Am I Missing Something?

[CunningPlan]

I have got the hang of Basel III, Sw8, tax relief on interest, MMR etc but to me there is really only one key point.

LLs can borrow interest only. OO's can't (and shouldn't). Therefore my LL can pay approximately twice what I can, using my income, for the same property.

LL's have bought approx. 80% of all new build in the last 5 years. No surprise there given the above.

Given that my LL has to pay agents fees, licences etc, if he had to have a repayment mortgage I could, in theory, outbid him using my rent.

They say they are a business. In 25 years of running a manufacturing company I have never been offered an interest only asset purchase loan.

The simple fact is that if LL's had to operate on a repayment basis, their model would implode overnight and a truly fair market would exist. The Government must know this but doesn't act.

Banning IO BTL mortgages is all it would take to revert prices to actual value/affordability.

What am I missing here?

[long time lurking]

I have got the hang of Basel III, Sw8, tax relief on interest, MMR etc but to me there is really only one key point.

LLs can borrow interest only. OO's can't (and shouldn't). Therefore my LL can pay approximately twice what I can, using my income, for the same property.

LL's have bought approx. 80% of all new build in the last 5 years. No surprise there given the above.

Given that my LL has to pay agents fees, licences etc, if he had to have a repayment mortgage I could, in theory, outbid him using my rent.

They say they are a business. In 25 years of running a manufacturing company I have never been offered an interest only asset purchase loan.

The simple fact is that if LL's had to operate on a repayment basis, their model would implode overnight and a truly fair market would exist. The Government must know this but doesn't act.

Banning IO BTL mortgages is all it would take to revert prices to actual value/affordability.

What am I missing here?

On the bolded bit you have missed nothing apart from the answer to why haven't they

There`s consultation going on with a view of restricting BTL mortgage lending but i would be very surprised if they banned IO would be great if they did

The simple fact is that if LL's had to operate on a repayment basis, their model would implode overnight and a truly fair market would exist. The Government must know this but doesn't act.

I would guess this is the answer to the question,,,,, why haven't they

[spyguy]

Leveraged BTL LLs operate on avery thin skin of solvency - the model encourages them to skate on thin ce.

Most L-BTL-LL scrape about about 1mo nths rent in free cash - and thats with letting the building fabric go to ruin.

I think BTL IO mortgages will be banned soon.

The fact that the only banks and the likes offerign them are 'specialised' i.e. dumbest in the market ought to give you an idea.

[Guest]

The fact that the only banks and the likes offerign them are 'specialised' i.e. dumbest in the market ought to give you an idea.

Is that true? I'd presumed all banks did IO BTL mortgages... Have they always been a niche product or have mainstream banks just phased them out?

But yes. banning them would be a good start... Would the banks need to let them run to end of fixed term or could they call them in immediately?

[ccc]

You have missed the most important thing. Those that make up the rules in this country - are themselves in BTL up to their necks.

Turkeys + Christams = your answer.

[Venger]

You have missed the most important thing. Those that make up the rules in this country - are themselves in BTL up to their necks.

Turkeys + Christams = your answer.

Nonsense.

[Even Keel]

Forget about the government for a while. It's the banks I don't understand

Why is it that interest rates are similar on IO and repayment BTL mortgages? Surely the risk to the bank is higher on an IO mortgage, and so the interest rate should be higher to price in the risk. As far as I can see, they offer the same rates for both.

[giesahoose]

Banks will use historic data to calculate risk. Government intervention in the past and now makes it a no risk bet so the only option for banks is to fill their boots.

[I'm out]

Traditionally, interest-only borrowing meant an overdraft. Overdrafts are repayable on demand, and also the lender can ask for partial repayment if the value of the security falls (a 'margin call'). For these reasons an overdraft would be very unsuitable to finance a property. Another factor is that a large overdraft would only be granted to someone who was financially sophisticated or had access to professional advice. By contrast, a loan was for a fixed period of time (long enough for it to be repaid in full), was on a repayment basis and could be provided to the great unwashed.

