OK - my final attempt to sell the structure:
- you have to be a banker working in mortgage backed securities for it to be sweet
- it is something that you had to set up in the past, you would be just milking it now
- it is a way to use BTL mortgages to leverage up, multiplying your gains if it pays out
- it should be looked at from the point of view of what else could you do with a £1m bonus, that you wanted to save not spend
- if you put the bonus in an investment that yields income, you have to pay tax on the income at 50% and bear the risk of the asset (shares maybe) losing value
- if you put the investment into the structure and it pays out the win is massive
- there is an "insurance policy" aspect against a small fall in house prices using a CGT loss if you can conjure up a CGT gain somewhere else
This is really big I think because it will be bloody brilliant politics to use retroactive changes to shut it down - seeing as its the same bankers who made the mess who are using the structure.
Also these people using the structure are hard nosed traders. One whiff of trouble and they will start ditching their BTLs at the price they need to sell at in order to sell quickly
Many of these BTLs may be focussed in the same BTL friendly local housing markets - i.e. university towns.
Because of the leverage you get from a high-LTV IO BTL, even £500,000 invested could become £5,000,000 worth of BTL property.
Let's say just 10 people did this and they only went in for £1,000,000 each, that's still £10,000,000 worth of deposits buying £100,000,000 worth of BTLs
What if it was 20 people at £2m?
That's a lot of houses possibly concentrated in the same areas.
The million dollar question is how much of this has been sold off already?
Equally importantly, I would speculate that it explains why the high LTV IO mortgage came to exist at all.
The same bank employees who provided the specialist lenders with funds were the ones taking the gamble.
They would have told the losers at the specialist lenders, "Yeah, we at Merrill Lynch really think that the market can bear a 90% LTV IO BTL mortgage, so go ahead and offer them"
Then they take out the same mortgages as a vehicle to take a personal side bet into the bubble that's already paying them millions at work in fees.
This added bonus of the product was that once the sheeple got hold of them they used them to bid up house prices, and the bankers side bet was paying out big time.
If you set this up in 2003, you won't be out of the money till it gets back to those levels, even if you never made a penny of net income on the rents, even if you had a £0 income from the properties from 2003-2012, all you would have lost is the after tax investment income on the money you put down, and all that time your capital was becoming increasingly protected as house prices inflated.
Edited by ChairmanOfTheBored, 14 April 2012 - 01:03 PM.