If You're Easily Shocked, Look Away

[the gardener]

Dont need the calculator, I can just check the bank statements . I'll give you a clue that my wife does not work and I'm not that far above the threshold on the tax front.

For those who dont know I found an explanation;

http://www.guardian.co.uk/money/2008/sep/11/taxcredits.familyfinance

"Child tax credit isn't just for the poorest families – households with an income of up to £50,000 are entitled to the full family element of the child tax credit."

You are not reading the article correctly.

Child Tax Credits are made up of 2 elements:

Family Element.

Child Element.

The family element is about £545 which is what you get. For a baby under 1 year it doubles.

The Child Element is about £2,235 per child but this gets withdrawn at a rate of something like 39p in the pound for incomes over about £6420 (£16,040 if you only get CTC). At £25k most people don't get much more than the Family Element.

Edited February 3, 2010 by the gardener

[headrow]

He's got loads of wriggle room.

Tell the social they've split up , leave her in the house getting everything paid for and he can pretend he's living in the flat while still in the house, when in fact one of his mates is giving him £400 to rent it

Keep the CSA off his back and they are laughing all the way to the bank.

The concept stinks but it will work.

[TheCountOfNowhere]

"Child tax credit isn't just for the poorest families – households with an income of up to £50,000 are entitled to the full family element of the child tax credit."

You are not reading the article correctly.

Child Tax Credits are made up of 2 elements:

Family Element.

Child Element.

The family element is about £545 which is what you get. For a baby under 1 year it doubles.

The Child Element is about £2,235 per child but this gets withdrawn at a rate of something like 39p in the pound for incomes over about £6420 (£16,040 if you only get CTC). At £25k most people don't get much more than the Family Element.

£50K and getting hand outs...you can just see whats going to get cut first !!!

[scottbeard]

It’s funny reading all the bulls argue that maternity pay and tax credits should be factored into decisions about whether a 25 year loan is affordable.

A 25 year mortgage is not a 25 year financial decision. If it were, no-one would ever take out a mortgage as who can say where they want to live or what they will be earning in 25 years' time?

Frankly an approach that says "I can afford it now. If I get salary increases i'll be fine, if I end up long term unemployed i'll have to sell it" seems pretty pragmatic to me. Take life as it comes.

[catmandu]

Sounds like the guy will be fine - might have done the same in his situation. Given that he has some savings and is good with money I think he'll be OK. Even if he can't rent the house out, he can still sell it.

As far as the banks are concerned, he has a loan of approx 200,000 and has approx 270,000 of capital. I think there are many people with worse situations that that and probably always have been. The guy is extended, but they still have a fair bit of capital there to repossess if he fails to pay up.

What does worry me is that RBoS were still offering 5x salary just a few months ago (and probably still are though I haven't checked.) It's a case of fitting the loan to the house price instead of basing loans on income multiples of 3-4.

[Si1]

A 25 year mortgage is not a 25 year financial decision. If it were, no-one would ever take out a mortgage as who can say where they want to live or what they will be earning in 25 years' time?

Frankly an approach that says "I can afford it now. If I get salary increases i'll be fine, if I end up long term unemployed i'll have to sell it" seems pretty pragmatic to me. Take life as it comes.

the very possible downside is horrendous. the leverage means even small changes of house prices can't afford it. flats have been more overpriced so an overall fall of 30% for him cannopt be ruled out, wiping out his equity completely. can't sell it for the mortgage balance. repo'd. negative equity charged at high %. Spends rest of life making piecemeal enforced payments to creditor until death, living in a council estate with a low skint standard of living, never being able to get credit and cut out of many skilled jobs owing to CCJ.

take life as it comes

yeah

Edited February 3, 2010 by Si1

[catmandu]

That's assuming it will still be worth £80k when and if that time comes.

Even if it's worth 60K it's still a chunk off his existing debt.

I still don't think it's excessive from the bank's point of view. His portfolio would have to drop by 80K before the bank was unable to get it's money bank and he is partially offset by rent (whatever occupancy he gets). If he didn't actually need to sell then there would be no issue at all.

Come on guys and gals, there are worse examples out there I'm sure...

[MississippiJohnHurt]

A 25 year mortgage is not a 25 year financial decision. If it were, no-one would ever take out a mortgage as who can say where they want to live or what they will be earning in 25 years' time?

Frankly an approach that says "I can afford it now. If I get salary increases i'll be fine, if I end up long term unemployed i'll have to sell it" seems pretty pragmatic to me. Take life as it comes.

Of course a 25 year loan is a 25 year financial decision. That's not to say you need to predict the future, but you need to take a view on realistic chances of paying back across the term of the loan (that's why people overpay when they're doing well financially, no?)