The introduction of interest-only loans for house purchases has overturned these principles and inflated house prices enormously. If they were withdrawn entirely, house prices would surely plummet, so I don't think that is likely. More likely is that lenders will jack up their interest rates to reflect the additional capital they need to hold against tenanted property loans under the new Basel rules.

[Even Keel]

The government has just intervened to make BTL more risky, and the banks don't seem to have taken much notice yet.

[Exiled Canadian]

The government has just intervened to make BTL more risky, and the banks don't seem to have taken much notice yet.

Bank bonuses are paid on annual results - the full impact of Clause 24 won't impact loan books until 2020

[LiveinHope]

I have got the hang of Basel III, Sw8, tax relief on interest, MMR etc but to me there is really only one key point.

LLs can borrow interest only. OO's can't (and shouldn't). Therefore my LL can pay approximately twice what I can, using my income, for the same property.

LL's have bought approx. 80% of all new build in the last 5 years. No surprise there given the above.

Given that my LL has to pay agents fees, licences etc, if he had to have a repayment mortgage I could, in theory, outbid him using my rent.

They say they are a business. In 25 years of running a manufacturing company I have never been offered an interest only asset purchase loan.

The simple fact is that if LL's had to operate on a repayment basis, their model would implode overnight and a truly fair market would exist. The Government must know this but doesn't act.

Banning IO BTL mortgages is all it would take to revert prices to actual value/affordability.

What am I missing here?

Maybe they hate the BTL-ers as much as we do and want to keep OO's out of the market so they are not hit by a HPC - perhaps it's for our own good.

But seriously, it's something I have pondered. I can only think it can be to profit the banks and to trap the proles in debt, to keep the workers working and the BTLer-s without an asset. They didn't think of the consequences at the outset.

Edited January 14, 2016 by LiveinHope

[ccc]

Nonsense.

Why ?

You dont think the powers that be in this country are heavily into BTL and ínvestment' in property in general ?!

[Simon Taylor]

Nonsense.

Not really.

http://www.theguardian.com/politics/2015/may/06/number-of-mps-who-earn-from-renting-out-property-rises-by-a-third

Perhaps what makes this particular group of 'investors' even more egregious is that so many of these properties were bought with tax payers' money.

[long time lurking]

Forget about the government for a while. It's the banks I don't understand

Why is it that interest rates are similar on IO and repayment BTL mortgages? Surely the risk to the bank is higher on an IO mortgage, and so the interest rate should be higher to price in the risk. As far as I can see, they offer the same rates for both.

I would guess FLS plays a big part in suppressing rates plus IO BTL seems to be the only game in town since the introduction of MMR

[Venger]

Why ?

You dont think the powers that be in this country are heavily into BTL and ínvestment' in property in general ?!

A recent thread on PT or maybe 118 suggested MPs aren't that hard into BTL.

MPs have other responsibilities in running the country other than BTLs and forever HPI. They also have the financial system to keep intact, and their pensions and future consultancy options.

And senior MPs and officials have to look at health of the banks and the economy. It comes before 'core-voters' and 'personal gain BTL for some MPs. Some have seen their family downsize from £12m homes last couple of years. They're not all narrow focus HPI heads. I think you will find some have some mettle to even go against 'core-voters' and the HPI forever heads.

Hmm did we just get a -3% cut in stamp duty for BTLers, and some extra generous further tax relief measure? No and no.

HTB 1 + 2 and London, just a smokescreen to pull in dumb money to allow banks to spread the risks onto market participants.

Vast majority of HTB1 takeup been for newbuild houses costing less than £200,000. One source (Sept 2015) says 4 out of 5 HTB1 buyers are FTBs, with HTB Gov loan bit averaging out at about £40K. Chancellor George Osborne originally pledged the scheme would enable up to £130 billion of lending over three years, equal to £43.33 billion a year. Yet Genworth’s analysis of industry, government and regulatory data shows Help to Buy 2 supported £5.76 billion of mortgage lending in 2014, just 13 per cent of its potential capacity.

Edited January 14, 2016 by Venger

[SarahBell]

BTL IO should have been banned years ago.

[long time lurking]

HTB 1 + 2 and London, just a smokescreen to pull in dumb money to allow banks to spread the risks onto market participants.

