Britain's next big financial scandal
Crowley
financial nightmare for thousands, perhaps hundreds of thousands, of
people ...........
Interest-only mortgage crisis looms
They look like an attractive, low-cost option, but borrowers should
beware of a potentially huge bill 25 years on. John Caine reports
Saturday July 22, 2006
The Guardian
http://money.guardian.co.uk/weekly/story/0,,1825897,00.html
Is this the next major financial scandal in the making? One in four
borrowers are taking out low-cost "interest-only" mortgages as the only
way they can afford sky-high property prices - but with little hope of
paying off the capital sum.
Many borrowers - particularly those who have remortgaged to a cheaper
deal - may not even understand that they have a loan which, when it
matures in 15, 20 or 25 years' time, will leave them with a huge bill.
In the worst case, householders in their 50s and 60s could face
repossession if they cannot stump up tens or even hundreds of thousands
of pounds.
Lenders admitted this week they have lost track of the situation.
Because lenders ceased checking that payments were being made into
repayment vehicles during the 1990s, they now have no idea if a
customer has set up a way to repay the capital sum.
The Financial Services Authority sounded the alarm this week in a
thinly veiled warning to lenders to get their house in order, putting
interest-only mortgages at the top of its list of "emerging retail
risks".
It said: "An analysis of data on sales of regulated mortgages between
April 2005 and December 2005 indicated that an increasing number of
mortgages were being completed on an interest-only basis, with the
lender not recording that there was a linked repayment vehicle in
place.
"Interest-only mortgages, especially ones where there is no repayment
vehicle in place, may represent a greater risk to consumers than a
repayment mortgage. While these are appropriate mortgages for some
consumers, they are not suitable for everyone."
There are worrying signs of irresponsible lending by mortgage companies
happy to push loans without properly explaining the consequences of
taking the interest-only route.
Glen Morris, of mortgage broker Berkeley Consultants, says: "Some of
the big lenders are prepared to offer interest-only mortgages to people
we would not consider suitable, based on nothing more than the
completion of an application form."
Research by the Council of Mortgage Lenders shows that 200,000
borrowers with interest-only mortgages failed to set up a repayment
vehicle, and more than 60,000 of those are first-time buyers.
A respected housing market analyst, who asked not to be named, confirms
the fears that regulators are starting to express. He believes the
number of mortgages that have no repayment vehicle in place is greatly
under-reported.
He says the situation is exacerbated by "the readiness of lenders to
advance money on interest-only terms without real evidence, or proper
scrutiny, of the proposed repayment vehicle".
Figures from Britannia building society - almost alone among leading
lenders in taking steps to address the problem of interest-only lending
- show why interest-only is so tempting for young borrowers.
A £150,000 Britannia mortgage fixed at 4.84% costs the borrower £863
a month over the first two years if it is on a repayment basis. But if
he or she takes an interest-only loan, the cost is just £605 a month.
For a £200,000 loan, the difference is closer to £350 a month.
As the market analyst explains: "Hundreds of thousands of borrowers
don't have, or have failed to keep up, payments on an appropriate
repayment vehicle, and the laissez-faire attitude of many lenders has
contributed to this situation. So we'll see a growing number of
defaulting borrowers and a corresponding increase in repossessions -
many of them the homes of elderly people."
Lenders will rely on the fact that they own the asset, and if the
borrower cannot pay the outstanding debt at the end of the mortgage
term, then that is the borrower's problem.
Many in the financial services industry know that a significant number
of borrowers with an interest-only mortgage are not aware that they
need a repayment vehicle. They believe they are paying the mortgage
when in fact they are simply paying the interest on their loan. The
full extent of their numbers will be revealed when the FSA publishes
the findings of research later in the year.
Financial ombudsman spokesman David Creswell says the complaints about
interest-only mortgages are already beginning to trickle in.
"We do get a few hundred, perhaps 300 complaints a year related to
interest-only mortgages, partly because we have not yet come to terms
with the changed culture of borrowing." ......................
