Buying a house right now. How safe?

What happens when the interest rates go back up, which in time they will? People do tend to look at the short term when in fact, this is in most instances a long term (25 year) commitment. Although we have had interest rates very low recently, we cannot say that this will continue for the full term. Then the lenders all issuing loans on an interest rate basis which people could afford before will be blamed for it "you lent me too much money - now I can't repay it - it's your fault".

It seems similar to a number of the endowment complaints we have now. Clients needed to get, say 8% per annum, which may not have been unreasonable at the time they took the plan out (similar to affording the mortgage payment now), we have had a recent down turn and they now have a shortfall projecting at 6% and it's everyone else's fault but their own. Over the full term of the plan though, they may in fact with long enough to run (a number of the older plans with shorter terms to run are acutally doing o.k) recover and still return enough - problem is, we don't know what's going to happen and that's the rub. However, although Joe public are willing to take the risk now, under our blame culture society, when things do change for the worse and they realise that they ahve messed up, they will then want someone else to blame and the consumer groups, et al, will find someone.

I don't advise on mortgages (and have never recommended an endowment either for that matter) but I think there are lenders who do offer mortgages on ability to pay rather than income multiples anyway, Standard Life Bank rings a bell.

I'd be wary though. Thank you for letting me rant on for so long, I'm off for a Tai' chi session now!

Paul.

"Paul Baker" wrote

While you've got your crystal ball handy - what is the highest rate which they *will* get up to??

"Paul Baker" wrote

How many mortgages actually last out the full 25 years? I suspect not many - the average length of time that people stay in one house is (apparently) much less than that!!

"Paul Baker" wrote

Isn't it interesting how, if people had continued to pay the monthly amount which was required in the "8% interest" scenario, even though interest rates had fallen to less than 6% (ie had they begun to overpay, but only up to the amount that they were expecting to pay each month at the outset) - then they would have paid off the mortgage *quicker* than intended, had *no* shortfall and been *better off* !!

But no - people allowed falling interest rates to let them pay less on their mortgages, and *spent* the savings instead - and then later cry "complaint!".

I expect historically most last rather longer.

That's irrelevant, because most will then immediately take on a replacement mortgage which should be seen as a continuation of the previous one. For financial planning purposes it makes no difference which property the loan is secured on, it matters only how big the loan is and how long it remains outstanding.

"Tim" wrote

Absolutely.

The only people with real grounds for complaint are those who were sold a repayment mortgage. They lost out on the free option retrospectively embedded in an endowment - i.e. get a return of either UK interest rates, or with-profits fund growth, whichever is the higher. Nice one.

The next financial "scandal" could well be people who didn't do this and simply took out a succession of 25 year remortgages with the upfront fees added onto the mortgage advance each time.

I haven't checked, but I imagine it's possible to remortgage 5 times in 10 years and end up with 23 years outstanding on a loan that's bigger than it was when you started. We'll then hear a lot of whines about how people didn't understand that the payment rate is not the only thing to look at.

It would be useful if you could find it. 12 times as much in absolute numbers is impossible, and even 12 times as much relative to the respective populations of the two countries sounds highly unlikely.

Steve

"The Blue Max" wrote

Yeh, I've pointed that out here before.

The next great "misselling review" : repayment mortgages? !

"Ronald Raygun" wrote

Your reasoning is of course impeccable, *but* only applies if :- (1) they are moving to an equivalent house (value-wise); (2) they retain the same size of mortgage loan; and (3) keep loan over the same remaining term.

(1), at least, quite often is not true (eg move to a bigger house as family grows, smaller house as offspring leave the nest).

Even if (1) is true, altho' (2) & (3) perhaps *should* (as you say) be adhered to - but how many people do you honestly believe *will* ?

In article , Steve writes

The Dutch are not 'suffering' a boom. They saw the biggest real increase in prices during the Nineties but this has now declined to around 2% pa nominal. Where they score is a higher proportion of new homes per head of population - about 6.5 compared with 3.4 in the UK - which may be where the idea comes from about twice as many 'available' homes

This does not apply to building in a single year. We have never built as many homes per capita as other developed countries, even in the Sixties boom when politicians courted votes by saying how many they built [a cause of the extensive demolition since then because speed does not help endurance]. Comparative figures for other countries are 13.5 in equally-crowded Japan, 4.1 in Germany and an average 4.9 across the EU.

As always. :-)

Isn't that what "replacement" means?

Irrelevant. If you change the amount of your loan, up or down, you would be well advised nevertheless to keep the end date the same, or at least not to shift it further into the future.

Inevitably that will mean an upmarket move will cost you more than you'd expect, but that's life. You always have the choice between paying a little more now and paying a lot more in the long run.

