Lender steering applicant to interest only mortgage


D

Dave West

There has been a lot in the news recently about people taking out 'interest'
only mortgages, and being left at the end of the term without enough funds
to actually acquire ownership of the property.

Some twenty years ago I accompanied someone who was applying for a house
mortgage from the Abbey National (taken over by Santander).

The applicant said in the interview that she wanted a 'repayment' mortgage.
She had a very good regular income with a well established company, and so
she well qualified for the house mortgage she was applying for.

The Person in the interview at Abbey National *tried* to steer her towards a
'interest' only morgage instead of the repayment mortgage she was wanting.
She said she particularly wanted the repayment mortgage, so that in the end
is what she got.

What would have been his motivation for trying to sell the 'interest only'
instead of a 'repayment' mortgage.

How would the lender have benefited financially or in any other way, by
steering the applicant towards the 'interest only' option?
 
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D

David McNeish

How would the lender have benefited financially or in any other way, by
steering the applicant towards the 'interest only' option?
By then selling a separate product intended to pay off the capital
e.g. an endowment policy?
 
M

Mel Rowing

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.
 
T

tim......

Dave West said:
There has been a lot in the news recently about people taking out
'interest' only mortgages, and being left at the end of the term without
enough funds to actually acquire ownership of the property.

Some twenty years ago I accompanied someone who was applying for a house
mortgage from the Abbey National (taken over by Santander).

The applicant said in the interview that she wanted a 'repayment'
mortgage. She had a very good regular income with a well established
company, and so she well qualified for the house mortgage she was applying
for.

The Person in the interview at Abbey National *tried* to steer her towards
a 'interest' only morgage instead of the repayment mortgage she was
wanting. She said she particularly wanted the repayment mortgage, so that
in the end is what she got.
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
 
J

John Silver

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.
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.
 
P

Phi

John Silver said:
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.
 
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G

Graham Murray

Dave West said:
What would have been his motivation for trying to sell the 'interest only'
instead of a 'repayment' mortgage.
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.
 
N

Norman Wells

John said:
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.
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.
 
M

Mel Rowing

On 03/05/2013 19:19, Mel Rowing wrote:

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.
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.
 
S

Simon Finnigan

Mel Rowing said:
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.
 
B

Big Les Wade

Jethro_uk said:
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".
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."
 
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A

Anthony R. Gold

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?
 
M

Mel Rowing

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.
 
A

Anthony R. Gold

There never was and never can be any guarantee as to the value of an
endowment policy upon maturity.
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.
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.
Les & wife are sure they were promised a better deal.
 
T

tim......

Mel Rowing said:
There never was and never can be any guarantee as to the value of an
endowment policy upon maturity.
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
 
T

tim......

Big Les Wade said:
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."
ITYF that the word "expected" rather than "guaranteed" preceded the answer

tim
 
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T

tim......

Simon Finnigan said:
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.
The regulator has already hinted that this will be his ruling, if asked

tim
 
J

John Silver

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."
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
 
J

John Silver

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.
My worst decision was transferring a small paid up pension into a fund
managed by my next personal pension provider in the belief that it would
grow. Over a period it lost value Even allowing the new provider at one
time putting in a sum to compensate it now pays just over 50% of what
the paid up pension would have.
John
 
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S

Simon Finnigan

tim...... said:
The regulator has already hinted that this will be his ruling, if asked

tim
Be nice to see a common sense approach. No compensation for stupid people,
no mad rush to sell houses in a rush, or make people homeless. Sell the
house when they die, pay off the capital debt and what's left goes to the
estate.
 

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