Maria
Crowley wrote:
> Lenders will rely on the fact that they own the asset, and if the
> borrower cannot pay the outstanding debt at the end of the mortgage
> term, then that is the borrower's problem.
>
Or simply they will keep paying the interest until they die, and the
life insurance will pay the lender off. A nice and profitable
arrangement!
Crowley
Maria wrote:
I doubt we'll see life insurance companies paying off people's
mortgages Maria ;-)
Mel Rowing
Yes and especially for the inheritors!
You gets what you sign up to. I don't see any reports of folk being
frog marched into banks and made to sign on the dotted line.
The interest only mortgage was popular some years ago. In those days it
was bound up with an endownment insurance policy or a pension plan. The
idea was that when your 25/30 year endownment matured or you retired
the money released paid off the capital usually with a significant sum
to spare which was yours.
Tax treatment of those schemes in those days made them financially
attractive. Alas we have allowed politicians to treat our savings and
assets as though they were their's. MIRAS was abolished (not altogether
a bad thing) Tax relief on insurance premiums was abolished (a bad
thing) Insurance and pension funds lost the advantage of tax credits (a
disasterous thing). The Great British Public slept through it "We don't
have to concern ourselves with that yet do we dear?" "Far better than
2p on a pint of beer!"
The result is that only an idiot with the means to take out a
conventional mortgage would enter into anything like that.
However, what can be said to he/she/they who feel they cannot meet
conventional mortgage commitments. The answer is leave them alone since
you cannot guarantee that interest rates will fall or even remain
stable. a 0.5% rise on a £150 000 mortgage will cost you an extra £15
pw.
If those same people were already struggling with a repayment mortgage
then provided action was done soon enough then why not? What is there
to lose? The option of selling up and paying rent is always open. You
have to live somewhere. At least this way you preserve the equity value
of your house. The nice thing about the principal of any loan is that
it remains constant. As time goes on there is a reasonable hope that
your work prospects will improve (wage rises, promotions, better job
etc.) and in addition there is the possibility of the Mr McCawber
factor (inheritance, windfall etc.) If and when those happen you then
need the discipline to get stuck into that principal that will further
cut your outgoings.
People really ought to be able to come to decisions like this
themselves. It's what being an adult is all about.
mma...@my-deja.com
> If those same people were already struggling with a repayment mortgage
> then provided action was done soon enough then why not? What is there
> to lose?
Not a lot provided you don't mind going bankrupt.
> The option of selling up and paying rent is always open.
So long as house prices continue rising. If they drop, you can't sell
as you can't pay off the mortgage. At least with a repayment mortgage
you can take a small hit on the selling price after a few years as
you'll pay off a small amount every year at the start.
> As time goes on there is a reasonable hope that
> your work prospects will improve (wage rises, promotions, better job
> etc.)
Not when the average FTB now is reportedly 35 years old and jobs are
being outsourced en masse, or given to cheap immigrants from Eastern
Europe.
The only ways an interest-only mortgage makes sense for Joe Sixpack are
if they expect to see massive wage inflation over the term of the
mortgage, so they can pay off the cost of the house at the end for the
price of a couple of pints of beer, or they're going to pay off
variable amounts against the principle each month so by the end of the
term it's clear.
Mark
Mel Rowing
mma...@my-deja.com wrote:
> Mel Rowing wrote:
> > If those same people were already struggling with a repayment mortgage
> > then provided action was done soon enough then why not? What is there
> > to lose?
>
> Not a lot provided you don't mind going bankrupt.
>
> > The option of selling up and paying rent is always open.
>
> So long as house prices continue rising. If they drop, you can't sell
> as you can't pay off the mortgage. At least with a repayment mortgage
> you can take a small hit on the selling price after a few years as
> you'll pay off a small amount every year at the start.
There is no suggestion here, I hope, that an interest only mortgage is
a superior instrument to a repayment mortgage. If you can afford it the
latter is by far the best option available under today's conditions.
There is no argument about that.
