Exhibit One
Up to 300,000 cash-strapped households have switched more than £60bn of mortgage debt from repayment into risky interest-only deals over the past three years to help cover their living costs.
Analysis of Financial Services Authority (FSA) data demonstrates just how desperate families have become as they contend with what Mervyn King, the Governor of the Bank of England, has described as the most dramatic squeeze on family finances since the 1920s.
With the average UK mortgage at £109,000 and average borrowing costs at 3.5pc, switching from repayment to interest-only saves households roughly £230 a month. But although the move may help families with their immediate cash-flow problems, concerns have been raised about how the debts will be repaid. Darren Winder, UK economist at Oriel, said: "For someone who's trying to alleviate monthly cash flow pressure, moving to interest-only makes sense. But it does raise questions about how that loan gets repaid."
From other sources, it appears that three million borrowers are on interest-only mortgages, which is about a quarter of all mortgages.
Exhibit Two:
Lender forbearance – where banks shift homeowners onto interest-only deals, extend their mortgage term, or even permit payment holidays – now accounts for 63pc of all troubled home loans, according to the Financial Services Authority (FSA).
Although forbearance can help households, the FSA is concerned banks are using it to flatter their numbers by reducing bad debt provisions.
In a guidance note on "forbearance and impairment provisions", it said: "We believe that there is scope for considerable improvement in firms' interpretation of the disclosure requirements." A spokesman added that "there are concerns" about banks' use of forbearance.
Exhibit Three
Companies including Taylor Wimpey, Persimmon and Barratt have injected huge sums into the market in the form of shared-equity schemes to help customers get on the property ladder.
Details of the massive sums housebuilders have had to carry on their balance sheets came as it emerged the Council of Mortgage Lenders is coming under pressure to ease the supply of finance to first-time buyers by reintroducing 95pc mortgages.
Figures from the Home Builders Federation (HBF) reveal that £835m of shared equity loans were made available between January 2008 and February this year, resulting in 28,000 sales. Under the schemes, housebuilders help customers get together a deposit to buy homes.
The Government has also supported the market with it own shared-equity schemes including HomeBuy Direct and FirstBuy. Much of the shared-equity funding supplied by housebuilders has been done in partnership with Government schemes.
All articles from The Telegraph, spotter's badge MBK.
Wednesday, 1 June 2011
Extend And Pretend Fun
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Up to 300,000 cash-strapped households have switched more than £60bn of mortgage debt from repayment into risky interest-only deals
Typical sort of media sloppiness. In the short to medium term an interest-only mortgage is no more "risky" to either the borrower or the lender than the capital-and-interest alternative, whether on fixed or variable terms.
In fact, short term, it might be said to be less risky if someone's struggling to make repayments.
Long term, I accept entirely it's a disaster with only the lender benefiting from additional interest over the period, but that's better than me as a taxpayer being mugged to bail out everyone else.
So long as people are told what the downside is, and so long as they understand they're not buying their house as long as they're on IO, so long as they know they need to have cash to pay off the mortgage sometime, and that property prices might yet go down further, that's fine with me. Let them crack on. Just don't come weeping to me when it all goes crunch.
FT, sure, but in global terms it is riskier for everybody to try and 'jump on the property ladder' by taking out £150,000 IO mortgages than it is for the same people to all take out £100,000 repayment mortgages (assuming that monthly repayments are the same on £150,000 IO and £100,000 repayment).
It's all going to go wrong sooner or later, isn't it?
I remember when I swapped to an IO mortgage and an elderly colleague enquired "But how will you repay it"? I had to explain that I had no particular intention of repaying it until either (i) we sold the house, or (ii) I retired and got my tax-free lump sum. He seemed a little bemused. Actually, since it's only costing us 2.5% p.a. we're still in no rush to clear it off.
Good be an advanced bet on high future inflation...
L, it all went wrong about three or four years ago and it's been going steadily wronger ever since.
D, fair enough, you have a 'repayment vehicle in place', as they say in the trade.
AC1, 'good' or 'could'?
MW, sure. I agree entirely. The main thrust of this "scare story" though, as I read it, is that people are swapping C&I repyt loans for interest only, because they can't meet their C&I commitment.
Ergo at the level of the individual debtor the risk in the short term is unchanged, and arguably, lessened. I entirely accept that the risk of loss to lenders at a "global" level if their debt is moving to IO is higher; but that increase in risk really just follows from the fact that many people are finding mortgage servicing hard going.
The people who are really pissing in the wind are those who remain convinced that it's in their best interest (sorry) to take any risk - including long-term IO mortgages - to "get on the housing ladder" because they still believe somehow they'll get wealthy.
There'll be some changes when I'm the Regulator..... :-)
FT, maybe I should have added that everybody taking out an £150,000 IO rather than a £100,000 C&I just means that house prices go up by 50%, so seeing as it's the same people with the same incomes and the same houses, this must surely add to overall risk in the system.
It's a bit different for people like D who probably paid tuppence for their house years ago and are just treading water until the pension lump sum materialises.
If you buy a property with a IO mortgage you are effectively renting the place from the bank. However if the property value drops into negative equity the bank can persue you for the difference. If the banks themselves were liable for any drops into negative equity then perhaps this would incentivise them to lend wisely and not to fuel housing bubbles.
DNAse, well you'd think so, but the USA, which seems to have non-recourse mortgages, would seem to suggest otherwise - the banks then just go wailing to the Treasury asking for money so that they aren't 'forced' to repo the poor long suffering borrowers.
@MW both. Still not woken up when I wrote it.
MW - Yes, perhaps I should have said 'it is soon all going to go really wrong isn't it?'
Godammit! Its as if Society and the State *want* me to become a Rentier.
:)
Those on interest-only mortgages will be proportionately more affected when interest rates go up. And if interest-only is the only way they can afford their home now, what happens when interest rates, say, double?
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