Borrowing, Btl And Interest Only Anecdotal

[Starla]

Anedotal first hand evidence of the shocking amounts of borrowing going on with 2 people I know. One a work friend, another a friend of a friend I see occassionally. I'll try to leave any emotion out of this and excessive use of exclamation marks. I'm in the Greater London/Middlesex area. These are both conversations I've had this week, first hand.

Case 1

* Aged 36, Secretarial/Admin worker, earns 28k basic, plus bonuses etc = 33kpa.

*Bought a leashold flat in 2006 for £280k in Raynes Park (Greater London). Similar in block are selling for £250k. It's an interest only mortgage. 2k pa service charges.

* She has been left in a will 60k, which I suggested she should use to pay down the debt on the flat.

* But no...she has decided BTL is the way forward and is currently looking at flats locally, in the region of 300 - 350k to buy on another IO mortage and rent out.

* I asked how she could get to borrow nearly 600k on her salary and she winked proudly and said "I know a hooky mortgage advisor".

* I asked her it she knew what the yeild would be. She doesn't know what yeild is. I explained it's the difference between the cost of your mortgage, maintenance fees, management agents fees, tax, replacement white goods, repairs and voids etc versus the rent coming in. Your profit/or loss. This was met with surprise

.

* She doesn't know what a void is. I explained it's the time your flat isn't rented, either between tenants, or if you have a problem tenant who doesn't pay the rent.

* She doesn't realise interest rates can go up.

* The Interest only repayments on a 300k mortgage at 2% interest is £500. She says she can get around £1,200 in rent so it's all covered with £700pm spare. Hurrah! I know she hasn't accounted for any other costs (having never heard of yeilds or voids) and if her BTL rates go to 4% the mortgage is £1,000 and at 6% it's £1,500.

Case 2.

* Bloke, 37, 40k salary, not an upward career with expected pay increases. My previous view of him was that he was a fairly sensible person who "owned" his own flat

.

* This week he tells me he's going to view a house in Feltham, Middlesex next Wednesday, is very excited, it's 320k* Then offers up proudly more info which is the flat he currently lives in and "owns" is on an INTEREST ONLY mortgage of 285k (GULP),

* Says current flat would rent out for £950pm the same as others in the block and will keep it to let out and buy the house to live in.

*I don't what the flat is worth now, but £950 rent on a 285k bought price/mortgage does not stack to anything but a massive loss/terrible yield?

* He also looked blank when I mentioned yeild/voids.* I asked how he was able to borrow around 600k on his salary, to which I was told "my mates a mortgage advisor so I can get round it".

* I asked him if he'd stress tested his borrowing against any interest rate rises and he said quote (this is again stunning) "I had no idea they might ever rise, I've based everything on rates now".

Either I'm risk adverse and too sensible, or are these people borrowing around 600k on 40k and 33k salaries are complete and utter idiots? I don't even understand how they got the borrowing on the current flats they live in, let alone second properties if and when they are bought? I haven't been giving them the whole HPC talk because I'm over that now and can''t be bothered, I just ask investigative questions, and give simple factual answers and let them get on with it. SHOCKING.

Edited December 14, 2013 by Starla

[doahh]

Yep, the best way is not to interfere.

I have a friend who is on an IO mortgage but they pay it down when they can with no penalties. I hadn't realised that IO could also be used sensibly as a payment vehicle when incomes are variable. One of the couple has a job which pays basic interest and living expenses, the other is working self-employed part time and uses that income to chip away at the capital amount. It doesn't sound like your two numpties are doing that though - I wonder where they will get the capital at the end of the term? that is a lot of money to raise.

Another friend is a single mum with two children and a 16 hour a week job. She owns two houses. I think she is very lucky as she met a guy who is quite well off. She is already borrowing money for a roof repair (£15K) from him and is hocked up to the nine's in debt to family members. She paid £180K for a one bedroom flat in a reasonable part of Edinburgh - all be it on a main road. If she hadn't met this guy then I expect she would be a train wreck waiting to happen when the child tax credits stop in a few years. As it is I am taking bets on whether or not her new BF will leave her when she gets further into trouble.

[John51]

She has been left in a will 60k, which I suggested she should use to pay down the debt on the flat.

If she does that and a year or 2 down the line she has trouble paying the monthly interest, would that count as a missed payment or would the £60k be treated as a buffer?

If not treated as a buffer wouldn't she be better off having it on deposit just in case?

[Wurzel Of Highbridge]

These stories remind me of the ones I read in disbelief here

I read in disbelief at how people bought extra properties as prices could only go up, and now have €200k/€300k in negative equity and cannot even repay the interest.