With regard to house price rises, despite occasional hiccups,
historically house prices have more than kept pace with inflation. Of
course past performance is no indicator of furture performance of any
asset. However, history is only indicator of the security of
investments that an investor has. Unless there are immediate
indications to the contrary which there aren't, then there is no reason
to believe that that real house values will suffer severe short or
certainly not long term decline.
> > As time goes on there is a reasonable hope that
> > your work prospects will improve (wage rises, promotions, better job
> > etc.)
>
> Not when the average FTB now is reportedly 35 years old and jobs are
> being outsourced en masse, or given to cheap immigrants from Eastern
> Europe.
35 years of age is the very age when you are approaching your maximum
earning potential. From somewhere there, an individuals earnins should
reach a plateau to some extent and only show a slight rise from thereon
but nonetheless a rise which exceeds the rate of inflation and,
remember, loan principals are inflation proof.
There has been some decline in job security perhaps. I'm not talking of
those who earn a living wielding a shovel or stacking pallets, or
answering telephones. These are not jobs so much as stop gaps.
Have you any idea what builders and allied tradesmen earn around here?
There's no wonder charted accountants line up to train as plumbers.
Have you any idea how many job opportunities exist at all levels in the
public sector? What about the small, lean techno indusries that are
mushrooming up. There's a lad who lives here and who is taking a year
out from full time education who is purported to be earning a packet to
see him through university with a local IT employer.
At present there are plenty of earning opportunities. The economy is
booming.
> The only ways an interest-only mortgage makes sense for Joe Sixpack are
> if they expect to see massive wage inflation over the term of the
> mortgage, so they can pay off the cost of the house at the end for the
> price of a couple of pints of beer, or they're going to pay off
> variable amounts against the principle each month so by the end of the
> term it's clear.
Joe Sixpack is not in the mortgage market. He couldn't be bothered to
go through all the hassle of buying a property even if the mortgage
market would have him. He's a loser and always will be.
mma...@my-deja.com
> Unless there are immediate
> indications to the contrary which there aren't, then there is no reason
> to believe that that real house values will suffer severe short or
> certainly not long term decline.
That's what they said just before the last crash, and prices hadn't
risen anywhere near as much that time.
> 35 years of age is the very age when you are approaching your maximum
> earning potential.
Exactly. So you can't expect any increase in income other than through
monetary inflation. Yet someone around here who's 35 years old and
earning twice the national average wage can't afford anything much
better than a two-bed terrace in Chav-town.
> There has been some decline in job security perhaps.
There's been a huge decline in job security for just about everyone I
know.
> Have you any idea what builders and allied tradesmen earn around here?
>From what I hear, more and more are earning nothing as they're undercut
by Poles.
> There's no wonder charted accountants line up to train as plumbers.
> Have you any idea how many job opportunities exist at all levels in the
> public sector?
LOL. Yeah, and what do you think happens to private industry when Brown
increases the taxes to pay for the worthless government jobs?
> What about the small, lean techno indusries that are
> mushrooming up. There's a lad who lives here and who is taking a year
> out from full time education who is purported to be earning a packet to
> see him through university with a local IT employer.
And what will that 'packet' actually buy him? Around here, twice the
national average wage would just about qualify you to take out a
mortgage on a two-bed terrace in Chav-town, with no prospect of ever
being able to buy anything better.
Look, I honestly don't see how anyone can claim that house prices can
treble over a few years with minimal wage inflation and be sustainable.
The market is held up purely by cheap credit, and with global rates
rising that credit is getting more and more expensive.
And now we've built up an economy based primarily on shopping,
construction and 'flipping' houses, the fallout from a rise in the cost
of credit will be immense.
Mark
Mel Rowing
> Mel Rowing wrote:
> > Unless there are immediate
> > indications to the contrary which there aren't, then there is no reason
> > to believe that that real house values will suffer severe short or
> > certainly not long term decline.
>
> That's what they said just before the last crash, and prices hadn't
> risen anywhere near as much that time.
The last 'crash' was in fact not as severe as people make out. My son
bought his house then right at the preceding peak to the market and
went immediately into negative equity where he stayed for two or three
years. He moved after about 5 years breaking even The recovery was as
quick as that!