My point was just that if people, desperately, have to factor in tax credits that probably won't exist in 5 years, just in order to live month to month, they have taken out too high a loan. Tax credits were supposed to be for very poor people to be able to afford basic living costs, they weren't supposed to be there to prop up people's finances when they have overborrowed on a family home. People would be very foolish to factor them in as long term sources of income.

[Dorkins]

A 25 year mortgage is not a 25 year financial decision. If it were, no-one would ever take out a mortgage as who can say where they want to live or what they will be earning in 25 years' time?

Frankly an approach that says "I can afford it now. If I get salary increases i'll be fine, if I end up long term unemployed i'll have to sell it" seems pretty pragmatic to me. Take life as it comes.

The guy takes home £19k and has just committed to servicing a £130k mortgage on his main home and a £70k mortgage on a flat with whatever rent he manages to get, maybe £4k after taxes, voids and repairs. That's £23k to pay down £200k of mortgage principal, plus interest. Oh, and he has to keep a wife and two kids, forgot about that.

It's not about your attitude to life, it's basic arithmetic. It's idiotic to treat overstretched homebuyers as if they were the fearless modern day counterparts of Scott of the Antarctic.

On second thought, that might be an appropriate comparison.

[Si1]

Even if it's worth 60K it's still a chunk off his existing debt.

I still don't think it's excessive from the bank's point of view. His portfolio would have to drop by 80K before the bank was unable to get it's money bank

only 30% of his portfolio - that includes a flat which ar emore volatile, so easily done

and he is partially offset by rent (whatever occupancy he gets).

no it isn't

- the rent as against capital opportunity, he woul dhave got that (acytually better) in other assets, this is zero sum so not offset at all

If he didn't actually need to sell then there would be no issue at all.

no, it's a money pit. it will make him very poor. it is awful capital allocation.

[catmandu]

only 30% of his portfolio - that includes a flat which ar emore volatile, so easily done

no it isn't

- the rent as against capital opportunity, he woul dhave got that (acytually better) in other assets, this is zero sum so not offset at all

no, it's a money pit. it will make him very poor. it is awful capital allocation.

Whether he could have got a better rate elsewhere is not the issue here - the point I'm making is that he has an additional means of income.

And sure he may lose 30% of his portfolio if prices go down that much (as he might with gold, copper etc). And maybe flats are more volatile (though I don't see any evidence for that from you and anyway the flat makes up a smaller part of his portfolio).

The point is I don't think it's an outrageous decision by the bank (which is the whole point of this thread by the way). If lending to someone who has this level of collateral is outrageous, the banks would be doing very little lending indeed. Yes, he's leveraged, but it's hardly comparable to those on liar loans and 110% mortgages.

Edit:dodgy spelling

Edited February 3, 2010 by catmandu

[Si1]

Whether he could have got a better rate elsewhere is not the issue here - the point I'm making is that he has an additional means of income.

And sure he may lose 30% of his portfolio if prices go down that much (as he might with gold, copper etc). And maybe flats are more volatile (though I don't see any evidence for that from you and anyway the flat makes up a smaller part of his portfolio).

The point is I don't think it's an outrageous decision by the bank (which is the whole point of this thread by the way). If lending to someone who has this level of collateral is outrageous, the banks would be doing very little lending indeed. Yes, he's leveraged, but it's hardly comparable to those on liar loans and 110% mortgages.

Edit:dodgy spelling

OK, agree it is not unreasonable from the bank - they will probably make money, a lot of it, from this chap

[Dorkins]

I don't disagree with you but he probably sees an increase of say £250k over the ten years, house prices always double every ten years. So what other chance will he have of gaining 25k per year tax free? Might be a struggle for the first couple of years until inflation takes away the pain but then he will be quids in. Just a different view - I couldn't live with this but maybe he can and if so good luck to him.

I doubt inflation can save him. He has £1920 in his pocket at the end of each month from wages and rental income. Repayments on a £200k mortgage will be £1070 at 4%, £1430 at 7%, £1840 at 10%. If he's on 4%, the guy has already committed 56% of his net income to mortgage payments, and that's at record low rates. If inflation picks up, a rise in interest rates will probably mean game over long before his pay and rent catch up with the mortgage payments. His cashflow is on a knife-edge.

[catmandu]

I doubt inflation can save him. He has £1920 in his pocket at the end of each month from wages and rental income. Repayments on a £200k mortgage will be £1070 at 4%, £1430 at 7%, £1840 at 10%. If he's on 4%, the guy has already committed 56% of his net income to mortgage payments, and that's at record low rates. If inflation picks up, a rise in interest rates will probably mean game over long before his pay and rent catch up with the mortgage payments. His cashflow is on a knife-edge.

