The UK's new financial watchdog (the FCA) has just released a 149 page report about the ticking timebomb of so-called Interest Only Mortgages. The release of the report just made the headline news on the BBC this morning. In turns out that in the run up to the financial crisis, millions of people in the UK signed up for mortages in which they only pay the interest payments each month. They were supposed to have some other scheme for paying off the actual cost of the house at the end of the term, often 25 years. Surprise, surprise, it appears that many of them didn't have a clue how they were going to do that. They often assumed that their house would have increased in value, and that thet would be able to move to a cheaper property at the end of the period. As a result the FCA reckons that nearly half of the 2.6 million UK households with Interest Only Mortgages will not have savings or other funds to cover the final bill, and that the average shortfall is expected to be £71,000.
So much for the so-called debunking of the "Debt Virus Hypothesis" that I mentioned yesterday. Yes, it is possible to run a system where people can get out of debt over thirty years if they pay off both the interest payments and a part of the principal every year. But even under the most optimistic reading, it still means that the banks get paid astronomical sums for creating the money that feeds the housing bubble.
But the massive introduction of Interest Only Mortgages demonstrates that things are even worse.
It would be difficult to imagine a more clear demonstration of the insanity of our current system. The banks were happy to loan hundreds of thousands of pounds of non existent "money" to people who, in many cases, had no way to pay off the loan 25 years down the road.
Those banks, which did not have the money they lent and just created the loans out of thin air, then felt that they deserved to be paid interest for the next 25 years for providing this "service". And then, at the end of the period, they will no doubt evict the people who have been paying them interest payments all along on the grounds that they don't own the house that they have been living in.
It is totally grotesque. And I believe that once the 2.6 million households have realised that the whole thing is a complete scam, and that the banks that lent the money didn't actually have the money to lend, then the revolution will be well on the way.
Sounds familiar....
ReplyDeletehttp://m.theatlantic.com/national/archive/2013/05/the-ghetto-is-public-policy/275456/?utm_source=feedly
Great job UK banks!!!!"
And congrats to the smart people who bought this. If they sell you hot water at 100% per bottle, will you buy it too? I am not sure banks are to blame here.... Fully. What about ignorant people falling for scams?
ReplyDeleteIt's fairly natuaral I guess. People see house prices doubling every 5 years and they figure that it will go on that way. They buy a house for £100,000 in 2007, and think that in 25 years it will have doubled in value five times (making it worth £3,200,000). They may be right... but it's because the whole system has been geared to pumping up the house price bubble.
ReplyDeleteSometimes it goes wrong... like in the US, when house prices halved, leaving millions of people stranded with loans to pay off that cost more than the house was worth.
Methinks that when all of these loans come to term, there will be a lot of people trying to sell at the same time to pay off the prinicipal on the loan.
Indeed, but I think that quite a lot of people are making semirational decisions here. But they are decisions based on the totally ridiculous idea that we should let the banks continue to pour more and more money into the housing market. As long as they are allowed to do that, they will be tempted to keep doing it, with the result that housing become totally unaffordable for the majority of ordinary people.
ReplyDeleteThat has to stop of course. But when it does, the idea that you will be able to pay of the cost of your house after 25 years by the increase in its value and still be able to afford somewhere to live by moving to a smaller property or a cheaper area will prove to have been horribly mistaken
We fell for an earlier generation of this scam, back in what now seem like the almost rational times of the early 1980s. In those days, the wisdom was to take out an "endowment mortgage" (remember those?). The mortgage was interest-only, but you paid into an endowment fund, a kind of with-profits life insurance. Theoretically, the endowment would mature with enough profits to pay off the principal, plus a nice little nest-egg.
ReplyDeleteWell, it turned out that these endowments were not as profitable as we had all been led to believe, although I think ours was one of the better ones. The later ones were worse. We got out, not because we were so smart, but because we couldn't afford to finance the interest and the endowment, and managed to change over to a normal repayment mortgage which we could afford. (This was around the time of Norman Lamont's "black Wednesday" with interest rates going to 15% or whatever ... scary times).
There was a whole mis-selling scandal about endowment policies in general that rumbled on, but I had naively assumed that nowadays interest-only mortgages were a thing of history. It is sad to think that a later generation of borrowers has also been misled, probably by even more devious means.
It's all right blaming the borrowers, but we are trained from a young age (brainwashed, you might say) to believe "experts", and the experts in the 80s were telling us that endowment mortgages were the thing. Later generations have been bamboozled by more "experts".