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A.steve

Btl Mortgages And Liability...

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During the boom, people who own one house, who had a bundle of cash, and wanted another house, had the option to get a BTL mortgage on the house they own, and buy their next property for cash - letting out their old one.

Someone who has done this recently told me that the maximum loss they could sustain (under any circumstances, such as an indefinite void and a freak absence of any personal income) would be the loss of the equity in their old house over-and-above the mortgage value. Sure, while the tenant pays the mortgage, everything is fine... but, what about the worst case?

The claim is that their BTL mortgage is a special one that limits their liability - either directly or indirectly by way of some kind of bundled insurance. Do such facilities really exist (timescale is past 3 years) and, if so, how much do they usually cost over and above normal mortgages?

Edited by A.steve

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quite a common thought...the only money they would lose is their equity. Its 8ollox of course.

Im sure you could insure against this, but who does?

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The claim is that their BTL mortgage is a special one that limits their liability - either directly or indirectly by way of some kind of bundled insurance. Do such facilities really exist (timescale is past 3 years) and, if so, how much do they usually cost over and above normal mortgages?

Are they getting confused with insurance to cover rental voids?

Some BTL mortgages have clauses that the original equity has to be maintained - but unless a property is going to be revalued no one is going to look too closely until someone stops paying the mortgage.

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Sounds like he is confused. Sounds like standard mortgage indemnity insurance. The mortgagee pays for said insurance, and it covers the bank. If on reposesion the price obtained is less than the mortgage outstanding the insurance company pays the difference to the bank and goes after the original mortgagee for the money!

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Sounds like he is confused. Sounds like standard mortgage indemnity insurance. The mortgagee pays for said insurance, and it covers the bank. If on reposesion the price obtained is less than the mortgage outstanding the insurance company pays the difference to the bank and goes after the original mortgagee for the money!

Yes - this is probably what he is confused about. Probably added to the mortgage + all other fees with free val and legals and sleeps contently at night in ignorance.

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The claim is that their BTL mortgage is a special one that limits their liability - either directly or indirectly by way of some kind of bundled insurance. Do such facilities really exist (timescale is past 3 years) and, if so, how much do they usually cost over and above normal mortgages?

This is often called 'mortgage indemnity insurance' and is a form of insurance that is sold, bundled with the loan. It ensures, that in the event of repossession in negative equity, the bank is able to recover the entire debt. For high-risk mortgages, e.g. BTL with high LTV, or owner occupier with very high LTV, this type of insurance scheme was fairly common - as it permitted the banks to write more loans on the same amount of capital.

In effect, it makes the loans less risky for the banks, if they can guarantee getting their capital back under all circumstances - even if the mortgagor declares bankruptcy.

The catch, which most mortgagors are not aware of, is that if the mortgagee claims on the insurance (because the property was in negative equity when they repossessed it), then the insurance company is able to recover the cost of the claim from the mortgagor. It is only if the mortgagor is totally bust, that the insurance company actually loses out.

The net result is that the mortgagor's liability is not limited in any way - and could potentially be even higher, due to accrued legal costs and admin fees accrued by the 3rd party to the agreement.

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Are they getting confused with insurance to cover rental voids?

Some BTL mortgages have clauses that the original equity has to be maintained - but unless a property is going to be revalued no one is going to look too closely until someone stops paying the mortgage.

You're talking about

Margin Calls

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  • 309 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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