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  Fears of ‘risky mortgage bubble’ as buyers stretch to afford homes

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  Fears of ‘risky mortgage bubble’ as buyers stretch to afford homes

https://www.thetimes.co.uk/article/fears-of-risky-mortgage-bubble-as-buyers-stretch-to-afford-homes-n7hwk3h7k

Quote

Fears of a “risky mortgage bubble” are growing as the number of people with super-sized home loans has accelerated sharply, putting tens of thousands of borrowers at risk if interest rates rise.

Up to 140,000 people took out a home loan of more than 4.5 times their income over the past year, an increase of 15 per cent on the previous 12 months, analysis of Bank of England lending figures shows.

The proportion of borrowers with these high-risk loans is now double the level before the financial crisis struck.

Househunters who overextend themselves to buy properties at the peak of the market are storing up trouble, experts warn.

Jeremy Willmont, of Moore Stephens, the accountancy firm, said: “Borrowers might be becoming too comfortable with low interest rates. Some are stretched even with rates at their current record low, so an increase of just half a percentage point would represent a significant relative jump in mortgage repayments.

“Too many homeowners ignore the possibility of a decline in house prices or that their salaries will not rise faster than inflation.”

No one under the age of 28 has experienced an increase in the cost of borrowing in their adult life but last month three of the eight members of the Bank’s monetary policy committee voted to raise the base rate from its low of 0.25 per cent.

The Bank of England defines mortgages of more than 4.5 times salary as “risky”.

In 2014, it introduced a cap of 15 per cent on the proportion of home loans that lenders can make above this income multiple. It said at the time that highly indebted households were more vulnerable. “In an economic downturn, there was a greater risk that such borrowers might need to cut spending sharply, making recessions deeper,” it added.

This week Alex Brazier, the Bank’s director of financial stability, said that a sharp rise in personal loans could be a danger to the economy and that lenders were at risk of entering “a spiral of complacency” about mounting debt. “Lending standards can go from responsible to reckless very quickly,” he said.

The Bank’s figures show that almost one in ten home loans are at or above 4.5 times salary compared with one in 15 in 2007. Another one in six mortgage customers borrow just below this “risk threshold”. Almost one in 100 borrow more than five times their salary.

Bank officials say that income multiples have grown mainly because of house price growth.

The figures also show an increase in lending to borrowers with small deposits. The number of loans worth more than 90 per cent of a property’s value has jumped by 35 per cent to almost a quarter of a million in the past year. However, this remains significantly below the 2007 level.

This week Virgin Money said that house prices in London and other cities may start falling, raising the prospect of negative equity for many borrowers.

Peter Tutton, of StepChange, the debt help charity, said: “The level of consumer borrowing is high by historical standards and the numbers of people seeking help are at record levels. Now is the time for government to acknowledge that debt is a major public policy issue.”

Behind the story
Alarm bells should be ringing”, the debt charity Step Change said at the start of this year after receiving a record 600,000 calls for help in 2016 (Tom Knowles writes).

The figures on consumer debt show this is not hyperbole. Households have been on a borrowing binge and are saving less than at any time in the past 50 years. The growth in credit card use, personal loans and car purchase schemes is rising at the fastest pace in more than a decade. As The Times reveals, the proportion of people taking out a home loan over 4.5 times their income has risen 15 per cent over the past year.

The Bank of England is worried, especially by the growing dependence on credit cards and personal loans.

In principle, debt is good for the economy. More debt means more spending — and more growth in the economy. With interest rates so low, consumers can binge on cheap money. The rate on a £10,000 loan has fallen from 10 per cent in 2009 to 4 per cent today.

Nearly 90 per cent of new cars are sold using finance deals and experts believe a downturn could result in thousands of drivers unable to keep up payments.

Mortgage holders are also in danger of becoming too comfortable with low interest rates, perhaps forgetting what even a half a percentage point rise could do to repayments.

The ingredients for a credit boom-bust look to be in place.........

 

Edited by Saving For a Space Ship

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My thinking on this is, after the BoE fckup 2007 on, a new set of regulators are driving.

These want restrictions on LTV, o the MMR. Id guess they wanted a top ltv of 3.5 LTV. Thered have been some bank lobbying, political arm twisting so the 4.5 came in.

The rest of MMR is very hard - once you discounr regular expenditure the limits on borrowing are very tight.