This I can agree with, though if inflation gets to that stage then half the country will be screwed. No particular reason to pick on this guy. We're probably a fair time away from 7% though - anyone with sense should be paying down their mortgage or building some savings.

[Si1]

This I can agree with, though if inflation gets to that stage then half the country will be screwed.

how is that relevant to the point ?

(and it's not true anyway)

No particular reason to pick on this guy. We're probably a fair time away from 7% though

really? in actual mortgage rates?

[babesagainstmachines]

... house prices always double every ten years...

You might want to check the accuracy of that statement here http://www.housepricecrash.co.uk/graphs-average-house-price.php

It looks like the only time it would have been true is if you bought in the mid 1990s.

[Si1]

house prices always double every ten years.

just making sure I heard that right...

[BrickandMortar]

I doubt inflation can save him. He has £1920 in his pocket at the end of each month from wages and rental income. Repayments on a £200k mortgage will be £1070 at 4%, £1430 at 7%, £1840 at 10%. If he's on 4%, the guy has already committed 56% of his net income to mortgage payments, and that's at record low rates. If inflation picks up, a rise in interest rates will probably mean game over long before his pay and rent catch up with the mortgage payments. His cashflow is on a knife-edge.

That's right. at 7% or 10% game over for him and millions more. Mass defaults = Game over for the banks too.

You can kiss goodbye the STR fund / savings in the process.

Will this tipping point allowed to happened? very unlikely. You know it, so do the governments.

[MississippiJohnHurt]

That's right. at 7% or 10% game over for him and millions more. Mass defaults = Game over for the banks too.

You can kiss goodbye the STR fund / savings in the process.

Will this tipping point allowed to happened? very unlikely. You know it, so do the governments.

Yes, interest rates have never been above 7% in living memory have they? Oh. Wait.

Edited February 3, 2010 by FallingKnife

[Bloo Loo]

Even if it's worth 60K it's still a chunk off his existing debt.

I still don't think it's excessive from the bank's point of view. His portfolio would have to drop by 80K before the bank was unable to get it's money bank and he is partially offset by rent (whatever occupancy he gets). If he didn't actually need to sell then there would be no issue at all.

Come on guys and gals, there are worse examples out there I'm sure...

no, he has 70K on the 80k flat.

he cant sell if its 60K, as its neg equity.

and there are selling costs, fees and charges.

worse examples? 29K income on 200K of debt....thats 6 times income.

[Si1]

I actually said the following; I don't disagree with you but he probably sees an increase of say £250k over the ten years, house prices always double every ten years.

so you're saying house prices always double every ten years.

then?

[Si1]

That's right. at 7% or 10% game over for him and millions more. Mass defaults = Game over for the banks too.

so you agree that somethign less like 5% would cause a crash then - nice of you to be so open.

You can kiss goodbye the STR fund / savings in the process.

why? you're just a loser who's scared other people actually made MUCH better calls than you

Will this tipping point allowed to happened? very unlikely. You know it, so do the governments.

err, as we already established numbskull, the possibility of it being so awful further implies just how bad it already is at low IRs - minor tweaks will hurt mortgagees.

these have to come sooner or later or we have Weimar Republic #2

Something bad has to happen or else something absoultely positively terrible will happen in its place

Property as an investment is toast and there's nothing you or I can do about it.

Edited February 3, 2010 by Si1

[Si1]

No, I could probably have expressed this better. The person buying thinks (tells himself) that he will make 250k over ten years as 'everybody' (EAs, people on the telly, Fergus etc) says prices double every ten years. Many people make decisions and convince themselves they are right, when if they sat down and looked at the facts in the cold light of day they would never do what they are going to do.

ahhhhh - OK

[Radge]

And folk wonder how we got into this mess? Beam me up for a shyte, Scotty!

And after 10 pages of this shyte, I still see nothing that would dissuade me from my original comment. Even on p8 or 9 there are chimps that think this guy "owns" an £80K flat!

[#1 on West side]

I don't disagree with you but he probably sees an increase of say £250k over the ten years, house prices always double every ten years. So what other chance will he have of gaining 25k per year tax free? Might be a struggle for the first couple of years until inflation takes away the pain but then he will be quids in. Just a different view - I couldn't live with this but maybe he can and if so good luck to him.

Which inflation would that be then? Food inflation, Energy inflation, Hyperinflation???

Or are you betting the farm on Wage Inflation?

Inflation doea not only erode your debt, it also erodes your available cash. When you hardly have enough money to spend on food it is great to know that your mortgage is less in real terms than it was a few years ago "because of inflation"...