I am left wondering when the plug will be pulled on those savvy UK investors who see no point in selling, so will rent out their old property.

For example picking a post from the top:

Hi I have two buy to lets .(1) Owe 250,000 value 90,000 intrest payments 450 and rent in 750. no arrears.(2) Owe 400,000 value 240,000 intrest payments 1447 not rented arrears 6000.(3) On my family home I owe 300,000. value 220,000 intrest payments 380 no arrears. (4) visa 15,700 (5) loans to family 9,000 .

The big problem is nos 2+3 are cross charged and ptsb is telling me they will repossess no2 and after its sold will add the short fall to my family home thats approx 160,000 and will make my family home unsutainable. All loans are on tracker (1) ecb + 1.1% (2) ecb + 3.35% (3) ecb + 0.8%

I am not paying into visa at the moment.

My income has dropped from 50,000 to 40,000 and my wives 26,000 to 16,000. we have 3 children and would hope to keep our family home.

Any advice please

Oh yes, but the UK is different... I see.

Edited December 14, 2013 by Gone to Ireland.

[MattW]

* I asked how she could get to borrow nearly 600k on her salary and she winked proudly and said "I know a hooky mortgage advisor".

Bloody hell, are these Liar Loans still being doled out? Have these people not learned a thing since the credit crunch?

Do Financial Advisors not realise that they will lose their freedom if caught and conviced of being part of a fraud? I don't think the hefty commission on such a big loan is worth the risk.

Borrowing £600k on a £33k income? That's 18 x income. I earn half of what the 36 year old female does and the most I can borrow is £56k...maybe £60k. Jesus wept.

[Mrs Bear]

Anedotal first hand evidence of the shocking amounts of borrowing going on with 2 people I know. One a work friend, another a friend of a friend I see occassionally. I'll try to leave any emotion out of this and excessive use of exclamation marks. I'm in the Greater London/Middlesex area. These are both conversations I've had this week, first hand.

Case 1

* Aged 36, Secretarial/Admin worker, earns 28k basic, plus bonuses etc = 33kpa.

*Bought a leashold flat in 2006 for £280k in Raynes Park (Greater London). Similar in block are selling for £250k. It's an interest only mortgage. 2k pa service charges.

* She has been left in a will 60k, which I suggested she should use to pay down the debt on the flat.

* But no...she has decided BTL is the way forward and is currently looking at flats locally, in the region of 300 - 350k to buy on another IO mortage and rent out.

* I asked how she could get to borrow nearly 600k on her salary and she winked proudly and said "I know a hooky mortgage advisor".

* I asked her it she knew what the yeild would be. She doesn't know what yeild is. I explained it's the difference between the cost of your mortgage, maintenance fees, management agents fees, tax, replacement white goods, repairs and voids etc versus the rent coming in. Your profit/or loss. This was met with surprise

.

* She doesn't know what a void is. I explained it's the time your flat isn't rented, either between tenants, or if you have a problem tenant who doesn't pay the rent.

* She doesn't realise interest rates can go up.

* The Interest only repayments on a 300k mortgage at 2% interest is £500. She says she can get around £1,200 in rent so it's all covered with £700pm spare. Hurrah! I know she hasn't accounted for any other costs (having never heard of yeilds or voids) and if her BTL rates go to 4% the mortgage is £1,000 and at 6% it's £1,500.

Case 2.

* Bloke, 37, 40k salary, not an upward career with expected pay increases. My previous view of him was that he was a fairly sensible person who "owned" his own flat

.

* This week he tells me he's going to view a house in Feltham, Middlesex next Wednesday, is very excited, it's 320k* Then offers up proudly more info which is the flat he currently lives in and "owns" is on an INTEREST ONLY mortgage of 285k (GULP),

* Says current flat would rent out for £950pm the same as others in the block and will keep it to let out and buy the house to live in.

*I don't what the flat is worth now, but £950 rent on a 277k bought price/mortgage does not stack to anything but a massive loss/terrible yield?

* He also looked blank when I mentioned yeild/voids.* I asked how he was able to borrow around 600k on his salary, to which I was told "my mates a mortgage advisor so I can get round it".

* I asked him if he'd stress tested his borrowing against any interest rate rises and he said quote (this is again stunning) "I had no idea they might ever rise, I've based everything on rates now".

Either I'm risk adverse and too sensible, or are these people borrowing around 600k on 40k and 33k salaries are complete and utter idiots? I don't even understand how they got the borrowing on the current flats they live in, let alone second properties if and when they are bought? I haven't been giving them the whole HPC talk because I'm over that now and can''t be bothered, I just ask investigative questions, and give simple factual answers and let them get on with it. SHOCKING.

