Friday, 23 November 2018

Rent-to-own buyers vs mortgage prisoners

Both these stories came out in the past couple of days, it's an interesting compare and contrast.:

1. From the BBC:

Plans to cap the costs of buying domestic goods such as TVs and fridges through rent-to-own shops have been welcomed by the stores' customers...

First, the FCA will limit the amount of interest that customers pay. From April 2019, they will pay no more in interest than the cost of the product itself. So if a cooker costs £300, they will pay no more than £600 in total, including the cost of credit.

However, rent-to-own shops will still be able to charge for insurance and warranties on top of that.

Second, the cost of the goods themselves will be limited. Shops will be able to charge no more than the median - i.e the middle price - of three mainstream retailers.

Whether those high interest rates are justified, bearing in mind the default risk and the cost of collecting regular small payments I do not know. Their 2017 accounts show a profit margin of 5% on sales for 2016 and a huge loss for 2017. So probably they are justified overall (half of customers get ripped off; the other half default, same as Wonga).

2. From City AM:

In the years leading up to the 2008 financial crisis, lenders were dishing out large mortgages and asking for tiny deposits in return. Property values were rapidly outpacing wage growth, and buyers were being allowed to borrow eight times their annual salary.

For many homeowners, the problems started after the crash when the regulators forced the banks to toughen up their lending criteria. This meant that people with large mortgages couldn’t negotiate a better deal – either because they no longer passed the affordability checks, or because their credit rating had been damaged.

As a result, tens of thousands of people are now “mortgage prisoners” – trapped on their lender’s high-interest standard variable rate (SVR), paying hundreds more each month than the average fixed-rate deal.

... the real sticking point is a piece of EU law known as the Mortgage Credit Directive (introduced in 2016). Essentially, this directive is stopping the banks from waiving affordability criteria – even for those borrowers who want to move to a new lender without increasing the size of their debt.

That's a foul excuse. Why can't the government just cap the interest rate payable by "mortgage prisoners", the same as they are suggesting for the rent-to-buy sector?

... while all of this is positive, Nicky Morgan points out that this does nothing to help the 140,000 customers who have mortgages with inactive lenders like Northern Rock and Bradford & Bingley.

The mortgage books of those two banks were run by the UK government, so they wouldn't have needed to do anything legal or formalistic, just drop the interest rate a bit, nothing to do with the EU, job done.

Only they can't do that any more because they have sold the mortgages on to other institutions who now want their pound of flesh, and who could probably accuse the government of misselling them the second-hand mortgages.

I would also assume that this is just a back door way of allowing 100% mortgages again.


formertory said...

Why can't the government just cap the interest rate payable by "mortgage prisoners", the same as they are suggesting for the rent-to-buy sector?

And while they're at it they can cap the price of houses and make sure that if I invest money in something and it loses money, I'm compensated. And then, like our hero Mr Maduro in Venezuela they might cap the price of fuel and toilet paper, so ensuring we have neither.

Having a mortgage carries risk. Ignoring advice about the variable price of money and other future unknowns when considering how much money to borrow is a risk.

I don't know if this is leading to 100% mortgages but I can certainly see a path to government moving to protect mortgage holders who can't afford repayments as interest rates rise. I've long maintained that there'll be - in this snowflake age - a huge wailing about "nobody told me this could happen - it's sooooo unfair!" and rather than letting it all correct naturally, some bloody idiot politicians will want to signal his / her virtue by making sure the rest of us pay for the excesses of some.

It's par for the course, really.

Mark Wadsworth said...

FT, that is all true. I was just pointing out what would have been the easiest way of "helping mortgage prisoners" without using it as an excuse for 100% mortgages.

Bayard said...

FT, yes, just like all the wailing about dodgy leaseholds recently. What part of "If it seems to good to be true, it almost definitely is" are these people struggling with? Doesn't anyone read anything any more before signing away their hard-borrowed cash. or wonder whether the reason why the houses were cheap was not due to the benevolence of the developer selling them?

James Higham said...

Yes, it was an interesting compare and contrast to a layman.

Mark Wadsworth said...

JH, thanks, all part of the service.