Thursday, November 09, 2006

Shock Horror: Daily Mail Over-Reaction !



You think this headline is alarmist ? Wait till you see the one on the Mail's on-line edition:

Lender offers 'mad' mortgages that take 57 years to pay off

Here's a sample of what you can read:


"But experts warned last night that while they initially appeared attractive due to low monthly repayments, the borrower can end up paying more than £100,000 extra in interest.
The deals are a far cry from the traditional 25-year mortgage and were last night labelled "madness" due the eye-watering cost of paying off the interest.
The moves come as soaring house prices have forced desperate home-buyers to resort to extreme measures to get onto the property ladder.
Young couples are borrowing up to five times their joint salary in an attempt to stretch themselves onto the housing ladder.......
......... lending giants are letting people as young as 18 take out a home loan which will not be paid off until they reach old age.


(ed. This is a prototype for what in future I will call a "XXXXX post" but haven't as yet had time to come up with a name for it; suppose it should be alliterative, but isn't that so restricting ? The tyranny of alliteration! Anyway, it means that I will post the bare bones of the topic, and then add flesh to it as the day wears on.)


Go to the link, dear friend, read the article in its entirety, and the attached posts (including one from this blogger).

Would you agree that the article is alarmist and poorly informed, and misses the point entirely about the the basic conundrum associated with any mortgage - how to get the best house for your money with least pain?

Here's the post I sent, using the full 1000 max characters. The black is what appeared. The Mail's editors gave the red section the blue-pencil ! ( Yes, let's have a little rant later about the Mail's editorial policies.)

"It's not as bad as you make out - in fact, used intelligently, it has quite a lot going for it.Firstly, with the standard repayment mortage, the fixed repayments, calculated to clear the loan over 25 years, make very little difference in the early years to the amount of loan outstanding. For example, after 10 years, only a quarter of the loan is repaid. And as for the main alternative - the much dreaded endowment ? With that, you pay interest on the entire loan till the very end !

Some buy-to-let loans are advertised as "interest-only loans ", but in reality one is usually expected to set up a so-called repayment vehicle, linked to a financial product (with fat up-front commissions for the middle man!) A true interest-only loan has much to commend it, if folk are disciplined and make voluntary repayments as and when they can. One can always remortgage with each house move, switching, say, to a shorter loan. It's one's growing equity stake that really pays for the house !"

Colin Berry, Antibes

ed: What you see above is what in future will be referred to as a "piton post". How's that for alliteration !

From Wikipedia:

"...a piton or pin is a steel spike that is driven into a crack or seam in the rock with a hammer........... to assist progress in climbing ." In other words, the first purchase in a rock face.

Second post to the Mail:


Now you have 26 posts up, would you please now let the second half of my previous post appear ? The point about making "intelligent" use of an interest-only loan may not make a lot of sense unless the post is read in its entirety.

Some buy-to-let loans are advertised as "interest-only loans ", but in reality one is usually expected to set up a so-called repayment vehicle, linked to a financial product (with fat up-front commissions for the middle man!)A true interest-only loan has much to commend it, if folk are disciplined and make voluntary repayments as and when they can. One can always remortgage with each house move, switching, say, to a shorter loan. It's one's growing equity stake and wherewithal to take out bigger motgages, that really pays for the house !

Second post not published ( as yet)

To paraphrase Winston Churchill: the interest -only mortgage may be the worst way of paying for a a house - apart from all the others that have been tried.

Why is that ? As indicated, the repayment mortage reduces the amount one can borrow initially, whatever multiple of salary one is offered by the mortgage provider, because it factors in loan repayment, albeit a variable quantity ( see previous post for 29 0ctober). But early repayments have little effect on the amount of outstanding loan. When one moves house, typically 6 or 7 years later, it is not unusual for the existing mortgage to be closed, and a new bigger one started. Not a lot of difference, some might say, to having had an interest-only loan from the outset, except the latter might have been bigger, and avoided having to start in the bargain basement of the housing market, which can be an trap.

As for the endowment loan, words fail one. Not only does the loan remain unpaid in its entirety for the entire period, meaning maximum interest. One is tied into an inflexible investment product, with charges, uncertain investment performance, steep penalties for early redemption, and being at the mercy of what the insurers determine as the final bonus on maturity. The latter goes up and down like a yo-yo, depending on how they see future investment climate, and can make a difference of thousands, or even tens of thousands in the final payout. They have no hesitation in robbing Peter today in order to pay Paul in the future. And as well all know, endowments taken out in the late 80s , and early 90s, especially short-term ones (eg 15 years) are in many cases failing even to repay the mortgage.

Endowments arguably made sense in the 80s, under MIRAS, and tax-relief on the life -insurance element, but both were phased out, leaving millions trapped in schemes that became financial millstones.

Maybe the interest-only loan IS the answer, used intelligently. Pay interest only, right at the beginning, to secure the maximum advance. Then, as one's income rises, and also, crucially, one's equity in the house through house price inflation ( though not guaranteed, needless to say) one can then make voluntary part-repayments of capital to reduce the loan, and benefit immediately from lower interest payments. However, all these advantages can be devalued or even cancelled out if the mortgage-provider insists that one sets up a "repayment vehicle" to run in parallel. Chances are that it will be an endowment, or something that mimics it in many, or most, of its worst aspects. Signing up for long term investment scheme will mean someone, a middle-man, maybe the mortgage provider, earning themselves, ultimately at your expense, a tidy up-front commission. A four figure sum, by all accounts. Not bad for simply acting as an Introduction agency, and a few hours work (if that).

14.20pm Sky News "Have Your Say" has just opened a thread on the same topic. There are 10 posts up so far. Blimey: they accuse me of being long-winded. You ought to see some of them.

Had no compunction about re-submitting the Mail post in its entirety, with just a word change here or there.

There are a few other word changes one would like to see on Sky, eg to the following post from "Mark"

"stop immergants buying houses with their social security money"

Free speech, at a price !





2 comments:

angela said...

I'm allergic to the Daily Mail, I'm afraid!

Re: your comment on my post; you're advocating "Publish and be damned" then?
As the link doesn't work(sigh) I may well put the poem back.
Bonne Continuation, as they say,
Angela

Colin said...

More a case of publish - with faint chance of having knuckles ever so slightly rapped ....

Bonne continuation .....