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VeryMeanReversion

Mortgage Trouble Anecdote

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Just having a bit of trouble with a mortgage application with HSBC so I'll tell you a little story :

- Want to buy a house at 5.5x income.

- Have savings of 5x income but some of it is in NS&I earning 5% tax-free so want to keep some there.

- Will put down a deposit of 3x income so require a mortgage of 2.5x income.

- LTV is 46%

- However I use a salary sacrifice scheme at work so the mortgage looks like 3.4x income.

- They previously approved-in-principle 3.5x which I meet, even on my post-sacrifice income.

- I have no other debt and minimal monthly committments (no mobile/satellite/car payments)

- I supplied written evidence from employer about the salary sacrifice scheme and that I can increase my current income by a third at any time.

HSBC say "NO".

They want proof of higher income via a P60 (which of course shows post-salary-sacrifice income) so this is stupid.

They wont accept proof of pension contributions which are quarter of my gross income as evidence so I am living well within my means.

So I can just borrow a few grand from relatives to then buy for cash but this is all getting a bit silly IMO. Or I can just reduce the mortgage amount to qualify using my NS&I money but that is just a waste of NS&I interest.

(All income in the above is gross)

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HSBC say "NO".

Just buy with cash and move on with your life.

You can always MEW some money back out if anything critical ever comes up.

Two or three years with no mortgage, savings will be back in the black in no time.

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So I can just borrow a few grand from relatives to then buy for cash but this is all getting a bit silly IMO. Or I can just reduce the mortgage amount to qualify using my NS&I money but that is just a waste of NS&I interest.

Alternatively you could wait at least 6 months and get the house 20% cheaper.

I'm glad a bit of sanity seems to be returning to the mortgage market.

Edited by Constable

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Maybe you are too little business or risk for them?

I mean with limited funds to deploy maybe they want someone requiring a higher ltv that will be on the hook for a full 25 years. If not then I really cant see any logic in this at all but then logic doesn't seem to be important anymore.

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Just buy with cash and move on with your life.

You can always MEW some money back out if anything critical ever comes up.

Keeping the savings at 5% tax-free whilst paying the mortgage at 2.19% is approx £3K tax-free income per year for up to 6-10 years so I don't want to give that away. If interest rates go up so this arbitrage doesn't work, I can just clear the mortgage. Basically, I am running a better version of an offset mortgage and at a 0.3% lower rate.

For safety, if I lose my job, I can still pay the bills for years if I keep this savings reserve. (100% govt backed)

I wouldn't expect MEWing to get me a rate this low in future.

I expect I'll realise the futility of explaining the tax implications of salary sacrifice to an underwriter and just take whatever the max is and live with it.

I did have a nagging feeling when I applied that I bet someone with lots of savings and good tax planning was going to take a bit of explaining.

Two or three years with no mortgage, savings will be back in the black in no time.

You haven't met my Mrs!

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Salary sacrifice scheme? Sounds very altruistic.

You reduce your gross salary by X. This X goes into your pension.

This saves you paying employee NI (minor % of X)

With a nice employer, they also pass on the employer NI savings (significant % of X).

This works out as improving tax-relief from 40% to around 45%. Very effective.

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They want proof of higher income via a P60 (which of course shows post-salary-sacrifice income) so this is stupid.

Why if the loan is such a small multiple of salary (2.5x)? Do they have some threshold on the house value as a multiple of salary?

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Alternatively you could wait at least 6 months and get the house 20% cheaper.

I'm glad a bit of sanity seems to be returning to the mortgage market.

After 7 years waiting, houses with big plots in target area are finally coming on the market from forced sellers at my target price (£200/sqft). I sold in 2003 at £234/sqft. (needed to move for work)

The wait/savings trade-off just isn't worth it any more.

I do expect another 20% off in real-terms, not in 6 months though.

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Why if the loan is such a small multiple of salary (2.5x)? Do they have some threshold on the house value as a multiple of salary?

The loan is 3.4x of gross post-salary-sacrificed salary. (2.5x gross pre-salary-sacrificed salary)

They do an affordability calculation based on my bank statement and say I can't afford it. They may not have noticed that £1Kpcm goes on rent that I wont need to pay any more and a couple of hundred pounds goes into savings schemes that I won't need any more since it was for the house deposit.

Basically, my little moan is that their tick-box system cant cope with anyone with optimally arranged finances.

I could of course have cancelled the salary sacrifice three months in advance but that is a bit silly, who knows when the right house will come up.

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HSBC have a 2.19% deal ??

Base+1.69% lifetime tracker special (not a short-term deal). Rather generous I thought to lend me money at 2.19% when NS&I are paying RPI+1% tax-free.