The risk is being spread onto the taxpayer we are the backstop the market participants only need to risk 5% deposit the tax payer is backing 15% and 35% for Londonup to £240k a pop the banks risks the rest

[Venger]

Yes. However it wasn't and we have to look at the position now.

BTLers laid claim to ever more homes and racked up something like £160 Billion in new BTL mortgage debt - about same size of Greece's national debt - since 2010.

Unregulated market. They've put themselves in position to absorb the HPC. Banks can pursue them and recover debt from their main homes, which many may have to bring to market because of tax-changes. And values are set at the market.

[Venger]

The risk is being spread onto the taxpayer we are the backstop the market participants only need to risk 5% deposit the tax payer is backing 15% and 35% for Londonup to £240k a pop the banks risks the rest

It's puny - so puny. The debt there, with HTB. And £0 for HTB London. (Just another political trick to project a view they stand behind the market, whilst at the same time they hit BTL hard.)

And HTB mortgages are reported to be stress tested even more so than regular MMR. Gov can order banks to freeze or lower HTB interest rates for the HTBers in the future. They can even offer some forbearance if it pleases the excuse givers. Won't bother me because HTB1ers won't be competing against me in secondary market.

The best thing is it's projected a view that Gov stands behind market, which from 2013 saw BTLers double down hard, to capture Generation Rent forever. That's where the debt is and the BTLers can pay or go bankrupt, with their own homes on the line.

All that mortgage free property which if I were a banker, could happily see crash 50%, and get fresh debt on to new buyers. The implied profits from HPC and fresh lending... the banks have a lot of incentives to bring about the HPC.

27 January 2014

UK housing stock value climbs to £5,205,000,000,000 but the gap between the haves and the have nots grows

Total value of UK’s housing stock now £5.2tn, from £3.6tn in 2003

Total value rose £186bn in 2013, of which >£100bn in London

10 wealthiest London boroughs worth 9% more than Scotland, Wales and Northern Ireland combined

Westminster and Kensington & Chelsea are together worth >£200 billion, 15% more than Wales

Since 2008:

Private rented sector has risen £275bn to almost £1 trillion

Wealth of 8.4 million unmortgaged owner occupiers has risen £86 billion to £1.8 trillion

But mortgaged owner occupied sector down -£172bn, an average fall of £11,000 per mortgaged household

Most indebted owner occupiers are in South are Slough (75% debt) and Newham (76%), but Blackpool (79% debt) and Burnley (80%) top the list of most indebted locations

The total value of the UK’s housing stock has risen from £3.6 trillion to £5.2 trillion over the past ten years, but the balance of housing wealth continues to tilt from North to South and become ever more concentrated in the hands of mortgage free homeowners, according to new data from international real estate adviser, Savills.

Edited January 14, 2016 by Venger

[winkie]

[Venger]

All those outright owner positions, and so many who doubled down into BTL.

I'm going to hazard that in 2008 the banks went easy on the margin calls as they knew that the only thing that could save them was the government stepping in to fill the hole on the liability side of their balance sheet as the money markets closed to them. As Brown did not want to see house prices collapse and that collapse to be interpreted as further evidence of his incompetency the lenders quickly came under pressure to put a halt to the fire sale (and were given assurances that they'd not be going to the wall).

Again, this time it is different. The liability side of the banks' balance sheets are now to a much greater extent retail deposits which will not be flighty in a crash so the systemic threat to the solvency of the banking sector entire no longer exists. Further the systemic threat was so significant because there was no framework for handling the insolvency of a decent sized bank. Its books would essentially freeze - there is a reason that they bailed the banks, the alternative was worse. However, the Treasury immediately got the 2009 Banking Act on the statute books and there has been a practice run for the resolution regime with a minnow, the Dunfermline, which passed off without fuss.

Hence now the execs at the big lenders know two things. Firstly, they will be allowed to go bust, because they will just be unfussily swept into UKAR. Secondly, they will know that if the bank they run goes bust, they will lose their nice little troughing job, and they won't get another so good. They are going to throw the buy-to-let investors under the bus at the first sniff of trouble and each lender will know that they mustn't dawdle with the mercy killings as their competitors would seize on the error by getting hold of and disposing the assets on which their loan books were secured before the oppo did.

