Monthly Archives October 2008

Income Multiples Reduced – Mortgages No Longer Affordable

One of the key factors that contributed towards the current financial climate was people borrowing more than they could actually afford.

Lenders were confident that house prices would continue to rise so if they had to repossess houses they would be OK. The property market was booming and it wouldn’t be a problem to sell the repossessed house on.

So, that clearly hasn’t quite worked out the way everyone wanted and who is really going to feel the pain? It’s Mr. Joe Public.

Now that mortgage lenders no longer want ‘high risk’ business they are starting to tighten their criteria and reduce the income multiples that define how much a person can borrow.

So the obvious problem arises when someone who was previously offered a mortgage at 5x salary can suddenly only get a mortgage for 4.5x.

If the salary is £20,000 they could have originally borrowed £100,000 but now the maximum would only be £90,000.

So what happens if the mortgage is still above £90,000?

If their existing lender has no offers they can either stay on the ‘standard variable rate’ or try to find a mortgage lender that will offer them the amount they need.

In addition, lenders are also reducing their ‘loan to value’ criteria and another problem is occurring.

If Mr. Public had a mortgage with Northern Rock for 125% of the value of the property but now the maximum any lender will let them have is 90% they have no choice but to stay on the Northern Rock standard variable rate which is currently 7.34%. There just aren’t any lenders offering enough of a ‘loan to value’.

e.g.: £100,000 at 5.5% (interest only) = £458.33 per month.

£100,000 at 7.34% = £611.66 per month.

A difference o £153.33 per month per £100,000.

And people wonder why Northern Rock is repossessing more houses.

This will force people who could easily afford their mortgage at a sensible rate to push the limits of their budget and in some cases lose their house.

People with ‘repayment’ mortgages may be able to increase the term of their mortgage temporarily to bring down the monthly payments but people with interest only mortgages will not have that option.

In a market where even repossessing isn’t very clever because any lender selling off houses now will only lose money, an alternative should be considered.

Why not let the people remain in their homes but just pay less for a while? Like a short term rate reduction?

OK, the mortgage company will probably have to keep the customer but at least they will make a regular income (which looks good on paper) and they will retain an interest in the property that could well increase in value in the future.

The borrower would no longer be stretched and the mortgage will have less chance of defaulting which in turn will make the debt look safer. Also good on paper….

Stamp Duty Threshold of £175,000 Forcing House Prices Down

Whose idea was it to increase the Stamp Duty threshold in a vain attempt at ‘kick-starting’ the property slump?

Whoever it was, did much thought, planning and assessing of the potential outcomes take place?

Look at it from the eyes of a purchaser. If a house is seen on the market for £190,000 what is the likely offer a potential buyer would have made a few months ago?

Because the previous stamp duty threshold was £125,000 a sensible offer would not take this into consideration and would probably come in at about £185,000.

Now because of the new threshold, buyers are immediately offering £175,000 to avoid paying stamp duty.

In a climate where new purchases are down to frighteningly low numbers vendors are having to accept a sale price of £175,000 or do nothing.

A property owner with a house that was valued £190,000 who has no option but to sell either due to family size, cost of living or moving for work etc. will find themselves £15,000 worse off thanks to the new threshold.

Because of this people who are not in a position where they have to sell but just want to are likely to do nothing and this in turn means they won’t be buying in the near future which will only add to the slow down in new purchases.

In some circumstances buyers will be very fortunate and pick up a bargain but everyone else is likely to lose out.

People wanting to remortgage to raise capital for improvements or debt consolidation in these times when they need it most will consequently find their property valued very close to the new threshold because valuers use statistics of recent sales in the area for the basis of a valuation.

This therefore means less equity available to achieve the objectives and with more mortgage lenders reducing their ‘loan-to-value’ criteria it also means less products available in the mortgage market.

It would have made more sense to simply reduce the percentage of the stamp duty applied.

Stamp Duty was previously taxed at 1% for property above £125,000 in value, 3% for property valued over £250,000 and 4% over £500,000.

It should have been changed to 0.5% at £125,000, 2% at £250,000 and 3% for £500,000 and above.

That way, it would be cheaper for the buyer, it wouldn’t affect the sale prices of houses and the government would still get something for low value house purchases.

Wouldn’t that have made sense?