"Shortfall fears for interest-only mortgage holders"
May 2, 2013 5:19 AM Subscribe
"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."
Gruaniad version.
"The research uncovered three "peak periods" when interest-only mortgages (buy-to-let loans were excluded from the study) will mature: 2017-18, 2027-28, and the biggest spike year of all, 2032, when about 190,000 loans, mainly taken out in the 2005-08 boom years are due for repayment."
Well it's good that someone is raising the alarm about this now because if there is anything democracies are good at, it is making short-term sacrifices in order to avoid long term problems.
posted by three blind mice at 5:30 AM on May 2, 2013 [2 favorites]
Well it's good that someone is raising the alarm about this now because if there is anything democracies are good at, it is making short-term sacrifices in order to avoid long term problems.
posted by three blind mice at 5:30 AM on May 2, 2013 [2 favorites]
These mortgages were popular when sold alongside an endowment policy in the 1990s, and again during the last decade when many homeowners banked on the rising value of their home to cover the cost.Hindsight is 20/20, but this is such a bad idea from all parties involved. Where were the regulators when this was first occurring? Here we go... The FCA is commissioning research to promote 'awareness' of the approaching financial mess that will occur. CYA at its finest.
posted by seppyk at 5:32 AM on May 2, 2013
"Repayment strategy" for the majority here is probably "sell house and downsize", on the assumption that the value of the house will have significantly increased over the decades since purchase. It seems that this is a case of *not* paying your money and taking your choice, then in 25 years you are fucked. Maybe.
posted by lawrencium at 5:41 AM on May 2, 2013
posted by lawrencium at 5:41 AM on May 2, 2013
"Interest-only mortgage" sounds, at best, like renting. At worst, extortion.
posted by DU at 5:43 AM on May 2, 2013 [4 favorites]
posted by DU at 5:43 AM on May 2, 2013 [4 favorites]
Outside of the uk at least it is renting with a tax advantage.
posted by JPD at 5:48 AM on May 2, 2013
posted by JPD at 5:48 AM on May 2, 2013
It's a higher level of leverage for real estate investors.
As a side note, my financial planning software has no ability to enter the terms of a balloon payment for a mortgage. I guess that's a sign of how rare balloon payments have become in the USA.
posted by surplus at 5:49 AM on May 2, 2013
As a side note, my financial planning software has no ability to enter the terms of a balloon payment for a mortgage. I guess that's a sign of how rare balloon payments have become in the USA.
posted by surplus at 5:49 AM on May 2, 2013
Well, at best, it is something that can help people with wildly inconsistent income from year-to-year due to the nature of their work. But they certainly aren't sold that way. (And I have always paid principal on mine because duh)
posted by mkb at 5:50 AM on May 2, 2013
posted by mkb at 5:50 AM on May 2, 2013
"Interest-only mortgage" sounds, at best, like renting. At worst, extortion.
In a way, it is renting. The reason to use them is when you can actually buy the property outright, but interest rates are so low that you can make more by investing the money. It works even better when there a tax advantage to paying interest. At the end of term, you either sell and pocket the profit, or you pay off the principle and stay.
Banks were willing to make this loan befor because, well, you had the money to buy it outright. Making a no-interest loan to someone who needs to borrow to buy is just wrong -- if something happens to the housing market, you're screwed, you need the house to sell for more than the principle.
posted by eriko at 5:50 AM on May 2, 2013
In a way, it is renting. The reason to use them is when you can actually buy the property outright, but interest rates are so low that you can make more by investing the money. It works even better when there a tax advantage to paying interest. At the end of term, you either sell and pocket the profit, or you pay off the principle and stay.
Banks were willing to make this loan befor because, well, you had the money to buy it outright. Making a no-interest loan to someone who needs to borrow to buy is just wrong -- if something happens to the housing market, you're screwed, you need the house to sell for more than the principle.
posted by eriko at 5:50 AM on May 2, 2013
Corporations have shown us exactly how to handle this problem, so what's all the fuss?
Transfer assets to holding companies overseas, wait for the bill to arrive, declare bankruptcy, transfer assets back on-shore under a different shell company, and hey presto you're done.
No fuss, no muss, and you'll have proven yourself a strong upstanding member of society.
Right? I mean, they will congratulate you on being a hardnosed businessman, right? Sure they will. They'll have to, it just wouldn't be fair otherwise.
posted by aramaic at 5:50 AM on May 2, 2013 [5 favorites]
Transfer assets to holding companies overseas, wait for the bill to arrive, declare bankruptcy, transfer assets back on-shore under a different shell company, and hey presto you're done.