The mechanics of all the leverage and the incentives for the lenders to murder their customers are extraordinary.

Carney believes that markets are vulnerable to liquidity shocks when rates move up globally and there could be a sharp increase in volatility, but he thinks that the risks are now being borne more by investors rather than core financial institutions.

First up, I agree with your idea that post-2009 BTL will not produce any material losses, even in the case of a 40% correction. However, for some loan books at some banks (particularly where the business was written at very high-LTV) I'm guessing that 40% from here would produce some red ink in some of the 2005-2008 stuff that is presently hanging on by its fingernails, but as the graphs in the OP show, with each passing year the 2005-2008 cohorts become a smaller and smaller part of the overall book. It is not unimaginable that some of the 2005-2008 lot are getting out by selling to the current lot!

As to why we've gone down this road rather than just allowing a correction, I think that you've got to recall the WTF mood of 2007-2008. The major consultation papers that led to the MMR weren't published till December 2011. I've taken the view that up to this point the regulators/technocrats 'knew' what was going on, but didn't know the gory details with sufficient confidence to win the political battle with the banks about the need for these practices to be reformed. Interest only mortgages were still being written as a mainstream product for owner-occupiers up to 2012. It takes time to turn the ship around.

As to why BTL is allowed to continue, I am also not inclined to suppose that there was a meeting in a smoke filled room where Mervyn King, chomping on a cigar and talking like James Cagney in Angels With Dirty Faces, told Osborne the plan. However, anything that shares out the risk, especially if it places it on the shoulders of those with the financial strength to bear it, was always going to be welcomed by the Treasury and the Bank of England. Likewise, the banks are placing whopping fees on this BTL stuff - £2000 a pop - and it is lent at decent rates. Given that it still falls under the FLS, the margins must be "Thank you very much!" The punters are clamouring for it, there is no political dissent because the MPs are all up to their necks in it. Likewise the journos. I agree it is emergent. However, I am inclined to believe that the regulators are on the same page as me - anyone who wants to help bail out the banks is welcome to chip in. BTL is not a regulated product. Nobody expected the regulators to stop people buying shares in Pets.com and nobody should expect the regulators to stop BTLers buying houses. As to whether the regulator should step in, or whether BTL is a political matter that should be addressed by statute law - those are different, important questions.

I think that the banks are good to go for 35%-40% off current prices. It's not price falls that produce losses - it's price falls and people failing to pay their mortgages. I seem to recall that there is no statistical link between negative equity and mortgage arrears. If people can pay their mortgages, then they do, as Carney delights in pointing out.

You see it yourself LTL.... HTB numbers pitiful, yet the sentiment doubled down into HPI forever and BTL to greedily capture Generation Rent forever. Oldies with flats bought for £100,000 in 1989, saw fall to £76,000 in 1991, on the brag that they're now worth £600,000..... having just doubled down to a 1 bed flat BTL at £500K before Budget. Crash fodder.

Doesn't it take effect until April ? the numbers of take up are pitiful for HTB ,but how do you put a number on sentiment it`s this that it has had the greatest effect on

HTB was announced in 2013

[long time lurking]

All relevant^^^^^^^ but the taxpayer is holding far more risk than market participants ,that was my only point ,and that was the point of HTB ,the banks see the risk to be higher and would be charging IR to reflect that extra risk, HTB is effectively nothing more than state sponsored subprime/teaser rate lending

The reasons for the introduction HTB is something i could only guess at,but as the chart say the effect it had in certain parts of the country is pretty clear

Edited January 14, 2016 by long time lurking

[Sawitcoming]

Do we know how many BTL mortgages are taken on by owner occupiers that they live in rather than rent out?

[long time lurking]

Do we know how many BTL mortgages are taken on by owner occupiers that they live in rather than rent out?

No that would be deemed to be a breach of T&C`s so no records would be available as no one would admit to it

I also wonder how many people have used HTB as a way of getting into BTL especially in London (by through HTB then rent out the old property)

I think HTB in London has been more about HPI speculation than houses as homes