From the BBC:-
More than a million people with interest-only mortgages face a financial crunch when they have to pay them off, a watchdog is warning.
Some 2.6 million UK householders have the mortgages but the Financial Conduct Authority said estimates suggested that nearly half would not have savings or other funds to cover the final bill.
The average shortfall is £71,000, according to FCA research.
Well, yes. If you don't have a way to payoff interest only, you're going to have a shortfall. Why people would have money sat in savings and not be paying it off over time, I don't know, but still...
The more serious problem here is how Interest Only mortgages were sold. Back in the old days of Building Societies, they wouldn't lend to you on Interest Only. You had to have a repayment vehicle, either paying off capital each month, or using an endowment. Interest only was reserved for hardship. Wife loses her job, money is tight, you switch to interest only until you get back on your feet and go back to cap and int.
But in the days of Crock, they didn't care about such things. It was sell, sell, sell. The demutualisation of Building Societies led to them finding any way to get customers. The restrictions on lending from money markets meant that building societies couldn't go gangbusters on lending like that - they had to keep their own investment ratios up (under BSA rules). You would be more conservative about lending policies.
Which is why the Brown housing crash is so much worse than the Major one. The lenders did everything to get people a loan, regardless of whether their risk really made sense (including very long terms and 100% mortgages), which of course, led to easier loans, which led to house prices continuing to rise well past the normal limits.
4 comments:
Very good analysis, but very slightly incomplete.
There are quite a number of borrowers on I/O mortgages who know exactly what they are doing. It was roughly the same price to buy as to rent on an I/O basis and doing so meant that they could take part in the housing boom. They know they'll have to sell or do soemthing else. Many have planned to use an equity release scheme. In this way they can have more house than they could otherwise afford, and why not? As long as they have a plan an know the risks, which they mostly do. And generally these buyers tailed off as the boom became manic.
But, there are people suckered into I/O schemes by estate agents and others at the top of the boom that will suffer. And it this group who will become the negative equity 'victims' when there finally is a reckoning on house prices. And whoever is the gummint when that happens will be blamed for it - hence all the manic gummint support for house buyers and sellers.
Lastly the actual numbers of real problem people here are miniscule. The true purpose of this announcement is simply 'regulatory marketing' by the wholly incompetent Financial Catastrophe Authority.
L: "The true purpose of this announcement is simply 'regulatory marketing' by the wholly incompetent Financial Catastrophe Authority."
That was my first thought, the Daily Mailexpressgraph trots out this story very six months or so, along the lines of "hard pressed hard working pensioners being victimised by big evil banks who want to strip them of their life savings, family home" etc.
This FCA announcement is also of course another cue for the rolling out of some "there ought to be a bail out" propaganda :-
"Wake-up call" - "The interest-only mortgage is the housing scandal that just keeps coming back." (http://www.insidehousing.co.uk/home/blogs/wake-up-call/6526745.blog)
"Presumably the lender would repossess the house and get back an asset almost certainly worth more than the amount that was borrowed 25 years before. It may not be much compensation to the former owner losing their home but they will have enjoyed 25 years living in it and probably have paid less in mortgage interest than they would have done in rent.
The repossessed owner may apply as homeless, triggering immediate costs for their local authority. Or they may simply move into rented accommodation when they are close to retirement, storing up a long-term liability for housing benefit on top of the huge bill that is already coming from the fall in home ownership.
And so ultimately the taxpayer will be left picking up the bill for the lax lending that inflated the housing boom. It’s not just lenders and borrowers who need a wake-up call but the government too".
Yes indeed, all those potential problems could be dispensed with at a stroke if "the government" just agreed to either pay off the outstanding capital on all those mortgages or simply instructed the lenders to "write them off"
And this FCA announcement is also of course another cue for:-
"Mortgage industry braced as claims management firms raise prospect of mis-sold interest-only mortgages"
"Money Boomerang, has launched a TV advertising campaign aimed at borrowers who were sold their loans through a mortgage broker.
The advert asks those who have taken out a mortgage since November 2004 (when mortgage selling regulations were introduced) and who believe the adviser did not check whether they could afford the loan to contact them.
"In some cases you may have been given the wrong advice. Money Boomerang can carry out a free mortgage review and find out if it [the loan] was mis-sold," the advert says.
The mortgage industry is preparing for even more frenzied activity from such companies following the recent release of a report by the Financial Conduct Authority, successor to the Financial Services Authority."
http://www.guardian.co.uk/money/2013/may/02/interest-only-mortgage-claims-management-companies
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