No fuss, no muss, and you'll have proven yourself a strong upstanding member of society.
Right? I mean, they will congratulate you on being a hardnosed businessman, right? Sure they will. They'll have to, it just wouldn't be fair otherwise.
posted by aramaic at 5:50 AM on May 2, 2013 [5 favorites]
Having recently gone through the process of having to get a mortgage I could never understand how these are not a catastrophically bad idea for anyone who doesn't already 100% know they would have the money at that point, or indeed now and were just treating it as a tax/accounting strategy.
But then I remember the Daily Mail, and daytime television, being chock full of c-list celebs telling you how these would let you get the house of your dreams which you could then flip for double the price in five years, or become a buy-to-let billionaire.
They had a big thing about this on Radio Five Live this morning, actually, including talking to various people who'd taken these out and were now in trouble, and I must admit I had mixed feelings.
It was hard not to feel sympathetic for some of the interviewees - they'd clearly bought into a product and a promise they'd been massively mis-sold, and would never have been able to pay off.
For some though, it was hard not to think:
"You bought a half million pound house with borrowed money and didn't have a payment strategy?! What the FUCK did you think was going to happen?!"
posted by garius at 5:56 AM on May 2, 2013 [2 favorites]
But then I remember the Daily Mail, and daytime television, being chock full of c-list celebs telling you how these would let you get the house of your dreams which you could then flip for double the price in five years, or become a buy-to-let billionaire.
They had a big thing about this on Radio Five Live this morning, actually, including talking to various people who'd taken these out and were now in trouble, and I must admit I had mixed feelings.
It was hard not to feel sympathetic for some of the interviewees - they'd clearly bought into a product and a promise they'd been massively mis-sold, and would never have been able to pay off.
For some though, it was hard not to think:
"You bought a half million pound house with borrowed money and didn't have a payment strategy?! What the FUCK did you think was going to happen?!"
posted by garius at 5:56 AM on May 2, 2013 [2 favorites]
"if there is anything democracies are good at, it is making short-term sacrifices in order to avoid long term problems."
You're welcome to not live in one.
posted by bardic at 5:59 AM on May 2, 2013 [1 favorite]
You're welcome to not live in one.
posted by bardic at 5:59 AM on May 2, 2013 [1 favorite]
So even if the economy is better by 2017 we could face:
1) a wave of people suddenly homeless;
2) banks holding assets worth less than their book price; and
3) a glut of housing coming on to the market.
Given that the housing bubble isn't deflating very quickly this would be very bad.
posted by Jehan at 6:16 AM on May 2, 2013
1) a wave of people suddenly homeless;
2) banks holding assets worth less than their book price; and
3) a glut of housing coming on to the market.
Given that the housing bubble isn't deflating very quickly this would be very bad.
posted by Jehan at 6:16 AM on May 2, 2013
Where were the regulators when this was first occurring?
Obviously, they were standing back, allowing the entrepreneurial spirit of the free market to innovate.
posted by Thorzdad at 6:18 AM on May 2, 2013 [2 favorites]
Obviously, they were standing back, allowing the entrepreneurial spirit of the free market to innovate.
posted by Thorzdad at 6:18 AM on May 2, 2013 [2 favorites]
> Well it's good that someone is raising the alarm about this now because if there is anything democracies are good at, it is making short-term sacrifices in order to avoid long term problems.
Is this an endorsement of greater government regulation of financial institutions?
Because I recall it was deregulation that led to the subprime mortgage debacle in the U.S. of which interest-only mortgages played a large part. The more stringent regulations that preceded did not allow it.
posted by ardgedee at 6:19 AM on May 2, 2013
Is this an endorsement of greater government regulation of financial institutions?
Because I recall it was deregulation that led to the subprime mortgage debacle in the U.S. of which interest-only mortgages played a large part. The more stringent regulations that preceded did not allow it.
posted by ardgedee at 6:19 AM on May 2, 2013
You're welcome to not live in one.
It is intolerably wrong to be critical of our political shortcomings. Hold back your traitorous tongue, three blind mice. There's nothing to see here, citizen, move along. hamburgers
posted by five fresh fish at 6:25 AM on May 2, 2013 [1 favorite]
It is intolerably wrong to be critical of our political shortcomings. Hold back your traitorous tongue, three blind mice. There's nothing to see here, citizen, move along. hamburgers
posted by five fresh fish at 6:25 AM on May 2, 2013 [1 favorite]
But then I remember the Daily Mail, and daytime television, being chock full of c-list celebs telling you how these would let you get the house of your dreams which you could then flip for double the price in five years, or become a buy-to-let billionaire.
