is not whether people can afford their mortgage repayments but whether a 'timebomb' of people will reach the end of their mortgage term without being able to pay off their houses.

As I said, now that IO mortgages have been withdrawn, that group of people you highlighted will have upwards of 15 years to sort out their shortfall.

OffGridLiving

Thrugelmir wrote: »

You are starting from the base point that these borrowers were suitable to be advanced thousands of pounds at the outset. That's where we differ in view. Many weren't. The remaining mortgages in NRAM are a testament to that fact.

Again, I covered this in the text of my original post:

"Those people who mismanage their finances will get in to financial difficulties, just as they always have. Everyone else will adapt and move on. "

I realise that yourself and the other poster are talking about mortgage affordability problems people will have over the immediate few years as they transittion from IO to repayment. However, the thread is actually about whether there is a ticking timebomb of people who will reach the end of their mortgage term without being able to repay their mortgage, and that's what I am discussing.

As I said, with IO mortgages being withdrawn and the subset of people that the poster highlighted having at least 15 years to sort themselves out, I honestly don't see any 'timebomb'.

You're posting on the thread on another board where we are giving advice/opinions to a real-life case. He had a 25 year IO mortgage and no repayment vehicle. He has not made any capital repayments for the first 5 years of his mortgage. His bank is offering to move him to a 30 year mortgage on repayment basis, which solves his problem and his monthly outgoings will be higher than IO, but not as high as just moving to a 19 year repayment mortgage. There are solutions out there for the majority of IO mortgage holders. The rest will just have to stay on their current product and save up, or sell up (which is also a solution).

cotleigh

CLAPTON wrote: »

No, endowments were generally more expensive than repayment mortgage.

they were meant however to produce a surplus at the end of the mortgage term so you ended by with your mortgage paid off plus some spare cash.

they worked Ok in a high inflation economy but were basically the 'normal' financial service fraud.

My first ever mortgage, taken out 1992, was an endowment, from Abbey National.

I was offered a repayment or an endowment, and the endowment was definitely cheaper, as well as (supposedly) promising a "very likely" bonus of some free money for me on top of paying off the loan at the end of 25 years.

I know the endowment was cheaper, because at that time, being young and not very well-off, I just picked the option that meant the lowest monthly payments!

cotleigh

I hate the way that the media and politicians describe any possible future problematic circumstance as a "timebomb".

So, maybe, some foolish and short-sighted people may have to sell their houses to pay off their mortgages?

Or (more likely) by the time the world's most pathetic "timebomb" goes off in 15 or more years:

* inflation will have made the sums involved relatively much smaller

* most of the people affected will have moved, remortgaged, switched to a repayment loan, married, divorced, had kids, moved house 3 times, or otherwise moved on in their life circumstances, and so won't still have their original IO mortgage from 25 years ago anyway

* they will just negotiate a new loan with their lender for another few years, or even for the rest of their lives: if they can afford the interest payments in year 25, why not just let them carry on until they do want to sell up and downsize, move in with family, move to an old people's home, or die?

The Daily Mash have picked up on this bogus "timebomb" thing:

http://www.thedailymash.co.uk/news/society/timebombs-actually-very-dull-2013050367616

Thrugelmir

cotleigh wrote: »

Or (more likely) by the time the world's most pathetic "timebomb" goes off in 15 or more years:

You obviously consider the level of consumer debt not to be a major issue. That the economy has merely paused. Before continuing its upward trend.

wotsthat

Graham_Devon wrote: »

They have 15 years to sort it, but straight away you have said they are unlikely to stay there for another 15 years. Therefore, they haven't got 15 years at all. If they ever want to move....as most people do, they have to sort it out much quicker or they become trapped. Being trapped and having no choice is no solution.

You've just worked it out.

The 'ticking time bomb' will never go off because in the real world people will likely want to move before the 25 year term is up and will therefore have to deal with whatever circumstances they find themselves in.

It's quite simple really - some people try and change their lives for the better rather than waiting for someone else to do it for them.

GhIFA

There is no "timebomb" - the author of the FCA report issued this week has said that is the case. The report has also shown the majority of people with IO mortgages have plans in place to repay their loans, and 75% are confident they are on track to meet the amount owed.

There will be very few people who reach the end of the term having made no provision to repay the capital, and those that have will have no-one to blame but themselves.

Doesn't matter how many times this has been highlighted, there are some who can't or don't want to grasp that fact.

System

So it is a timebomb, but most people will know how to pull the plug out before it goes off.

TruckerT

Clifford_Pope wrote: »

So it is a timebomb, but most people will know how to pull the plug out before it goes off.

I think the whole scare story is based on an obsession with the idea that moving out of property ownership into property rental is an unimaginable fate worse than death.

People with interest-only loans only need to save the amount of any possible shortfall in the event that they are forced to sell their homes in order to pay off their loan.

Their dreams of untold wealth from their venture into property speculation may well prove to be unfounded - it's just a pity that, unlike the banks, they will not be eligible for taxpayer compensation for their mistake.

TruckerT