MSE News: Interest-only mortgage warning

silvercar

Nick_C wrote: »

Seems like a statement of the bleedin' obvious.

Surely when you apply for an Interest Only mortgage, you have to satisfy the lender that you have the means to pay it off at the end of term?

For people that cannot pay it off, I guess they have two options. Try to extend the term, or sell up and use the tax free capital gain to downsize or rent.

I agree that a fifteen year old should be able to understand what "interest" and "only" mean, but it is the history of the housing market in this country that has led to this situation.

For a long time, in a lot of areas, it has been cheaper to buy than to rent. Combine that with the fear/ hope that house prices will rise and people rush into buying a home.

Wind back to when these mortgages were taken out., around the early 90s. Mortgage deals were easy to obtain, interest only was cheaper than repayment so people jumped in.

As to satisfying the lender, there were a number of easy options to do this. endowment policies were still being sold, people were promising pension lump sums to use as repayments and people were hoping (sort of) on inheritances. 25 years is a long time.

Even for cautious people, living in a house that had room for your growing family made sense, at the back of your mind you could downsize to a flat once the children had left home, so it made sense to buy a house whilst they were growing up.

Now you combine that with children living at home for far longer/ people having children later/ mortgages being harder to obtain/ repayment mortgages often being the only ones on offer and people are coming unstuck.

Hard to say to your student offspring that there won't a bedroom to come back to as Mum & Dad are moving to a little flat.

Thrugelmir

silvercar wrote: »

My lender has written to me a couple of times over the last few years asking for confirmation of how I intend to repay my interest only mortgage. I guess they are trying to act responsibly or avoid having to take action against those without plans in the future.

Failure to respond does a borrower no favours. Safe to assume that many borrowers simply have no plans. Slowly rising interest rates aren't going to help either. As will reduce the opportunity to pay down capital.

Grumpyoldmoo

Our endowment policy paid out just over 1 week ago, it was roughly 16.5k short of what was needed. We fixed the repayment part of our mortgage (from upsizing) about 1 month ago & our advisor advised us to email her direct to make an appointment re borrowing the diff. due to the shortfall.
We are waiting to hear back from her.
We have more than enough equity (250k) in the property & they will not force us to downsize.
N.B we have 7yrs 3 mths left on repayment part of mortgage.

Thrugelmir

Grumpyoldmoo wrote: »

We have more than enough equity (250k) in the property & they will not force us to downsize.

Equity isn't the issue. What matters is the ability to service interest/repay the debt under current affordability rules. Where a borrower is unable to, and a lifetime mortgage could be a possibilty. If like you there's sufficient equity to cover the debt. Otherwise the lender will seek repossession. As your mortgage contract has ended lenders hold all the rights.

Amst

Nick_C wrote: »

Seems like a statement of the bleedin' obvious.

Surely when you apply for an Interest Only mortgage, you have to satisfy the lender that you have the means to pay it off at the end of term?

For people that cannot pay it off, I guess they have two options. Try to extend the term, or sell up and use the tax free capital gain to downsize or rent.

You missed out the obvious one - cry about it online, to the DailyMail or to anyone that will listen that they were mis-sold and the 35 annual statements they received showing the balance staying the same were too confusing :duh duh: :beer:

enthusiasticsaver

This is a ticking time bomb. I understand that sometimes people go through rough times, I see a lot on the DFW forum but to let a mortgage go decades and not address the problem of how to repay it is head in the sand mentality. Endowment shortfalls have been talked about since the 90s almost 30 years ago. We opted to keep our endowments but changed to part repayment to eliminate the shortfall. This was in 1994 so that is when the warnings must have started. Three of our policies had a small shortfall and the oldest was higher than expected so our mortgage was paid off early.

michaels

I do not understand, more people rent than have IO mortgages and yet those with the IO mortgages who almost certainly have some equity are a problem and the renters with no equity are fine.

Can someone explain it to me? Sure being a forced seller is extremely unpleasant but having sold the odds are they will still be better off than the renters.

(And this is even before considering that housing costs for the same property on IO are almost certainly less than renting as their is no landlord to subsidise)

curtlyb

There's nothing wrong or ever has been wrong with Interest Only Mortgages, it's simply problems with the vehicles used to finance them at the end of the term...

fewcloudy

enthusiasticsaver wrote: »

Endowment shortfalls have been talked about since the 90s almost 30 years ago. We opted to keep our endowments but changed to part repayment to eliminate the shortfall. This was in 1994 so that is when the warnings must have started. Three of our policies had a small shortfall and the oldest was higher than expected so our mortgage was paid off early.

With respect, I'd say 1999 was when possible shortfall stories made the newspapers, and shortly after that companies started writing to policy holders. Still a popular and common way to get a mortgage in 1998...
Our first of several was bought in 1993 and the last in 1998. We ended up doing the same as you.
So maybe talked about for 20 years ago more like, but still a long time to do nothing about it...

Pixie5740

My mum used to work for one of the UK's largest mortgage lenders during the 90's and 00's. Frequently she would have people applying for mortgages, who had taken financial advice, and the repayment vehicle was them putting £50 a month into a cash ISA. Basic arithmetic tells you that even after 25 years that's going to be nowhere near enough to cover the outstanding capital.

That's not to say there is anything wrong with interest only mortgages it's more a case of user error. However, lenders have to comply with regulations to try and protect the lowest common denominator from themselves.