The interest gains on this exceeds the interest portion on the mortgage.

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You reduce your gross salary by X. This X goes into your pension.

This saves you paying employee NI (minor % of X)

With a nice employer, they also pass on the employer NI savings (significant % of X).

This works out as improving tax-relief from 40% to around 45%. Very effective.

Seems to be popular these days, tax avoidance for the masses.

I'm sure it will be banned soon, only the rich are allowed to scam the tax man.

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Doesn't answer my question.

Your question had multiple meanings, I picked the one meaning I could answer.

If you were asking what their total funding availability is for this product, it is unlikely anyone outside HSBC would supply that info.

If your question was meant to say "are they prepared to make a loss on this" then I have no answer.

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Base+1.69% lifetime tracker special (not a short-term deal). Rather generous I thought to lend me money at 2.19% when NS&I are paying RPI+1% tax-free.

The interest gains on this exceeds the interest portion on the mortgage.

That's the best mortgage they do, and they seem very tight on the requirements. I couldn't go above 2.5* income regardless of what the LTV was.

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If you were asking what their total funding availability is for this product, it is unlikely anyone outside HSBC would supply that info.

<paul daniels>Not a lot</paul daniels>

is all I was looking for.

You've explained it yourself, this is free money to you so I'm not surprised that HSBC are reluctant to give it out. I don't think this anecdote says much for state of lending at the moment, other than its harder to get a BR+1.69% loan than it was before the BR jumped off a ledge.

Looks like you're going to have to pay more interest on your loan or give up some savings if you want to buy that house.

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After another chat to explain the tax implications of salary sacrifice and how it will not appear as income on a P60, the mortgage is now approved. They realised that the only to prove my higher income was via my employer and rather requesting to see my original contract, they already have pre/post sacrifice figures in writing.

I did a bit of HPC research with the underwriter at the same time:

- For this deal (60% LTV max), the normal maximum loan/income ratio is 2.5x to 3x.

- Some deals are going through at 4.5x but requires a higher management sign-off

- 5x is considered on other deals but rarely gets through.

- Very few deals are done at 90% LTV

- Max loan is £1M

- A down-valuation only affects LTV product thresholds and is independent of the loan/income/affordability ratios

So now, if this works out as this after buying:

Savings of 2x

Mortgage of 2.5x

Net debt of 0.5x

Interest income exceeds mortgage interest so repayments are basically a tax-free savings scheme.

House prices to drop 5% per year real-terms for 4-5 years.

So there is an opportunity cost to buying now but savings rates are at 2% net if I'm lucky and the house will be providing ~£1kpcm of housing "services" whilst prices are dropping so that will balance out to some degree.

If there is inflation, my NS&I RPI-linked fund covers that

If there is deflation, I clear the mortgage in ~3 years

If I lose a job, saving/benefits can be optimised to cover me for a long time. Savings can be used with my free labour to extend.

If the financial system implodes, I can clear the mortgage with family reserves.

I think I'm now covered for most scenarios.

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... other than its harder to get a BR+1.69% loan than it was before the BR jumped off a ledge.

True. This time has been a lot more time and paperwork to sort out. Last time, around 1999, I just walked past Halifax, saw a good deal, walked in, signed a couple of bits and paper and sorted out a (re)mortgage on the day.

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So you did get your free money after all.

It's not free, they are paying me to take it. ("they" being the government/financial system). If RPI is increasing at 5%, they are paying me 6%-2.19%=3.81%.

If I was smarter, I could have moved more money into NS&I earlier and gone for the max 4x income loan and be making 3.81%x4 = 15% gross salary for free.

Which again means that those of us without 5x income to fall back on have even further to climb.

As long as they force base rates to ridiculous lows, link mortgages to it and print money, yes. I don't know how long that will last but I can't wait any more, I'm running out of working-life years.

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Keeping the savings at 5% tax-free whilst paying the mortgage at 2.19% is approx £3K tax-free income per year for up to 6-10 years so I don't want to give that away. If interest rates go up so this arbitrage doesn't work, I can just clear the mortgage. Basically, I am running a better version of an offset mortgage and at a 0.3% lower rate.

Realistically, how long will this arbitrage last for? And what's it worth after various transaction costs such as arrangement fees and early payment penalties?

If you are spending half a million on a house, don't fart around with a few grand per year in interest. Just pay it off, avoid this whole scheme, and take pleasure in never dealing with banks again.

I know this is not the optimum financial solution, but peace of mind, an easy life, and the ability to avoid dealing with banks has some monetary value.

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  • 144 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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