Saturday, Apr 21, 2007
What we were eagerly waiting to read
FT: Subprime market in UK 'has parallels with US'
The FSA has already identified the subprime mortgage market as a priority area for supervision and is due to report its findings in June
Posted by confused76 @ 05:14 PM (129 views) Add Comment
5 Comments
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1. lvmreader said...
It's ALL subprime
Tell me why someone who earns £100,000 p.a. and has a £1.2m mortgage is any better a credit risk than someone who earns £10,000 and has a £120,000 mortgage?
2. paul said...
And so it comes to pass that contrary to popular belief, the UK market is just as subprime-liable as the US.
No surprises there.
3. tony marshall said...
IVMR: I agree that 12 times income would be pretty much impossible for anyone with rates at 5% or above - in your example, the first takes home around £65k of which £60k would go in interest, whilst he second takes home around £8,700 and pays £6k in interest. Once you get to about 9 times income (leaving the first guy £20k for food, etc and the second around £4,200 after mortgage interest), each is living on a knife edge, but in theory the first has slightly more slack there. But again, I agree that each represents a high risk and interest rates at 6% or 7% would wipe them both out.
But at more typical ratios of up to 6 times income, 5% interest leaves the first guy £35k for food etc. and the second just £5,700, so there is a big difference there. If rates rise to 7%, the first is then left with £23k and the second just £4,500. My guess is that the first would be drawing in his horns, whilst the second would be defaulting on his debts left right and centre.
Of course, if rates rise to say 10%, they are down to just £5k and £2,700 each respectively after interest, so by that time I think they'd have both thrown in the towel, even with loans 6 times income. If it was my money being lent (and in a way it is – so no more than £35k in any one account...) I would not lend anyone more than 4 times their income - so I suppose on that basis you're right - it is all sub-prime!
4. confused76 said...
I think the math is quite simple. Assume you start an interest only mortgage. Call K% the percent of your net salary that should go into mortgage payment, i% is the interest rate, T is your average tax rate
Salary multiple = (1-T) K% / i%
Ex. you decide to pay 50% of your post tax take home salary as mortgage interests, your avg tax rate is 30%:
Salary multiple = (1 - 0.3) 50% / 0.06 = 5.8x
Try some sensitivity:
a.
i% goes up to 7%
Salary multiple = (1 - 0.3) 50% / 0.07 = 5x (ie. you can only afford 5x mortgage if you want to use 50% of your take home)
b.
You really desperate to buy and agree to pay 60% of your take home as mortgage, plus you are fool enough to believe the introductory interest rate of 5%
Salary multiple = (1 - 0.3) 60% / 0.05 = 8.4x (you see how risky a very high multiple is, what happen if one in the family loses the job? what happens if your mortgage interest go to 6+% --- A: default!)
5. tony marshall said...
Confused - your model is a bit too simplistic - firstly, the average tax (+NI) rate for someone on £10k is 13% compared to 35% on £100k and secondly the subsistence costs remain similar for both, ie in absolute terms, rather in terms of percentage of income. IVMR's point was that there was no difference between the two cases - the point is that there is some difference - in certain circumstances.