> > 35 years of age is the very age when you are approaching your maximum
> > earning potential.
>
> Exactly. So you can't expect any increase in income other than through
> monetary inflation. Yet someone around here who's 35 years old and
> earning twice the national average wage can't afford anything much
> better than a two-bed terrace in Chav-town.
Monetary inflation + economic growth which is about the level of wage
increase. Everybody has to start somewhere. Going back to my son, he
started in a 'Chav ' terrace in Romford. It wasn't too bad when he
moved in but he felt it was going downhill when he moved out which is
perhaps why he didn't get his price.
> > There has been some decline in job security perhaps.
>
> There's been a huge decline in job security for just about everyone I
> know.
First there would appear to be no real level of unemployment. Working
age employment rate hovering between 74.5 & 75% Unemployment rate of
5.4% of the economically active.
It is true that the concept of 'job for life' is in serious decline.
> > Have you any idea what builders and allied tradesmen earn around here?
>
> >From what I hear, more and more are earning nothing as they're undercut
> by Poles.
Then they should get their bodies up here!. The last time I had my
boiler serviced the guy charged £67 incl VAT and wasn't in the place
half an hour. He refused a coffee. I suppose at those rates he couldn't
afford the time!
Apparently according to some I did well. And that's when you can find
one. Many of them are not interested in domestic jobs where they have
to move about but would rather work on sites and developments. The best
and only quote I got from painters and decorators to paint my house
was £1400 to start the following spring (around 8 months)He must have
thought I'd just dropped off a hay cart! I did the job myself in 4 and
a bit days.
I'll tell you summat else! These blokes don't live in Chavtown they
have country cottages. Nor does the van double up as the family car.
I think the difference between us surrounds the question of skills. The
National Federation of House Builders? seems perpetually to be crying
out for skilled labour. Once upon a day it was fairly usual for young
lads leaving school to take apprenticeships. Now the same lads (and
lasses) go to college and follow dead end courses that lead to dead
ends. The shops and supermarkets are full of them carrying all kinds of
fancy titles on their lapels that amount to shop assistant.
> > There's no wonder charted accountants line up to train as plumbers.
> > Have you any idea how many job opportunities exist at all levels in the
> > public sector?
>
> LOL. Yeah, and what do you think happens to private industry when Brown
> increases the taxes to pay for the worthless government jobs?
Contrary to popular belief, not all or even most public service jobs
are worthless. I would agree with you that its difficult to see what
function some jobs serve. If I had my way I'd fire or redeploy the
incumbants into some more useful activity today rather than tomorrow.
At the same time, we shall always need front line health workers,
teachers, policemen, fire fighters along with the less glamourous
refuse collectors, street cleansers, road repairers, pest control
officers and so on.
> > What about the small, lean techno indusries that are
> > mushrooming up. There's a lad who lives here and who is taking a year
> > out from full time education who is purported to be earning a packet to
> > see him through university with a local IT employer.
>
> And what will that 'packet' actually buy him? Around here, twice the
> national average wage would just about qualify you to take out a
> mortgage on a two-bed terrace in Chav-town, with no prospect of ever
> being able to buy anything better.
Well I can't answer that since I don't know how much he earns. I know
his dad who is not exactly amoured with the situation and who is not
paid a pittance himself says he is being paid well.
> Look, I honestly don't see how anyone can claim that house prices can
> treble over a few years with minimal wage inflation and be sustainable.
> The market is held up purely by cheap credit, and with global rates
> rising that credit is getting more and more expensive.
Nobody claims these figures.
I think your're right when you say interest rates are probably overdue
for a 0.25% point rise. That might be enough to squeeze some but by no
means most or even many. bear in mind that if this estimate is wrong
there will be a downturn and this will cause a downward pressure on
interest rates.
> And now we've built up an economy based primarily on shopping,
> construction and 'flipping' houses, the fallout from a rise in the cost
> of credit will be immense.
I find it difficult to convince people of some simple facts.