I don't find the cluelessness about IRs (or anything else for that matter) surprising. Very recently on a TV piece for help to buy they interviewed a young primary teacher who was very happy in her new HTB flat. Presenter asked if she'd thought about what might happen if IRs rise. She looked completely blank, said she hadn't thought about it. Evidently it had never even occurred to her.

[renting til I die]

I'll try to leave any emotion out of this and excessive use of exclamation marks.

I'm going to add them for you. WTF!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

* She has been left in a will 60k, which I suggested she should use to pay down the debt on the flat.

Or put into a bank and earn interest, plus save for a rainy day!

* But no...she has decided BTL is the way forward and is currently looking at flats locally, in the region of 300 - 350k to buy on another IO mortage and rent out.

I was sure that all the IO mortgages had been pulling, maybe that's only for FTB's

* I asked how she could get to borrow nearly 600k on her salary and she winked proudly and said "I know a hooky mortgage advisor".

This requires excessive use of exclamation marks!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

* I asked her it she knew what the yeild would be. She doesn't know what yeild is. I explained it's the difference between the cost of your mortgage, maintenance fees, management agents fees, tax, replacement white goods, repairs and voids etc versus the rent coming in. Your profit/or loss. This was met with surprise

This doesn't surprise me. I've stopped being shocked at how financially illiterate people are. Still made me laugh!

* She doesn't know what a void is. I explained it's the time your flat isn't rented, either between tenants, or if you have a problem tenant who doesn't pay the rent.

Now that is more surprising!

* She doesn't realise interest rates can go up.

* The Interest only repayments on a 300k mortgage at 2% interest is £500. She says she can get around £1,200 in rent so it's all covered with £700pm spare. Hurrah! I know she hasn't accounted for any other costs (having never heard of yeilds or voids) and if her BTL rates go to 4% the mortgage is £1,000 and at 6% it's £1,500.

Or heard of paying tax on her income!

* This week he tells me he's going to view a house in Feltham, Middlesex next Wednesday, is very excited, it's 320k* Then offers up proudly more info which is the flat he currently lives in and "owns" is on an INTEREST ONLY mortgage of 285k (GULP),

* Says current flat would rent out for £950pm the same as others in the block and will keep it to let out and buy the house to live in.

I would love to see rents come down a bit! That would shock a few people!

*I don't what the flat is worth now, but £950 rent on a 277k bought price/mortgage does not stack to anything but a massive loss/terrible yield?

About 4.1% from my basic sums. People would be jumping up and down and saying 'you can't get that in a bank!'

* He also looked blank when I mentioned yeild/voids.* I asked how he was able to borrow around 600k on his salary, to which I was told "my mates a mortgage advisor so I can get round it".

Top bloke this mortgage advisor. Same one as your first friend or are they all bent!

* I asked him if he'd stress tested his borrowing against any interest rate rises and he said quote (this is again stunning) "I had no idea they might ever rise, I've based everything on rates now".

I do wonder when they will rise. Who knows but it does show how short sighted (or just plain dumb!) people are!

I do look at Japan and think about how long they have had 0.1% rates for. I rather play safe and keep saving, as long as I can pay my rent and save I don't if under any pressure to buy anything.

[SuperChimp]

Either I'm risk adverse and too sensible, or are these people borrowing around 600k on 40k and 33k salaries are complete and utter idiots? I don't even understand how they got the borrowing on the current flats they live in, let alone second properties if and when they are bought? I haven't been giving them the whole HPC talk because I'm over that now and can''t be bothered, I just ask investigative questions, and give simple factual answers and let them get on with it. SHOCKING.

It is shocking but interest rates are not going to rise dramatically in the near future and as Sterling continues to lose value property is seen as a relatively safe haven.

The government is bailing out the banks by supporting those with unaffordable mortgages. Your colleagues have the government on their side.

[Starla]

Yep, the best way is not to interfere.

Absolutely agree. I haven't bothered to explain you're worse off than renting when you have an IO mortgage on a property worth less than you paid for it. It just won't compute because, hey, they're on the property "ladder". If anything I need people like this to crash and burn so one mythical day I can minesweep up the wreckage with cash. Your friend with the Edinburgh flat needs that loaded boyfriend or the Roll Over Jackpot.

She has been left in a will 60k, which I suggested she should use to pay down the debt on the flat.

If she does that and a year or 2 down the line she has trouble paying the monthly interest, would that count as a missed payment or would the £60k be treated as a buffer?