That was rather the implicit point of my remark. Most people will tend to stretch the term, hence the average length of time people keep the same mortgage (or effectively the same) is not less than, but more than 25 years.

"Ronald Raygun" wrote

Why? Eg - When you bought your first tiny house, it was cheap so you decided to spread the cost over a short period (say 15 years). Then, when you moved upmarket you realised that you couldn't afford the artifically high monthly payments over a ten year (remaining) term, so you extend it (still to be completed well before age 60, or perhaps even 50). What's wrong with that?

Just because you decided to try to pay off the cost of the tiny house quickly, shouldn't force you into paying the more expensive larger house on the same schedule!!

"Ronald Raygun" wrote

One would think that they would take out mortgages which were longer than 25 years when young (eg 30+ year term when in their twenties). Then, when they move 5 years later they can have the more usual 25 year term.

Instead, people tend to take out 25 year term mortgages both times, giving the impression that they are "pushing back" the final date of maturity - but really, all they are doing is "over-paying" a 30 year mortgage in the first

Not bloody likely, because the nice financial "adviser" automatically recommended a 25-year term and the bottom-line monthly payments looked OK, and you were grateful even to get a loan at all, so you didn't hesitate to sign on the dotten line.

Nothing at all is wrong with that. In theory. But nobody is that sensible in practice.

Would one?

Very nice! And then they suddenly realise that the 30 year deal was really just overpaying the 40 year one...

In message , Ronald Raygun writes

When I "sold" endowments with mortgages, that was generally the thrust of my sales pitch. i.e. with a repayment, the temptation is to renew with a fresh 25 year term, but with an endowment, you just take a new endowment to end at the same time as the 1st, and so on.

I didnt sell many because I always painted the true picture - most people went and bought one from someone who told them that they couldnt fail - In my time in estate agency, most people tend to do business with people who tell them what they want to hear

Anyway, my tables have now turned, and I choose to have all of my property loans on an interest only basis, with no repayment vehicle.

Please note that this is not advice that I would give to anyone else, without extreme caution, but my cavalier attitude to property seems to be serving me well. I'm only about 50% geared, so I can always sell something to reduce the loans if necessary. ( the gearing is getting less every day, as the market rises, and will no doubt get higher as the market falls, when & if it does ).

How refreshing that you are able to take such a philosophical view. Just you wait. ;-]

"Richard Faulkner" wrote

That's a strange distinction.

When I traded-up from my 1st house to my 2nd (5 years after taking out a 25 year endowment for 1st house), I took out a further 25 year endowment for the difference, keeping the old endowment -- with 1st endowment to mature 20 years later, and 2nd one to mature 5 years after that.

How is there *more* temptation to "renew with a fresh 25 year term" if you have a repayment, rather than an endowment??

"Richard Faulkner" wrote

The other advantage of an endowment was that if you're 22 and buying your first place, like many did in the Eighties, you're likely to move quite a few times for job or other reasons over the following 10 years. So if you keep selling and remortgaging, paying fees each time, you wouldn't make terribly impressive inroads into any of these successive loans if they were repayment mortgages. This is especially true given that on a repayment mortgage at rates of 10% or so, as we had back then, you spend years paying off interest before you really start to bite into the capital.

In effect, at a certain level of interest rates and over a short enough period, a repayment mortgage looks almost identical to an interest-only.

The appeal to me of my original endowment was that you could take your accumulated capital with you.

You'd pay the same fees if remortgaging interest-only loans.

Rubbish, unless you reset the clock each time by going for a new

This is often exaggerated. After, say, 2.5 years, you would pay off

Now, 2.75% may not seem a lot compared with 6.2%, but it's still a lot more than the 0% you'd have paid off an interest-only loan.

Well, you can't get much shorter a period than 1 month. At 9% (which makes the arithmetic easier than 10%), the monthly payment on a 300 month £50k loan is £419.60. Interest-only it would be £375. So even in the 1st month you're paying off nearly £45, and this amount gets bigger every month, so even after just a year, you'd have paid off about 1.1% of capital. Not spectacular, but not to be sneezed at.

A pity, then, that it was never explained to you that that's exactly what you do with a repayment mortgage as well. The difference is that the extra £45 you invest in your repayment loan in effect "earns" interest at the loan rate, because it exponentially reduces the size of your debt, and it's tax free. With the endowment, you're probably investing a similar amount, perhaps a little more, and it "earns interest" through stockmarket investments. With luck, they will outperform the loan rate in the long run, but with the repayment mortgage, you don't need luck.

In message , Tim writes

It was always my view that there was a focus point to aim for, whereas with a repayment, the focus disappears and lowest cost becomes the focus.

I dont know the statistics, and was just agreeing with RR.