To worry about lots of poor pensioners that have been miss sold interest only mortgages

[breakfastmeansbreakfast]

www.theguardian.com/money/2018/jul/16/im-65-and-my-interest-only-mortgage-is-ending-what-can-i-do

Not much sympathy on the guardian comments unfortunately. But shouldn't it be upo to the bank to make sure a repayment plan is in place for interest only? I worry there are going to be lots in the same situation

No sympathy here. As other posters have said, we had lots of letters from the building society asking about how we intended to pay off the balance. Only an idiot would have ignored these.

We had an interest only mortgage, coupled with an endowment policy which was a condition of the mortgage when it was granted. This was a LONG time ago now, and we have actually had compensation for being mis-sold the endowment policy. It wasn't that much, a couple of thousand, but we put it towards paying off some of the capital.

The problem was, the endowment was supposed to make us big bucks, enough to pay off the mortgage in full and give us a healthy nest egg for our retirement. It didn't perform anything like as well as it was supposed to (in part due to the massive commissions they earned from selling them). By the time the endowment mis-selling scandal came to light, we decided we might as well continue the policy rather than cash it in for peanuts (it was quite cheap really, as we were fairly young when we took it out)

Because WE HAD BEEN WARNED SEVERAL TIMES by the Building Society about the likelihood of the policy not being sufficient, we started overpaying a couple of hundred a year to reduce the capital. This was during the period when interest rates were falling, so not a great sacrifice.

We were lucky in the policy did eventually pay out enough to pay off the outstanding mortgage in full. However, we had always had the intention of downsizing when we retired, so that was our safety net.

As other posters have illustrated, IO can work if there is a plan in place, borrowers are sensible and know their options. The ostriches who act cute and are looking for a bail out after 25 years of paying less get little sympathy.

I see no reason why you shouldn't be able to continue paying interest-only until you die, at which point your house gets sold to pay back the lender

But that's not how banks work. They have set amounts of funding to lend on a certain batch of mortgages and they raise this money by issuing bonds or trading on the money markets.

So the mortgage referred to in the OP will be accounted for within a certain block of money in the lenders accounting system.

At the end of the 25 years the bank will have to pay back its investors. Fine, the banks have loads of money, but not if too many people don't stick to the agreement that they made to pay back all the money at the end of the term. That's how the bad loans in the US failed and why many Spanish banks have large liabilities that threaten their stability - they have lent on overpriced holiday apartments that have plummeted in value.

A spanner in the works for the 'victims' of the IO problems is that lending conditions have changed massively since the financial crash, so they can no longer roll these loans over indefinitely. They may be able to get a new loan, but they have to qualify in today's environment, which they don't always do if their income has dropped, or just tighter requirements.

In their favour, there are now probably more products available to older borrowers. After all, a pension income is far more secure than one from employment, and if the borrower dies, the property can be sold to repay the bank, so all is not lost.

However, it's risky relying on downsizing as a repayment strategy. It might work for some - those with larger properties in areas of high growth in value will probably be able to sell a large house, pay back the IO mortgage and be left with enough to buy a smaller property outright.

But it doesn't always work out like that. A year or two ago there was a similar story to the one referred in the OP where a woman had bought a new build flat in Liverpool at the previous peak, in around 1990 on an interest only mortgage, so it must have been in 2015 that she got to the 25 years and the bank wanted their money back. But by then, there had been the crash of the early 1990s and the 2007 crash and her flat, which had been an overpriced new build (she might have paid around £100k for it, which might not sound like much, but it does when you compare it with the 2 bed terrace that I bought in Leeds for £32k in 1995 - £100k for a small property in a northern city at that time was a lot), wasn't worth any more than it had been in 1990, so she had little or no equity.

We were offered one in our early 20's well over 20 years ago. We said no we wanted repayment.
They could have said no then but no they are whining. It was a simple, clear financial choice.

We had IO with underperforming endowments. We kept the endowments going - switched part of the mortgage to repayment, and kept some on IO, which was cleared when the endowments paid out. Not long to go til the repayment part goes as well.

Banks also need to hold more capital depending on LTV and risk profile of lenders. They can't just lend as much as they like indefinitely without it having an impact in other areas.

No i'm not sympathetic.
I have an IO mortgage atm. I completely understand what it means and fwiw absolutely love the house we're able to live in now while the kids are growing up. I'm happy to trade that for the smaller house we'll have to move to in retirement.
But my goodness the bank and our financial advisor made us sign so msny forms to indicate we knew what we were doing. And that's less than a year ago.

I really don’t get how anybody could be missold interest only mortgages - the clue is in the name. People happily put any gain in their pockets, but complain if they loose. Don’t gamble if you can’t afford it!

I’m sympathetic to anyone who find themselves in financial dire straits but mortgage lenders in my experience are very very clear about the risks of choosing an interest only mortgage.
We took our original mortgage as interest only nearly 15 years ago and it was stressed to us on more than one occasion that at the end of the term the full mortgaged amount will remain and we would need to have a plan in place for how to pay it off.
If they didn’t do this then they were foolish but I don’t believe they were misled.

Nope, not much sympathy here either - they would have been well aware of the risks, our first mortgage was IO and we had to assign an endowment policy to the mortgage lender to ensure repayment at the end. The policy would have paid out directly to them first!

It's a cheaper option, but it is made clear that you owe the balance at the end. It's not mis-selling at all.

