Tuesday, 19 March 2013

Boo hoo! Ah diddums! Etc!

Emailed in by MBK, from The Telegraph:

According to analysis by ratings agency Moody’s, there are about 52,000 borrowers aged over 60 in the UK on interest-only mortgages that mature before 2016 and who have less than 20pc equity in their homes.(1)

With the regulators cracking down on interest-only deals and rates expected to rise in the next two years,(2) the group is unlikely to be offered equivalent terms to those they are on, Moody’s warned. "Older borrowers with interest only loans face refinancing risk," it said.

Annabel Schaafsma, a manager in Moody’s structured finance group, said: "The most at-risk group are those with deposits of less than 20pc. Some will have to use their savings to repay the mortgage.(3) Others will have to downsize.(4)"

The analysis is surprising as older borrowers have been the main beneficiaries of a massive housing boom, with house prices trebling between 1997 and 2010 alone. However, separate research by Fathom Consulting suggested they may be carrying large debts because they released equity to help their children.(5),(6)

1) How on earth is that possible? Assuming a 60 year old couple bought 30 years ago with a 75% mortgage when the average house price was £26,307 (Nationwide), their mortgage principal was £19,730 (I'm not even sure that there were many interest-only deals 30 years ago, but let's assume), then assuming an average house price today of £163,000, they have 88% equity (more or less for free). So basically they must have pissed about £110,000 of mortgage equity withdrawal up the wall in the mean time.

2) The Homey élite have been spinning this one for five or six years, it is all part of the plan to stampede people into "getting onto the property ladder now" (quite why is a mystery; if people really believed that interest rates would go up, then all things being equal, hosue prices would go down).

3) Thus reinstating what the position would have been had they taken out a repayment mortgage.

4) Probably a good thing in and of itself; that way we don't need to build so much new housing for the next generation.

5) That's a lie. People who took out interest-only deals 20 or 30 years ago could not possibly have assumed that prices would sky-rocket the way they did. And those who took out a second mortgage recently to "help" their children into a lifetime of debt slavery probably wouldn't have been given an interest-only mortgage anyway.

6) This is the Achilles' Heel of Home-Owner-Ism. It's all well and good sitting around gloating about how wisely you invested, but sooner or later surely it will dawn on people that not only have they ruined their children's lives but that they are getting dragged back to the bottom of the pyramid? Or maybe not.


The Stigler said...

I think the answer to 1) is that they bought big in the past 10-15 years, probably overstretching themselves because investing in houses is like a magic money pot, isn't it?

as for 6) I've tried explaining it, with diagrams to people, that rising house prices just mean rising prices for their kids and they just don't want to know.

There are 3 official religions in the UK: 1) The monarchy 2) The NHS 3) House Prices.

Mark Wadsworth said...

TS, your answer to 1) is the most likely, but what did they do with the windfall equity in their previous home? Why would a 50 year old take out an interest-only (or even be given one)?

6) The Homeys are not very good with actual numbers. Time and again they insist that household X, Y or Z would be worse off under LVT, and I've set up a nice spreadsheet to do a fair before-after comparison to show that (unsurprisingly) nearly all working age people would pay less tax and they flatly refuse to touch it, they insist that their "soft maths" must be correct, it must be, it must be, it must be. IT MUST BE. Because this is a matter of FAITH.

Graeme said...

Mark, surely the article is really about endowment mortgages rather than "interest only" mortgages. In most cases, the endowment policy will not supply sufficient funds to repay the loan. However, this does assume that the mortgagors have not taken additional steps to cover the debt, eg by remortgaging, switching to repayment loans etc... It is just a scare story.

A K Haart said...

"How on earth is that possible?"

I don't know. I certainly don't know anyone in that position and I must know almost enough people of that age to be statistically significant.

Presumably it is something like the duplicate birthdays stat.

Mark Wadsworth said...

G, probably, but there's still 68% of their "equity" missing and the endowment policy must be worth something, half of what they expected at least?

AKH, the article refers to 52,000 households, which is about 1 in 200 households over people over 60.

Bayard said...

"With the regulators cracking down on interest-only deals"

It may be that this sort of article is preparing the ground for interest-only loans to be the next mis-selling compensation-fest.

Graeme said...

Mark, I think we should just assume that Moody's invented these numbers.

Lola said...

Bayard - Yep. The regulators need to keep the 'problems' comong if they are to stay in business.

The Stigler said...


My endowment is about 22% short. And they stopped being so heavily sold soon after.

One thing that did happen, though, is that some people cashed in their endowment when they got a bit short.

The new banks (like Crock) were OK about interest-only, as it allowed more people to borrow more. Of course, the end result of this was to raise house prices.