First everyone needs somewhere to live. It takes a desperate situation
before most people will give up their homes even if they slightly enter
negative equity.
Second a house is one of that type of investment that you don't and
can't put into a drawer. You have the use of it throughout the time you
own it.
Because of this, there will always be potential buyers out there. For
every mortgagee who struggles and falls out of the market there will
always be another ready to drop in at the new slightly lower level.
Large numbers of people who are outside the housing market are not
there out of choice. It is when this supply of potential entrants dries
up that the market declines steeply. Even then significantly falling
prices raise the aspiration of those well outside the market.
Big Bill
<mel.r...@btinternet.com> wrote:
Actually for a lot of people they're career choices.
>Have you any idea what builders and allied tradesmen earn around here?
That must be looked at in context. This country has to be earning
money for folk to be needing to employ builders etc.
>There's no wonder charted accountants line up to train as plumbers.
Um. Big supermarkets are wiping out small shops and local environments
and taking lots of employment opportunities for accountants with them.
If the trade you used to get from the butcher, the baker and the
candlestick maker has gone because they've been replaced by the local
Tesco that has all its accounts done in India on the cheap, you need
to look for other employ. So, if there's no work for you as an
accountant, suddenly plumbing looks good maybe. It doesn't mean
plumbers get well paid. In comparison with the dole, maybe.
>Have you any idea how many job opportunities exist at all levels in the
>public sector? What about the small, lean techno indusries that are
>mushrooming up.
If everyone jumped on board they wouldn't be lean anymore.
> There's a lad who lives here and who is taking a year
>out from full time education who is purported to be earning a packet to
>see him through university with a local IT employer.
If he's earning good money why does he want to waste years losing
touch with related developments at a university? The whole point of
uni is you get the, ahem, big bucks when you come out - if he's
already coining, why go to uni?
>At present there are plenty of earning opportunities. The economy is
>booming.
Niche opportunities for the technologically inclined, not for the
hewer or the drawer. Many of whom seem hell-bent on prodigious
breeding, worryingly.
>> The only ways an interest-only mortgage makes sense for Joe Sixpack are
>> if they expect to see massive wage inflation over the term of the
>> mortgage, so they can pay off the cost of the house at the end for the
>> price of a couple of pints of beer, or they're going to pay off
>> variable amounts against the principle each month so by the end of the
>> term it's clear.
Joe Sixpack is going to appreciate this, is he? Of course he isn't, if
he did he'd be Justin Winebar.
>Joe Sixpack is not in the mortgage market. He couldn't be bothered to
>go through all the hassle of buying a property even if the mortgage
>market would have him. He's a loser and always will be.
Um, yeah. I wouldn't have been so unpleasant but essentially, yeah.
BB
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Big Bill
<mel.r...@btinternet.com> wrote:
>boiler serviced the guy charged Ł67 incl VAT and wasn't in the place
>half an hour. He refused a coffee. I suppose at those rates he couldn't
>afford the time!
>
>Apparently according to some I did well. And that's when you can find
>one. Many of them are not interested in domestic jobs where they have
>to move about but would rather work on sites and developments. The best
>and only quote I got from painters and decorators to paint my house
>was Ł1400 to start the following spring (around 8 months)He must have
>thought I'd just dropped off a hay cart! I did the job myself in 4 and
>a bit days.
>
>I'll tell you summat else! These blokes don't live in Chavtown they
>have country cottages. Nor does the van double up as the family car.
>
>I think the difference between us surrounds the question of skills. The
>National Federation of House Builders? seems perpetually to be crying
>out for skilled labour. Once upon a day it was fairly usual for young
>lads leaving school to take apprenticeships. Now the same lads (and
>lasses) go to college and follow dead end courses that lead to dead
>ends. The shops and supermarkets are full of them carrying all kinds of
>fancy titles on their lapels that amount to shop assistant.
Supermarkets are killing trades. Butchers, going, grocers, going,
fishmongers, going.
Big Bill
<mma...@my-deja.com> wrote:
And benefits for all the immigrants?