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Reform to put millions in interest-only trap

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    Reform to put millions in interest-only trap

    Reform to put millions in interest-only trap

    Millions of homeowners on interest-only deals risk becoming 'mortgage prisoners' under rules laid out by the financial watchdog yesterday.

    Proposals to crack down on irresponsible lending could make it virtually impossible for up to half of the five million interest-only customers to remortgage on to a better deal.
    The warning came as the Financial Services Authority published a long-awaited review of the mortgage market.

    The FSA, which admitted it had failed to prevent reckless lending in the past, said it was shifting to 'more intrusive and interventionist' regulation.

    Applicants will have to prove not only their income, but also their outgoings on everything from utility and food bills to spending on holidays and Christmas presents. But the regulator stopped short of banning controversial 100% mortgages.

    Chief executive Hector Sants admitted the move would mean some who were able to obtain mortgages in the boom years would no longer be able to do so.

    The FSA said interest-only deals should be regarded as 'high-risk products' as they are far more likely to end in arrears and repossession.

    In future anyone applying for an interest-only deal will have to prove they could afford a more expensive repayment mortgage should they be required to do so.

    On a typical £150,000 mortgage, at 5% interest, an interest-only deal would cost £625 a month, while a repayment mortgage would cost £877.

    On a repayment mortgage, homeowners pay off the capital as well as the interest on a loan, typically over 25 years.

    Those with interest-only deals pay off just the interest, leaving them to find other ways of paying off the capital at the end of the loan term. The FSA found that only a quarter of interest-only deals were making provision to repay the capital.

    Robert Sinclair, director of the Association of Mortgage Intermediaries, which represents mortgage brokers, said 40% to 50% of those on interest-only deals would struggle to pass the FSA's new affordability tests.

    'They may well find themselves trapped on an unattractive variable-rate mortgage,' he said.

    A spokesman for the FSA said the aim of the rules on interest-only mortgages was to ensure they are not used as a cut-rate way of buying a house.

    Millions on self-certified and so-called 'fast track' mortgages could also face problems in remortgaging after the FSA confirmed it would require banks to check the income and outgoings of all applicants.

    These mortgages allowed applicants to inflate their incomes in order to qualify for bigger mortgages and were known as 'liars' loans'.
    Ok - so what is someone has an interest only mortgage, it might not be the brightest thing to do but if the payment is made on time every month and if its cheaper than renting then as long as the property is sold at retirement to pay off the mortgage what's the problem? Sure you have paid a lot of interest, but in my case its the only way I can afford to house my family, with a house at 50% equity my monthly cost is less than 1/2 the rent.


    BTW Malvio - brilliant blog on the mortgage crackdown BTW - you should post a comment on the thisismoney website
    This default font is sooooooooooooo boring and so are short usernames

    #2
    If you had to buy house with interest only mortgage then you could not really afford it - you should have rented instead.

    Comment


      #3
      The problem is, that people taking on interest only mortgages leads to rampant house prices.

      If the interest rate is low and you don't have to pay back the capital borrowed, you can "afford" to borrow huge amounts, causing house prices to rocket.

      I'd chuck you all out on the streets.

      Comment


        #4
        Cough. Endowment mortgages were interest only mortgages.

        In the early 90s nobody wanted to talk to you about a repayment mortgage - the only practical way to get one was to start out with an endowment jobbie and convert it.
        Behold the warranty -- the bold print giveth and the fine print taketh away.

        Comment


          #5
          What is this "mortgage" thingy of which you speak?
          Hard Brexit now!
          #prayfornodeal

          Comment


            #6
            In some countries, interest only mortgages are de rigeuer. I have two mortgages, one is a repayment, one is interest only. In 3 years, when I remortgage, I will have paid off the repayment mortgage, and get another one, plus a smaller interest only mortgage.

            Part of the reason why some people never pay their mortgage off (kids can inherit the mortgage), is that at some point the tax deduction for interest, is the same as the additional wealth tax you pay for owning and living in your own home.
            Down with racism. Long live miscegenation!

            Comment


              #7
              Originally posted by sasguru View Post
              What is this "mortgage" thingy of which you speak?
              A device to entice people into long term debt, a mortgage was at one time judged to be a particularly useful tax reduction vehicle for higher rate tax payers.

              Maggie in particular persuaded many to jump on this bandwagon by giving tax relief at the standard rate to lower rate tax payers and non tax payers.
              Behold the warranty -- the bold print giveth and the fine print taketh away.

              Comment


                #8
                Originally posted by Sysman View Post
                Cough. Endowment mortgages were interest only mortgages.

                In the early 90s nobody wanted to talk to you about a repayment mortgage - the only practical way to get one was to start out with an endowment jobbie and convert it.
                WHS

                I was actively talked out of a repayment mortgage by the IFA and colleagues.
                My all-time favourite Dilbert cartoon, this is: BTW, a Dumpster is a brand of skip, I think.

                Comment


                  #9
                  Ok - so what is someone has an interest only mortgage, it might not be the brightest thing to do but if the payment is made on time every month and if its cheaper than renting then as long as the property is sold at retirement to pay off the mortgage what's the problem?
                  What about these:
                  1. That would be a forced sale, and is unpleasant for people who are around retirement age
                  2. Not only would you have no home, but little or no equity with which to buy/rent a new one
                  3. The house might not even be worth what you owe on it
                  The FSA found that only a quarter of interest-only deals were making provision to repay the capital.
                  That there is another timebomb...

                  Comment


                    #10
                    According the the Guardian:

                    What the watchdog is banning – and thinking of banning

                    Red light (ban)

                    • Self-certification mortgages

                    • "Fast track" loans – light-touch checking by lenders

                    • "Toxic combination" loans, such as 90%-plus loans to people with poor credit histories

                    • Ban on upfront fees and charges being rolled into a 25-year loan

                    • Banning arrears charges when a borrower is already repaying, ensuring firms do not profit from people in arrears

                    Amber light (possible ban)

                    • Interest-only mortgages

                    • Raising extra money when remortgaging

                    • Offset mortgages, where households can draw down the equity in their homes

                    • Mortgages that run past retirement age

                    Green light

                    • 100% mortgages. No ban on high "loan to value" mortgages

                    • High income multiples. Borrowers potentially able to access five-times salary loans



                    Interesting they see no problem with 100% mortgages at 5x income!
                    First Law of Contracting: Only the strong survive

                    Comment

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