When I first got to the UK in 2005 and saw all the TV shows about buying and flipping homes on the BBC I joked that it was the British Bubble Corporation. It turned out to be accurate and the defense? "We were just giving people what they wanted".
posted by srboisvert at 6:26 AM on May 2, 2013 [1 favorite]
When I first got to the UK in 2005 and saw all the TV shows about buying and flipping homes on the BBC I joked that it was the British Bubble Corporation. It turned out to be accurate and the defense? "We were just giving people what they wanted".
posted by srboisvert at 6:26 AM on May 2, 2013 [1 favorite]
"Interest-only mortgage" sounds, at best, like renting. At worst, extortion.
Well there's nothing wrong with renting per se. It makes sense some times. In an environment of rising asset prices, however, renting cuts you out of any asset leverage. With an interest only loan, poor slobs who might only be able to afford paying rent could suddenly get a piece of the rising asset action. All things being equal - which they are not - it is better to pay rent and have interest in asset appreciation than to just pay rent. It was a great deal if you timed it right.
The extortion came on the other end. The price of housing. The problem is that basing loan amounts on the ability of a loan applicant to pay only the monthly interest contributed greatly to the amount of loan for which said applicant was granted. The bigger the qualifying loan, the higher the price of housing. It was a key element to the bubble from which a lot of people made a lot of money.
And now interest only mortgage have to be re-financed on assets having suffered a propitious loss of value and a tightening of rules on lending (which is why asset prices have dropped) and it's gonna be tough for a lot of people who stretched themselves into a home.
Is this an endorsement of greater government regulation of financial institutions?
No it is a sardonic comment about fecklessness of government to tackle such problems.
The fact is that more regulation on financial institutions is only going to exert downward pressure on housing prices which will hurt people like this even more - now that they are in this mess, they want and need easy, cheap money loans that caused the problem. Sure the medicine of tougher standards for lending and a requirement to amortize might be good for society, but for this particular constituency it puts them out on the street.
I'm not arguing for or against regulation, but that you can't ignore that political nature of the decision making process makes it very hard to do the "right thing" what ever that may be.
posted by three blind mice at 6:33 AM on May 2, 2013 [1 favorite]
Well there's nothing wrong with renting per se. It makes sense some times. In an environment of rising asset prices, however, renting cuts you out of any asset leverage. With an interest only loan, poor slobs who might only be able to afford paying rent could suddenly get a piece of the rising asset action. All things being equal - which they are not - it is better to pay rent and have interest in asset appreciation than to just pay rent. It was a great deal if you timed it right.
The extortion came on the other end. The price of housing. The problem is that basing loan amounts on the ability of a loan applicant to pay only the monthly interest contributed greatly to the amount of loan for which said applicant was granted. The bigger the qualifying loan, the higher the price of housing. It was a key element to the bubble from which a lot of people made a lot of money.
And now interest only mortgage have to be re-financed on assets having suffered a propitious loss of value and a tightening of rules on lending (which is why asset prices have dropped) and it's gonna be tough for a lot of people who stretched themselves into a home.
Is this an endorsement of greater government regulation of financial institutions?
No it is a sardonic comment about fecklessness of government to tackle such problems.
The fact is that more regulation on financial institutions is only going to exert downward pressure on housing prices which will hurt people like this even more - now that they are in this mess, they want and need easy, cheap money loans that caused the problem. Sure the medicine of tougher standards for lending and a requirement to amortize might be good for society, but for this particular constituency it puts them out on the street.
I'm not arguing for or against regulation, but that you can't ignore that political nature of the decision making process makes it very hard to do the "right thing" what ever that may be.
posted by three blind mice at 6:33 AM on May 2, 2013 [1 favorite]
When I first got to the UK in 2005 and saw all the TV shows about buying and flipping homes on the BBC I joked that it was the British Bubble Corporation. It turned out to be accurate and the defense? "We were just giving people what they wanted"
Well as it says in the Bible:
posted by garius at 6:55 AM on May 2, 2013 [13 favorites]
Well as it says in the Bible:
Now it was the BBC Governor General's custom at commissioning to renew a series chosen by the crowd.-- Wogan 25: 15-24
At that time they had a really good antiques sitcom whose name was Lovejoy.
So when the crowd had gathered, Sir Christopher Bland asked them, “Which one do you want me to renew for you: Lovejoy, or Bargain Hunt?”
For he knew it was out of pure penny-pinching and laziness that the management and production companies had handed Lovejoy over to him.