If not treated as a buffer wouldn't she be better off having it on deposit just in case?

Not sure on answer to that, but agree your advice is probably better, keep the 60k in reserve for when the SHTF with either property or both simultaneously.

These stories remind me of the ones I read in disbelief here

Brilliant read (when you're a renter with cash in the bank). I spent a good hour reading that forum and finshed feeling queazy as though I had 3 underwater properties and maxed up credit cards. What an mess.

[Starla]

Bloody hell, are these Liar Loans still being doled out? Have these people not learned a thing since the credit crunch?

Just wait and see how big the red letters will be when Eric Pebble finds out.

I don't find the cluelessness about IRs (or anything else for that matter) surprising. Very recently on a TV piece for help to buy they interviewed a young primary teacher who was very happy in her new HTB flat. Presenter asked if she'd thought about what might happen if IRs rise. She looked completely blank, said she hadn't thought about it. Evidently it had never even occurred to her.

Saw the same prog. Panorama I think. This would be financially tight for someone borrowing on repayment on one property vaguely within their means. For my friends borrowing on 17/18 times salary you'd think they might make some enquiries.

I'm going to add them for you. WTF!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Thanks!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

It is shocking but interest rates are not going to rise dramatically in the near future and as Sterling continues to lose value property is seen as a relatively safe haven.

The government is bailing out the banks by supporting those with unaffordable mortgages. Your colleagues have the government on their side.

I saw plenty of friends hand back the keys in the 1990's and no one issued an advanced warning that interest rates would peak at 15%. Saying that you're right about how the game is rigged at the moment. But, would you suggest we all do the same and go for 600k borrowing and a few BTLS? If property prices keep rising you're quids in and if they don't and interest rates move a couple of percent over the next 5 years, never mind, we'll get a bail out?

[SuperChimp]

I saw plenty of friends hand back the keys in the 1990's and no one issued an advanced warning that interest rates would peak at 15%. Saying that you're right about how the game is rigged at the moment. But, would you suggest we all do the same and go for 600k borrowing and a few BTLS? If property prices keep rising you're quids in and if they don't and interest rates move a couple of percent over the next 5 years, never mind, we'll get a bail out?

Not for me. I fight the system by staying out of it. Minimal debt. No savings in the banks etc.

The problem is that the money supply has to keep growing and they have ran out of options. I cant see interest rates rising above 1% in the next 5-10 years so maybe they have the right idea.

[SuperChimp]

No savings in the bank ? What else do you stick it ?

Precious metals mostly. The knowledge that I do not support their economic paradigm is worth far more to me than any interest I could earn.

Although my job doesn't pay well so my savings are quite meager anyway

Borrowing £600k on a £33k income? That's 18 x income. I earn half of what the 36 year old female does and the most I can borrow is £56k...maybe £60k. Jesus wept.

Many moons ago I worked in a bank branch in Liverpool. The thought back then that someone would have either an interest only mortgage or a mortgage at anything above 4-5x salary was unthinkable. Without even an endowment policy (remember them?) it is truly a scary situation. Just goes to show how utterly crazy the UK economy is.

[Wurzel Of Highbridge]

Here in Ireland you WILL NOT get a mortgage for more than 3.5x single wage + other partners income and then they deduct expenses like child care. They go through every financial detail and bank statement then you get a mortgage in principal.

It took me 3 months to get a mortgage in principal! It's expired now

[long time lurking]

The Interest only repayments on a 300k mortgage at 2% interest is £500. She says she can get around £1,200 in rent so it's all covered with £700pm spare. Hurrah! I know she hasn't accounted for any other costs (having never heard of yeilds or voids) and if her BTL rates go to 4% the mortgage is £1,000 and at 6% it's £1,500.

I think If the IO 300k mortgage is changed to a BTL IO she will be paying those sorts of rates (4%-6% ) now never mind when interest rates rise

[Starla]

I think If the IO 300k mortgage is changed to a BTL IO she will be paying those sorts of rates (4%-6% ) now never mind when interest rates rise

This is where I am being being very generous with my calculations at 2%, and I don't think that interest rate rises are the only problem. It's the rates now.

[pras]

Its idiots like this (and there are many many of them) that cause London prices to rise and makes other idiots offer well over the asking price and therefore pricing people like me out!!

[John51]

Wow! People actually saying that their (ie. the banks) property is worth 2/3 of mortgage. Mostly Ireland but still, the cracks are getting bigger. Looks like 2014 is going to be an interesting year.

My biggest fear is that when the bust does come, it will also greatly lower the living standards on non house buyers, my kids in particular.