I had an interest-only mortgage and saved to pay it off. When the time came to pay the capital I decided to move instead of staying in that house. Throughout the process of taking advice from a financial adviser, applying for the mortgage, going through the documents with the FA and then my solicitor, there were numerous warnings, written and verbal, about having to pay the capital back at the end of the mortgage.

I don't believe any borrower can realistically claim that they didn't understand this.

We kept our endowment mortgage going as a savings plan and regularly had letters through reminding us that it wouldn't meet our mortgage and we should have alternative plans in place and offering advice if needed.

People on interest only will have had the same, if they haven't acted on it before now I have no sympathy for them.

At the end of the 25 years the bank will have to pay back its investors.

Banks can and do lend for planned periods other than 25 years, and all mortgages can be and I'd imagine more than half are paid back before the nominal 25 year period ends, usually when people move. So I don't think there's really much of a constraint that borrowing has to be for exactly 25 years.

Even if there were a constraint that the planned period had to be 25 years, why should the fact that a 67-year-old might die before the 25 years are up be more of problem than the fact that a 27-year-old first time buyer might pay off the mortgage when they move five years later. (And of course with most mortgages either could remortgage to a better deal after a few years without encountering excessive penalties.)

I can't see how they wouldn't realise. We have an interest only mortgage because for years we had a higher rate in savings than the mortgage rate and get letters every year with the balance and other letters reminding us of the term and having to clear the balance.

Though I think it's mostly automated because the letters have a definite tone of doom to them while telling us we have another 25 years to pay off about £8k.

I don't understand IO; it seems like you can get one with no plan to repay (no endowment scheme etc.)...I know people who have IO mortgages and they never had any plan, they just ignore the reminder letters that come through. I just don't understand what people think is going to happen after the 25 years; it's like they think the debt will magically vanish or something. But then I suppose if that's the only way they could afford a mortgage, if they hadn't got IO they'd have been paying extortionate rent all this time and at least this way they can sell the house...

Yes, I think there are people who assumed they would have enough equity to downsize after that period, because prices can only go one way and unearned equity is an entitlement for homeowners after all. And others who are ok with effectively renting from the bank with more security and more freedom to decorate the place. At least at the start. Then people get to the end of the term and realise they don't want to move after all.

@goingonabearhunt1 they must presume like everyone else who has a mortgage that it gets paid the off.

If you young instead of taking out an IO mortgage you can take out a repayment mortgage with a longer term. So while you pay more in interest you still end up paying of the mortgage.

After 25 years, a house bought for eg 50K will now be worth 500K - so sell it, pay back the balance of 50K and downsize. Not rocket science.

Nah OP the responsibility rests on the borrower 100%.

If the loan was taken out 25 years ago i.e. 1993, it was a very different financial climate then. It was assumed that house prices would rise significantly. It was assumed that endowment policies would perform well. My first mortgage was IO and I was assured that the endowment policy would pay it off and leave plenty left over. In the end, that's not how it turned out, but the writing was on the wall for a number of years, so I don't think anyone could claim to be taken by surprise

The letter writer isn't seeking sympathy, or complaining that they were misled, but merely asking what their options are

Er, no, NewYear, far from it, might be the case in some areas, but no way universal. There are people who bought houses and flats 25 years ago that are worth less now than they were sold for 25 years ago.

25 years ago is the early 90s, so a peak time, and there's been 2 crashes since then, and in many areas, prices now are only just back at 2007 levels. Some areas such as Northern Ireland, might even be still lower. What has happened in London/SE is not representative of the whole country.

I mentioned upthread about a similar report to the OP where a woman had bought a new build flat in Liverpool in the pre-crash early 90s, who's now fighting to keep her flat as she has paid an IO mortgage for 25 years, and has very little equity. This is an extreme example as the flat was an overpriced new build, but it won't be unique.

I will be surprised if there are many people who purchased 25 years ago who haven't acquired any equity at all or very little simply through house price inflation. Notwithstanding Barbara's example, but it's not going to be a common one, now. Because of both prices and the fact that 100%+ IO mortgages were a noughties thing.

It will be though, as we get further away from peak boom period. There are a number of areas in the UK where prices aren't just lower than they were in 2007 ie peak, but only at about 2004 rates. If you purchased in 2004 on a 25 year IO, that's only just over a decade away from fruition. I've seen a graph somewhere of the maturity date of IO mortgages in the UK and it starts to go boom around the late 2020s. And remember, some of these people will have borrowed more than 100%.

The issue is actually that inflation has been running so low for the last 10 years. Many of these pensioners were banking on inflation paying off the capital for them. What has happened is that house price inflation has kept going steadily but real inflation has not. So unless they bought somewhere massive they can't now downsize. That combined with taking on additional borrowing during the term of the mortgage.

I took out my first mortgage in 2001 - inflation between 2001 and 2008 in real terms meant that my mortgage was minuscule (and I had interest only for the first 2 years of that and never overpaid). From 2008 onwards the only people that have really benefited from low interest rates are those that have tried to pay down the capital. You have had your head in a box if you have been paying interest only for the last 10 years. At one stage the interest element on my by then giant mortgage was £200 a month (£1300 a month when first taken out). I kept paying the original amount and paid £60k off of the capital in 5 years. It's there own fault.

many of the IO mortgages were given to BTL landlords (often self certified - no questions asked) who are quite happy to write off the interest payments against the rental income and had no concerns about having a repayment vehicle in place as it was not their home.