If the 15% of borrowers whove borrowed 4.5 earnings do start to default then that 4.5 limit is going down to 3.

Start putting 3 x the mean local salary into local house prices.

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how does this 15% work in practice though?

 

assuming the majority of people going into a bank to take on mortgage DEBT will ASK the expert banker how MUCH they are able to BORROW, how does the expert banker cap the MEGA borrowing customers to 15% of total customers??

 

Say the first customer walks in on Monday "how much DEBT will you give me mr expert banker?"

"4.5 times your earnings, becoz you is worth it, innit blud"

"thank you so much, I'm RICH"

 

Can the expert banker then only offer 3.5x to the next five/six customers, or to be more accurate can the expert banker only offer the 4.5x MEGADEAL to the fifth/sixth customer each time? it could mean the amount you are offered varies greatly depending on when you walk into the BRANCH.

 

Also what happens if one month say all the 3.5x customers don't end up taking on the freemoney (DEBT) but the jackpot winning 4.5ers do, that would mean ALL The borrowing was at 4.5 for that month.

 

anyone got a CLUE how this works in practice? 

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4 minutes ago, thewig said:

how does this 15% work in practice though?

 

assuming the majority of people going into a bank to take on mortgage DEBT will ASK the expert banker how MUCH they are able to BORROW, how does the expert banker cap the MEGA borrowing customers to 15% of total customers??

 

Say the first customer walks in on Monday "how much DEBT will you give me mr expert banker?"

"4.5 times your earnings, becoz you is worth it, innit blud"

"thank you so much, I'm RICH"

 

Can the expert banker then only offer 3.5x to the next five/six customers, or to be more accurate can the expert banker only offer the 4.5x MEGADEAL to the fifth/sixth customer each time? it could mean the amount you are offered varies greatly depending on when you walk into the BRANCH.

 

Also what happens if one month say all the 3.5x customers don't end up taking on the freemoney (DEBT) but the jackpot winning 4.5ers do, that would mean ALL The borrowing was at 4.5 for that month.

 

anyone got a CLUE how this works in practice? 

It used to be a 15% maximum per fixed quarter. However.... the "worried about risky mortgages" BoE changed that to a rolling annual period earlier this year. This means more riskier mortgages can be issued because if there is a dip, like say after Brexit, banks have a year to top it up by doing more than 15% in subsequent quarters. 

http://www.thisismoney.co.uk/money/mortgageshome/article-4263602/Bank-England-make-EASIER-borrow-mortgage.html

 

 

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59 minutes ago, goldbug9999 said:

I thought the BoE was being vigilant.

Ha!!!!!!!!:rolleyes:   I've been on HPC for about 12 years ---- and I have gone on about this for ALL that time;

 

THIS IS ---- PREDATORY LIAR LOANS:   

THE GREATEST FRAUD OF ALL TIME:

The KEY Driver behind hpi for YEARS AND YEARS...

THE Greatest Elephant in the Room EVER.....

 

 

Edited by eric pebble

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1 hour ago, spyguy said:

My thinking on this is, after the BoE fckup 2007 on, a new set of regulators are driving.

These want restrictions on LTV, o the MMR. Id guess they wanted a top ltv of 3.5 LTV. Thered have been some bank lobbying, political arm twisting so the 4.5 came in.

The rest of MMR is very hard - once you discounr regular expenditure the limits on borrowing are very tight.

If the 15% of borrowers whove borrowed 4.5 earnings do start to default then that 4.5 limit is going down to 3.

Start putting 3 x the mean local salary into local house prices.

We were looking at the end of last year for a mortgage and were told we could borrow 5 times earnings if our joint income (excluding bonuses etc) was over £80k. This end of the market is rationed and I understand that the MMR fixes the ratio of >4.5x earnings at 15% of their loan book. It's not ideal I grant you, but it seems at least more sensible to have that end of earners borrowing larger sums than the other end. Of course if rates increase or we get a recession then that would make for some sleepless nights on their part. 

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8 minutes ago, adarmo said:

We were looking at the end of last year for a mortgage and were told we could borrow 5 times earnings if our joint income (excluding bonuses etc) was over £80k. This end of the market is rationed and I understand that the MMR fixes the ratio of >4.5x earnings at 15% of their loan book. It's not ideal I grant you, but it seems at least more sensible to have that end of earners borrowing larger sums than the other end. Of course if rates increase or we get a recession then that would make for some sleepless nights on their part. 