But the management and the producers persuaded the crowd to ask for Bargain Hunt and to have Lovejoy cancelled.
“Which of the two do you want me to renew for you?” asked the Governor again. "You do know Bargain Hunt's got that tit David Dickinson in it?!"
“Bargain Hunt,” they answered. "Oooh! Oooh! And More Homes Under the Hammer!"
“What shall I do, then, with Lovejoy?” Sir Christopher asked.
They all answered, “Cancel Him!”
"Why?! It's got Ian McShane in it FFS!” asked the Governor.
But they shouted all the louder, “Cancel him!”
When Sir Christopher saw that he was getting nowhere, but that instead an uproar was starting, he took water and washed his hands in front of the crowd. “I am innocent of this man’s blood,” he said. “It is your responsibility!”
"We are just giving people what they wanted."
posted by garius at 6:55 AM on May 2, 2013 [13 favorites]
Interest-only mortages were a way to fool people into "buying" homes they could not afford, like the US property bubble it fed on people's belief/hope that house prices would keep on rising. Unlike the US property bubble, ours was perpetuated by intellgent poeple, they at least knew how to maintain a long term cash flow.
posted by epo at 7:08 AM on May 2, 2013
posted by epo at 7:08 AM on May 2, 2013
Interest only mortgages were originally for people like investment bankers whose compensation is mostly in the form of a bonus. Their relatively small income allowed them to make their monthly payments, and then they would pay off a big portion of the principal once a year after getting the annual bonus. At the end of the term, they would pay off the balloon or refinance. It still is really only appropriate for that situation. Mortgage bankers who sold these mortgages to people who simply didn't have the income or type of job to justify it were at best fooling themselves, but much more likely were being predatory and reckless (both to the borrower and to the eventual buyer of the loan).
posted by odin53 at 8:00 AM on May 2, 2013
posted by odin53 at 8:00 AM on May 2, 2013
Out of curiosity, where are y'all now with your housing bubble? I have a vague impression that it wasn't nearly so bad in the UK in general and that in London in particular you had enough expatriate inflows that housing prices never really outright fell. Is that way off? Are lots of people in the UK underwater --- that is, they couldn't sell today for more than they owe?
posted by Diablevert at 8:22 AM on May 2, 2013
posted by Diablevert at 8:22 AM on May 2, 2013
The publicised influx of foreign buyers was largely in London and mainly at the top end of the market.
The UK property market used to be thought of as a ladder, predicated on the expectation of increased income and ever-increasing house prices. Thus one bought a starter home, did it up, sold it for a profit, used that to finance a more expensive home and so it went on. Once the recession bit, salaries stopped rising and house prices became static or fell and the whole thing gummed up. Increasingly people couldn't afford to move on (or even sell because that would realise a loss), the supply of starter homes has dried up, mortgages are harder to come by and the whole market has stagnated.
I paid off my repayment mortgage a couple of years ago and it was a nice feeling. Despite recent falls, my house is currently worth about 6 times what I paid for it (assuming I could find a buyer of course).
posted by epo at 8:51 AM on May 2, 2013
The UK property market used to be thought of as a ladder, predicated on the expectation of increased income and ever-increasing house prices. Thus one bought a starter home, did it up, sold it for a profit, used that to finance a more expensive home and so it went on. Once the recession bit, salaries stopped rising and house prices became static or fell and the whole thing gummed up. Increasingly people couldn't afford to move on (or even sell because that would realise a loss), the supply of starter homes has dried up, mortgages are harder to come by and the whole market has stagnated.
I paid off my repayment mortgage a couple of years ago and it was a nice feeling. Despite recent falls, my house is currently worth about 6 times what I paid for it (assuming I could find a buyer of course).
posted by epo at 8:51 AM on May 2, 2013
I think it changes wildly on an area-to-area basis. Even within London, if my personal experience is anything to go by.
Our current landlady plans to sell the flat we're renting at the moment in Hackney (East London), for example, when we move out. She's the epitome of the "buy to let" crew that came onto the scene right before the bubble burst, and is likely to make a 15 - 20k loss we reckon.
Given that she's had our rent money covering her mortgage since she bought it though, I'm not too upset for her (and I doubt she is either, she just wants to free up the capital).
Hackney is still too expensive though for us to buy anything like what we want (now that we've finally been able to save up enough for deposit) so we had to widen our search out.
