Very long or interest only mortgages

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Thirsty

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I was replying on another thread about three generation mortgages & didn't want go on a tangent there.

Why do banks insist on mortgages being repaid in full by age 65?

What's so bad about paying interest only on your home loan, if your life assurance will clear the capital when you die?

Or if that doesn't work, the mortgage can be inherited along with the property.

What is stopping us from 50 year mortgages?

Edit: I'm posting to start a discussion!
 
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65 is the traditional retirement age so most people are good in terms of repayment capacity until that age.

Life assurance, like all insurance, only works so long as there are a small proportion of claims versus policy holders. If you widen out the age you can claim life assurance to clear a mortgage way beyond 65, you need up with more claims as more people die, leading to prohibitively expensive life assurance policies, no?
 
Hm...except that life assurance is a guaranteed payout.

The insurance company is not estimating the risks of death as they might be with a car driver.

I understand why 65 was the 'traditional' age; why can't we go beyond that?
 
The lender may not like the open ended nature of contract as it is not clear when the loan will be repaid - it could be tomorrow, it could be 100 years
 
Ok; so if we say that life assurance will clear the capital, then that is a certainty.

Granted the exact date might not be known, you might die at 60 or 85; but you will definitely die.
 
My understanding of life assurance in the context of mortgage protection is that it is only payable if the mortgagor dies during the currency of the mortgage term. As only comparatively few mortgagors die before, say, 65, then the life assurance company pays out on relatively few policies.

As you near the average age of mortality, the more certain it is that the life assurance company will have to pay out. In this instance, the more expensive such policies become.

Let’s say the banks give interest only mortgages for 50 years and the capital ends up being discharged by a life assurance policy. This will end up in the life assurance company paying out on nearly all policies. Such a company will not last.

Am I missing something?
 
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I would imagine that the cost of a whole of life policy would be higher than a normal repayment mortgage - after all you are borrowing money for a lot longer.

Not sure what the benefit is to the borrower
 
It'd be worth looking at a few figures; I don't think it's quite as dire as you say.

Back of the envelope figures for now.

Property purchased say 1995 for €60k, 30 yr mortgage, borrower aged 40. Normal capital & repayments.

At age 65 in 2020, there's say €40k left in capital owing. Remortgaged at some point, moratorium, lost job, whatever - life stuff that happens.

€40k in 2020 is pretty small beer; interest might be €100 pm?

In 20 years time, when hopefully our borrower dies of old age at 85, that €40k is even less in real terms. And life assurance co has had premiums for 45 years.

I'm open to correction; as things may have changed, but life assurance (whole of life) used to be fixed at the time you took them out? The younger you were the better of course.
 
What I don't understand is why banks won't consider it on amounts that are a) small as a share of income, and b) when someone has a solid pension.


A divorcing 60 year old on a €100k salary with a €1m pension fund should be good for a €300k mortgage over 15 years.
 
Hi NRC

I have long argued this, particularly in the context of mortgage arrears.

Key Post - Central Bank no longer insists that mortgages in distress must be repaid by age 70

The Central Bank has updated its Internal Guideline - Sustainable Mortgage Arrears Solutions This arose in response to a request from Ciarán Lynch T.D. to the Central Bank Governor that they revise their guidelines in accordance with his comments to the Oireachtas Finance Committee...
www.askaboutmoney.com

It is crazy deeming a mortgage to be unsustainable because it won't be paid off by age 65 and then letting other 65 year olds take out life loans.

Likewise the whole Personal Insolvency approach is based on mortgages being cleared by aged 65.

If a lender reschedules a loan which will have a balance due at 65, it is a non-performing loan. So some of these very profitable loans have been sold to funds.

Brendan
 
The cost of a mortgage, i.e. the interest rate, is a function of a number of things.

For example, the fact that the bank knows when it’ll get its money back.

Then there’s the amount of capital it needs to set aside.

Mortgages aren’t advanced based solely on the value of the property continuing to increase or even just maintaining its current value. The “exit strategy” is the person just repaying the loan on a pre-agreed time horizon without any recourse to the property.

What’s being hinted at here is reckless lending…lending to people who can’t repay the money.
 
Jim2007 wrote a good piece about what happens in Switzerland

Key Post - The mortgage system in Switzerland

OK, so lets start with an example of the typical criteria used by a bank to determine if a customer is suitable for a mortgage: Assume that Hans-Jourg as seen a suitable home with a market value of 500K that he wishes to buy and he approaches the bank about a mortgage, the basic criteria to...
www.askaboutmoney.com

I believe it has changed since, but in summary:

The loan repayment schedule must ensure that the loan be reduced to 67% of market value by retirement age and it can be interest only after that.

Brendan
 
From the bank's point of view, it would be very profitable.

They lend someone, say 60%, of the value of their home on an indefinite interest-only basis at market rates.

This is much better than getting the capital back only to lend it on again and having to pay the costs of setting up a mortgage including cash back.

One of the big problems for Irish banks is that they can't lend enough money. If they stopped requiring the capital to be repaid on low LTV mortgages, that would help their profitability.

Mortgage protection beyond 65 would not be necessary. But we would need a repossession regime. As it's quite likely that the kids will have moved into the house and refuse to leave and refuse to pay the mortgage.

Brendan
 
Gordon Gekko said:
What’s being hinted at here is reckless lending…lending to people who can’t repay the money.
Click to expand...
Not seeing any "hinting" here; it's an open discussion.

What was 'reckless' about a 40 year old borrowing 60k in 1995? About average for a new house at that time in the wider Dublin area.
 
Brendan Burgess said:
Mortgage protection beyond 65 would not be necessary. But we would need a repossession regime. As it's quite likely that the kids will have moved into the house and refuse to leave and refuse to pay the mortgage.

Brendan
Click to expand...
If there's surviving spouse / partner I think you would definitely want the life assurance to pay the capital.

It also removes any need to be concerned about repossession after the borrower dies.
 
Thirsty said:
Not seeing any "hinting" here; it's an open discussion.

What was 'reckless' about a 40 year old borrowing 60k in 1995? About average for a new house at that time in the wider Dublin area.
Click to expand...
Without knowing further detail about the person, it’s an impossible question.

It’s also misleading to cite a period of extraordinary price growth which encompasses our move to the Euro, access to cheaper borrowing, etc.

The key point is, though, that if such a product were offered, i.e. an ‘interest only never-never mortgage’, the rate wouldn’t be 1.95-3.00%.

Also, it’s not the value of the underlying asset, i.e. the property, that’s the lender’s exit strategy. My bank expects me to repay my mortgage independently of the value of the property. If their exit strategy is the sale of my house or some form of life policy, the rate’s probably closer to Seniors Money type stuff at 5-6%.
 
Gordon Gekko said:
Without knowing further detail about the person, it’s an impossible question.

It’s also misleading to cite a period of extraordinary price growth which encompasses our move to the Euro, access to cheaper borrowing, etc.
Click to expand...

So first part - it's an example not a real life question! Buying a house at 40 is not unreasonable. A house price of (say) €65k at that time would also be pretty reasonable. Even in 1995 banks had T&Cs on deposits and multiples of salaries. So lets take it, for the sake of discussion, that the figures added up at the time.

Second item: that is a fair point.

However, I think if you took any 30 year period, you'd likely see a similar pattern.
 
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