[The Knimbies who say No]

It's what Osborne wants. People who will instinctively donate their lives to a bank at the drop of a hat, they probably wouldn't stick £100 on a top vs bottom football match, but will put six-figure sums they don't have on property at the drop of the hat.

All in the expectation of HPI.

While it is satisfying to a degree to know that there will be a steady strem of rental properties available where the 'owner' couldn;t care less about the yield, having LLs in precarious financial positions is hardly good, and of course the yields may be low but the absolute cost of housing is still way too high.

If you could be sure that these clowns would get the rug pulled when they hit the skids, it wouldn;t bother me so much. But you just know that when the SHTF, it'll be someone else's fault...

[John51]

When the SHTF, when not if, everyone is going to suffer, not just the feckless. We're all going to pay, blameless or not. Never thought I'd say it but I am really hoping that tptb can keep the plates spinning.

[Si1]

To what degree are taxpayers on the hook for this, what degree banks, and just how crooked are mortgage advisers being?

[Andy T]

I just don't get how bent mortgage brokers can get the bullsh#t past the underwriters to such a degree.

Do you know which brokers/advisors are involved, are you not tempted to shop them, would be doing the two people you know a favour in the long term

[Si1]

I just don't get how bent mortgage brokers can get the bullsh#t past the underwriters to such a degree.

Do you know which brokers/advisors are involved, are you not tempted to shop them, would be doing the two people you know a favour in the long term

Indeed

[Venger]

When the SHTF, when not if, everyone is going to suffer, not just the feckless. We're all going to pay, blameless or not. Never thought I'd say it but I am really hoping that tptb can keep the plates spinning.

As someone who sees many young professionals working hours on end in high-pressure careers, renting and suffering in their own ways, house prices totally insane... I say bring it on.

Couldn't care less for your feckless. They're still at it, as per examples in this thread. Total belief in HPI, with nothing learnt from modern era crunch 1.0, no concern about economy still rebalancing, UK facing biggest public spending cuts in Europe over next 10 years. Just trying to get as much debt as possible to pay stupid prices.

The majority are cushy older owners with no mortgage debt, who enjoyed a life of constant HPI, and rising incomes, and final salary pensions, who just have no clue whatsoever of difficulties for younger independent people. It needs to rebalance, and others get a taste of a drop in living standards, rather than more plate spinning to protect privileged VI positions.

[lastlaugh]

This is where I am being being very generous with my calculations at 2%, and I don't think that interest rate rises are the only problem. It's the rates now.

BTL doesn't stack up in London anymore. Yields are south of 3%. Of course, a few idiots will talk the talk, there's a lot of media propaganda right now. There's even talk of "total returns" again even though I don't remember "total losses" ever mentioned. I'm seeing a slow trickle of obvious ex-rental properties coming to market. Either stretched or wise landlords. A few idiots will bite the bullet. Is this what the Return to Normal phase looks like?

[Starla]

I may as well update on progress. Saw "Friend 2" (40k pa earner) today at some lunchtime drinks. Again he offered up most of the info, as he's really excited.

* He didn't offer on the house he looked at last Weds, looked at a few others and has made an offer on a house, £305k, asking price. It's just been accepted.

* Tells me mortgage on house, on a repayment , is £1000 as he has saved money to put down. (I didn't ask the mortgage rate but an optimistic 2% that's circa 240k mortgage, 3% 220k etc).

* The street is full of indentikit houses, so I did a Land Registry check on same road, same beds and nothing has ever sold for more than £260k. Including peak up until this year.

* Worse than that, he was enthusiastic that this house is a project, is currently a bit of a wreck, never been extended, needs new everything, heating system, windows etc etc.

* He's paid 45k more than any other house on the street plus has to re-furb it.

So there we go, all very exciting with new house purchase, circa 200k+ mortgage on a wreck, at record low interest rates earning 40k per year. He can't wait for it all to go through.

* Re the flat he currently lives in that he wants to keep and rent on the 285k IO mortgage, I asked if he'd got his residential mortgage changed to a BTL and he looked a bit blank. I think he pretended he knew what I was talking about and said "I don't know the rate yet, it's being sorted out".

*Nevermind that bit though, he's now confidently expecting £1,000pm when it rents out. (If the BTL rate is any more than 4% that's that gone).

*I can almost let him off for not doing his sums because he can't do any when he has no idea what his costs are. Brilliant.

I'm wondering how long I can hold out before saying the sums don't work out. The good news is my original projection of £600k's worth of debt is now only circa £500k which brings it down to only 12.5x salary.

Edited December 21, 2013 by Starla