MMR is a start, not an end.

Problem with 4.5+ and rules brung relaxed for high earners is the naive belief that people remain high earners. In reality, outside if public sector, high earning tends to be variable over a mortgage term.

The 4.5+ mortgage book will be monitored clisly. Any ruse in defaults and the bank will fcked over.

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1 minute ago, spyguy said:

MMR is a start, not an end.

Problem with 4.5+ and rules brung relaxed for high earners is the naive belief that people remain high earners. In reality, outside if public sector, high earning tends to be variable over a mortgage term.

The 4.5+ mortgage book will be monitored clisly. Any ruse in defaults and the bank will fcked over.

I guess it depends on what people do to earn that money. If you are in a stable profession then more likely you stay up there. If you're a shoot-the-lights-out sales boy then your earnings will be far more volatile. I do think they do an awful lot of due diligence around this these days. I was surprised by the change I saw when getting my mortgage approved a couple of months ago. 

Personally I think that the multiples should be much lower and that would have a positive impact (bring prices down). Don't know if that will ever happen. At least we aren't in a position where they're dishing out self certs again. The number of people in my office who are only 10 years older than me all openly admit (and quite fondly at that) how they lied on their mortgage applications back in the day and now live in super expensive houses, or have paid off the mortgage in full and are looking at a second home with their endowment payout. Even if they keep pushing with MMR I think that it'll take years for the effects of the past to flush out. 

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3 minutes ago, adarmo said:

I guess it depends on what people do to earn that money. If you are in a stable profession then more likely you stay up there. If you're a shoot-the-lights-out sales boy then your earnings will be far more volatile. I do think they do an awful lot of due diligence around this these days. I was surprised by the change I saw when getting my mortgage approved a couple of months ago. 

Personally I think that the multiples should be much lower and that would have a positive impact (bring prices down). Don't know if that will ever happen. At least we aren't in a position where they're dishing out self certs again. The number of people in my office who are only 10 years older than me all openly admit (and quite fondly at that) how they lied on their mortgage applications back in the day and now live in super expensive houses, or have paid off the mortgage in full and are looking at a second home with their endowment payout. Even if they keep pushing with MMR I think that it'll take years for the effects of the past to flush out. 

Again what priffesion in thd pruvste sector? Theres huge changes in law at the mo. Accountancy has been reemed. The rest are very cyclical.

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1 minute ago, spyguy said:

Again what priffesion in thd pruvste sector? Theres huge changes in law at the mo. Accountancy has been reemed. The rest are very cyclical.

I'd go with lawyer, chartered accountant, chartered surveyor etc. People with real 'old school' professions could expect to be earning a reasonable amount once they are a few years post qualified. I agree there might be some impact during a deep recession but I got my training contract in 2010 which was probably the hardest time in living memory to get a firm to commit to training you and paying for your exams for three years. Point is they were still hiring and there was still a lot of work. Audits are required, tax returns, closing the books, approving spend etc. If companies start going to the wall then insolvency picks up while other areas fall a bit quieter so there's some mitigation. 

Sales on the other hand would have been a blood bath I think. Certainly some estate agents in London might have been pulling in £40k or £50k in 2006 and 2007 and then found themselves on their basic or unemployed come 2008. 

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But people like @spyguy have been saying MMR contradicts this for ages. He talks of BTL being screwed and these people who have brought being in trouble post MMR. Look at the figures look at the article there are few restrictions on lending today the 4.5x rule is easily broken. I'm sorry but 4+ years of many posters saying how credit is being tightened seem to be living in a parallel universe not borne out by the facts.

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1 hour ago, lombardo said:

" In principle, debt is good for the economy. More debt means more spending "

 

What a joke.

"Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt."

Extract from the NY Times - Link

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3 minutes ago, maverick73 said:

"Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt."

Extract from the NY Times - Link

Thanks for that! :)

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Househunters who overextend themselves to buy properties at the peak of the market are storing up trouble, experts warn.

Freudian slip or brutal honesty from the Times?

