Lender steering applicant to interest only mortgage

By then selling a separate product intended to pay off the capital e.g. an endowment policy?

People whose plans began in the 60s and matured in the 90s probably did a good piece of business.

Since then several things have happened.

Tax relief on insurance premiums has been abolished in 1984 though relief continued to be allowed on old qualifying policies.

There were stock market crashes which curtailed the growth in value of the policies.

In recent years the exponential growth in property values ceased.

Suddenly these schemes cease to be a good thing.

Only a few years ago did many lenders received letters to the effect that the insurance policies against which their loans were assessed might at the end of the term were unlikely to yield insufficient funds to pay off the capital on the loan and that lenders were advised to make contingency arrangements as a consequence of this.

I wonder how many people took notice of these because now an element of these people are claiming misselling by the providers. I'm afraid that it won't wash this time round.

In 1988, I was due to graduate, and with a friend looked into the option of buying a house together (these were the days of MIRAS per-person ;) )

We visited a few estate agents to get an idea of prices and one or two estate agents recommended some financial advisers (I believe this was stopped subsequently). They, along with our building societies were very keen to sell us endowment mortgages. Not being at all financially savvy, my friend and I asked how they worked.

It took us about 2 minutes to decide they were risky, and not a good idea at all.

Which has sadly tempered my sympathy for people older and more experienced than myself that did take them out, and are now - surprise surprise - unable to pay them off. It was the most obvious flaw we spotted in 1988 ... I think what alerted us was the upfront question: "Would this be guaranteed to pay off our mortgage ?". No one said "yes".

In the 80/90s IO loans were always sold with financial product to (in theory) pay off the loan. A financial product that the advisor would gain a commission on.

only in the noughties did IO loans with no attached investment vehicle become anything approaching normal

tim

Interest only mortgages have been around for a long time and I don't believe that anyone taking one out did not know that they had to make provision to pay it off. Unfortunately spendthrift types preferred to spend rather than save for payback day. The same time of person who prefers not to contribute to a pension scheme. I first heard of them in 1967 from an advert in either the Observer or Sunday Times. The advertiser was an insurance broker in Mayfair who would have made commission from the insurance policy he would sell me. They were quite open on that part. The figures at that time were quite clear in that I would be paying less than for a repayment mortgage and would have a lump sum at the end of the period dependent on how the stock market performed. I did not like the idea of my initial debt being outstanding for twenty years and took the conventional approach and paid off my mortgage after fifteen years. A later colleague had taken an interest free option and a with profits insurance policy. After twenty years (mid 80's) gleefully collected around £24K more than he needed to pay off his loan. John

It appears from watching Channel 4 News on Thursday that the media are already on the side of those who will be in the shit. I hope that they remember that that their own financial pages were giving such schemes glowing write ups in the 70'sand 80's. John.

Interest only mortgages worked very well in the days of high inflation and high interest rates, but once the those levels came down to low single figures the financial returns fell well below expected levels.

Probably because it makes them more money. Imagine a £100,000 mortgage over 20 years at 5% interest (for simplicity assume that the interest rate does not change over the term of the mortgage).

For an interest only mortgage the borrower will pay back 20x£5000 in interest plus £100,000 capital, a total of £200,000 at maturity.

For a repayment mortgage the repayment would be 240x£659.96, a total of £158,390.40.

So for an interest only mortgage the lender would make nearly twice as much profit than on a repayment mortgage.

Most people weren't concerned in the least about paying back the capital. That's because the average length of a mortgage was something like 7 years. It got paid off when you moved house and took out a new one, perhaps of a different type, for a new term.

Indeed! At one time you were met with scorn if you happened to mention you were buying your house through a good old fashioned repayment mortgage. In fact if I had taken instead an interest only mortgage parceled with an endowment policy back in the 60s I would have been quids in. However I figured that 25-30 years was a long and quite unpredictable time for any investment. I was not prepared to take that risk and so Iost out. Fair enough, wrong decision.

The trouble with today's generation is that they are not being educated to stand by their own decisions and to understand that they will make bad as well as good ones. It's only since the 80's that the man in the street has been led by the nose into a capitalist society where he is expected to live and flourish. Old habits die hard and 30 years is only just over a generation ago.

There still persists that attitude of entitlement where under every one is entitled to the rewards of capitalism provided that somebody else carries the risks. They regard various forms of credit as some kind of adjunct to social welfare.

Some of them are going to learn another lesson which is that financial affairs have to be managed. These people have known and have been reminded every year that at the end of the mortgage term they will be required to find and repay the whole of the original capital borrowed. If they don't, then in theory at least, the provider could sell their home from underneath them though that is very unlikely to happen.

I don't see how the banks can be punished for mis-selling interest only mortgages. At the end of the current term, allow the customer to extend the term and keep taking interest off them until they die or move on, then get the capital repaid then.

Jethro_uk posted

My wife and I took out an endowment mortgage in 1990. We asked that same question of the promoter, and the answer was quite definitely "Yes, and a bit extra too."

Aren't you now glad that you got that promise in writing?

There never was and never can be any guarantee as to the value of an endowment policy upon maturity.

AIRI the provider/seller used to give two projections of estimated maturity assuming 5% and 10% growth. The advance was then pitched below the 5% figure.

If someone wants to promise that, then where's the harm or the prohibition? And if you are going to rely on that then be sure to get it in writing.

Les & wife are sure they were promised a better deal.

Actually they did all include a guaranteed minimum sum hidden somewhere in the document that customers were provided with

usually, it was less than the accumulated payments

tim

ITYF that the word "expected" rather than "guaranteed" preceded the answer

tim

The regulator has already hinted that this will be his ruling, if asked

tim

What notifications have you had since about your provisions for finally paying of the loan? Presumably the house you bought is now worth at least three times the buying price. A three bedroom Semi in Surrey that we sold for £97,500 in 1993 changed hands for £398,500 in 2011. Our buyer had a maisonette with negative equity that he did not want to stand a loss on and he bought ours with an interest only mortgage.I thought that he was rather irresponsible but things house prices went in his favour. Our next house that we sold in 2006 was bought by a would be artist/musician without a regular source of income.I expressed my concerns about his ability to service his loan that had been arranged through his rather dodgy accountant. He said that he realised the chance he was taking. John