For a while that meant looking at Walthamstow - still London but a mile or so eastwards. That was promising, but in the last six months prices there have rocketed. We were actually about to buy a nice three bed house there only for the seller to back out about a week or so before we were ready to exchange contracts. Houses on the same road are now listed at about 20k more than they were when we started the process of buying that house, and the same price inflation seems true elsewhere in the area.
We've now had an offer accepted in Leyton, another part of London just down the road, which so far seems to have avoided the Walthamstow bubble.
I'm just hoping this time our purchase actually completes as it's a soul destroying process buying a house in England, and frankly we're running out of non-bubbly areas to move to that we like. I'm also barely restraining myself from murdering an estate agent and/or solicitor, and if I have to do all this again I refuse to be accountable for my actions.
The key problem in the market as a whole is really what epo identifies - it's all about the ladder, and critical to the ladder are first time buyers.
The fact that it is only now, with us both at 32, that both myself and the wife (who have both been in constant, good, employment since university) have been able to pull together enough to get a deposit for a mortgage should probably show you just how hard it is for first time buyers to get on that ladder at the moment - in London at least.
posted by garius at 8:58 AM on May 2, 2013
Our current landlady plans to sell the flat we're renting at the moment in Hackney (East London), for example, when we move out. She's the epitome of the "buy to let" crew that came onto the scene right before the bubble burst, and is likely to make a 15 - 20k loss we reckon.
Given that she's had our rent money covering her mortgage since she bought it though, I'm not too upset for her (and I doubt she is either, she just wants to free up the capital).
Hackney is still too expensive though for us to buy anything like what we want (now that we've finally been able to save up enough for deposit) so we had to widen our search out.
For a while that meant looking at Walthamstow - still London but a mile or so eastwards. That was promising, but in the last six months prices there have rocketed. We were actually about to buy a nice three bed house there only for the seller to back out about a week or so before we were ready to exchange contracts. Houses on the same road are now listed at about 20k more than they were when we started the process of buying that house, and the same price inflation seems true elsewhere in the area.
We've now had an offer accepted in Leyton, another part of London just down the road, which so far seems to have avoided the Walthamstow bubble.
I'm just hoping this time our purchase actually completes as it's a soul destroying process buying a house in England, and frankly we're running out of non-bubbly areas to move to that we like. I'm also barely restraining myself from murdering an estate agent and/or solicitor, and if I have to do all this again I refuse to be accountable for my actions.
The key problem in the market as a whole is really what epo identifies - it's all about the ladder, and critical to the ladder are first time buyers.
The fact that it is only now, with us both at 32, that both myself and the wife (who have both been in constant, good, employment since university) have been able to pull together enough to get a deposit for a mortgage should probably show you just how hard it is for first time buyers to get on that ladder at the moment - in London at least.
posted by garius at 8:58 AM on May 2, 2013
I'm not doing well today, "about 6 times what I paid for it" should be "about 6 times the original price", I had to pay interest of course. And garius, I feel for you, I'm glad I don't have to do it again.
posted by epo at 9:27 AM on May 2, 2013
posted by epo at 9:27 AM on May 2, 2013
The key problem in the market as a whole is really what epo identifies - it's all about the ladder, and critical to the ladder are first time buyers.
This is one of the best descriptions of a Ponzi schemes I have ever heard...
posted by bartonlong at 9:40 AM on May 2, 2013 [3 favorites]
This is one of the best descriptions of a Ponzi schemes I have ever heard...
posted by bartonlong at 9:40 AM on May 2, 2013 [3 favorites]
I hate the metaphor that is the housing ladder. The implication being that you have to get on and keep climbing. What has really happened, with the mass trend of BTL, the selling off of a large amount of council stock, and cheap credit in the late 90s, is that the ladder has been pulled up out of reach. This is especially true in London and the South East.
Since the government *really* does not want a housing price crash, or mass repossessions, they are doing their damned best to keep the ladder upright; with a variety of schemes aimed at assisting FTBs. Interest rates being kept low for the long term are also keeping the ladder upright for those already on it.
Which is all well and good but, as epo says, the market has essentially ground to a halt.
posted by lawrencium at 12:14 PM on May 2, 2013 [1 favorite]
Since the government *really* does not want a housing price crash, or mass repossessions, they are doing their damned best to keep the ladder upright; with a variety of schemes aimed at assisting FTBs. Interest rates being kept low for the long term are also keeping the ladder upright for those already on it.
Which is all well and good but, as epo says, the market has essentially ground to a halt.
posted by lawrencium at 12:14 PM on May 2, 2013 [1 favorite]
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Wow.
posted by (Arsenio) Hall and (Warren) Oates at 5:29 AM on May 2, 2013