 

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3 hours ago, Saving For a Space Ship said:

  Fears of ‘risky mortgage bubble’ as buyers stretch to afford homes

https://www.thetimes.co.uk/article/fears-of-risky-mortgage-bubble-as-buyers-stretch-to-afford-homes-n7hwk3h7k

Fears of a “risky mortgage bubble” ... :o Imagine, what on earth might one of those look like? Scary stuff.

“Lending standards can go from responsible to reckless very quickly”.  :o think we'll all agree we don't want anything like THAT unimaginable scenario to happen. In case you didn't quite digest that, they're saying that our current, responsible lending practices... get this... could change, becoming, yup, hate to break it to you, becoming irresponsible. If it weren't in the Times, that impeccable source, I'd think this was written by crazy conspiracy theorists, but, hey, that's what they're saying. Don't know about you but I'm just dead bloody grateful to have experts to warn us about this potentially very difficult future turn of events.

Bank officials say that income multiples have grown mainly because of house price growth. To paraphrase a fellow poster from the other day, don't join up the dots, you expletive clowns.

The Bank of England is worried, especially by the growing dependence on credit cards and personal loans. Oh, diddums, is you worrit? Shame you have at no point in the last 20 years been in a position to do anything about it, you effing clowns. And the dots thing again.

Ok, that's enough of that.

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1 hour ago, Mr Banks said:

But people like @spyguy have been saying MMR contradicts this for ages. He talks of BTL being screwed and these people who have brought being in trouble post MMR. Look at the figures look at the article there are few restrictions on lending today the 4.5x rule is easily broken. I'm sorry but 4+ years of many posters saying how credit is being tightened seem to be living in a parallel universe not borne out by the facts.

Nope. The 4.5 rule is not easily broken.

The level of mortgage rejections points to it being folllowed to the dot.

MMR has only been in place for about 2 years.

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6 minutes ago, spyguy said:

Nope. The 4.5 rule is not easily broken.

The level of mortgage rejections points to it being folllowed to the dot.

MMR has only been in place for about 2 years.

But he is correct that credit has been as loose as can possibly be ...though that looks like changing.

Your predication that Basel 3 was going to wipe everyone out a long time ago has proven to be wrong .. correct me if i'm wrong but its not even got past the Germans yet.

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43 minutes ago, spyguy said:

Nope. The 4.5 rule is not easily broken.

The level of mortgage rejections points to it being folllowed to the dot.

MMR has only been in place for about 2 years.

What MMR did allow for was for BTL to easily outbid owner-occupiers, up until the various changes to tax and underwriting came in. The restrictions put on people were so tight that the unregulated BTL buyers, with their IO mortgages and lower stress rates, stepped in to buy up properties. This imbalance has largely been reversed.

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8 minutes ago, Ah-so said:

What MMR did allow for was for BTL to easily outbid owner-occupiers, up until the various changes to tax and underwriting came in. The restrictions put on people were so tight that the unregulated BTL buyers, with their IO mortgages and lower stress rates, stepped in to buy up properties. This imbalance has largely been reversed.

Yes. A bank will allow you to spend 30% of your income on housing. A landlord will happily gouge you for 60%. It has become a fight where the OO has one arm tied behind his back.

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1 hour ago, Habitationi Bulla said:

But he is correct that credit has been as loose as can possibly be ...though that looks like changing.

Your predication that Basel 3 was going to wipe everyone out a long time ago has proven to be wrong .. correct me if i'm wrong but its not even got past the Germans yet.

Nope. Basel 3 has not been fully introduced. Banks are reporting to it, classifying loans etc.

Thryve not adjusted the capital they need to retain yet as theres some tweaking going on.

Residential loans hit a wall in 2008. The numbers have not recovered. The bubblein lending has been in the unregulated sector - btl. The cost of those loans will crank up.

https://en.m.wikipedia.org/wiki/Basel_III

World is in final adjusting - tweaking ratios, loan classification.

Goes live next year.

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Is 5 x Salery really that risky to banks and borrowers though. After a 5 year fixed rate we went from 5 x salery on our first home to under 3x due to both getting pay rises and the debt we had paid off the mortgage. 

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7 minutes ago, houseface2000 said:

Is 5 x Salery really that risky to banks and borrowers though. After a 5 year fixed rate we went from 5 x salery on our first home to under 3x due to both getting pay rises and the debt we had paid off the mortgage. 

It's not risky in a rising market. Brutally pro-cyclical in a declining market...

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