Discounted Rate Mortgages: Good, Bad or Evil?
Darren Shaughnessy, Director Kings Residential, Estate Agents in Manchester and Letting Agents in Manchester writes:
I have felt for some time that discounted rate mortgages are a very bad idea. They are great for the young career couple with a clear and definite salary incease path. It helps these people onto the house ladder earlier than they might otherwise have been able to. Where a clear expectation of substantially higher income coincides with the increase in the mortgage rate they continue to be able to afford the payments albeit now probably higher than market rate but because (in this scenario) this has been a carefully considered decision, it is probably not a decision that will be regretted.
However, for most people who’s incomes remain fairly constant increasing just modestly each year, a discounted rate mortgage can be a long-term albatross. Luckily in the UK most mortgage advisors would look at projected income levels and advise against this if it was not appropriate but in the US this has not been the case and is the root of the current sub-prime lending crisis. Mortgage brokers have targetted the poorest and most vulnerable with the promise of low payments but not really emphasised that these low payments will turn into large (unaffordable) payments in a couple of years time. To make things even worse, by allowing these products onto the mass market they have artificially fuelled the prices of houses so that when the banks do foreclose on the mortgages in huge numbers they are left with a property that is worth far less than they lent in the first place.
For some, discounted mortgages can be great, for other they are bad. But the unscupulous brokers - they are just plain evil. The lenders however have just been plain stupid. They have not asked questions and will be carrying huge dents in the profits as a result.