Converted Lurker Report post Posted March 10, 2006 Kent Reliance Building Society has launched a 25-year fixed rate mortgage. The Chatham-based society, recently judged Best Regional Lender in a magazine poll, offers two interest rates according to the percentage of loan to value. The rate is 4.98 per cent (5.2 per cent APR) for anyone borrowing up to 75 per cent of the property's value. For borrowers taking out a 95 per cent loan, the rate is 5.5 per cent (5.9 per cent APR http://firstrung.co.uk/articles.asp?pageid=NEWS&cat=44 Quote Share this post Link to post Share on other sites
BillyShears Report post Posted March 10, 2006 Kent Reliance Building Society has launched a 25-year fixed rate mortgage. The Chatham-based society, recently judged Best Regional Lender in a magazine poll, offers two interest rates according to the percentage of loan to value. The rate is 4.98 per cent (5.2 per cent APR) for anyone borrowing up to 75 per cent of the property's value. For borrowers taking out a 95 per cent loan, the rate is 5.5 per cent (5.9 per cent APR http://firstrung.co.uk/articles.asp?pageid=NEWS&cat=44 A long term fixed rate mortgage at what looks like a low rate IMHO benefits the buyer, but to me it looks like a sizeable risk for the building society. Could anyone explain what happens if interest rates rise to 7-8% while the buyer is relatively safe on the fixed rate? Surely someone must lose out if that happens? This reminds me of the featured advertisements I saw on a property supplement for one of the major papers. There was a teaser on the front page, and on the back page "TIME TO INVEST IN LEEDS", advertising new build "luxury apartments" in the Leeds city centre. The main "inducement" offered was a guaranteed 7% gross yield until 2010. Like the fixed rate mortgage, this could feasibly end up costing the developer nothing if suitably rich tenants can be found, but otherwise it could cost them dearly. I'm no economist or financial expert, but I believe that there is a "value" or "expected cost" that can be placed on guarantees such as the long term fixed iinterest rate, or years of guaranteed, and I expect above current market, rent. Then we have other inducements to buy such as the relaxation of mortgages for BTLers. And like paying stamp duty or deposit, none of this turns up in the actual sale price figures. The guaranteed rents, relaxed mortgages, and very long term low interest rates make it look like the companies involved are prepared to take greater and greater risks themselves to keep the market going. While in the short term these strategies can keep the market "buoyant", why are they necessary? What are the values of these inducements to the purchaser, enough to make the properties "cheaper" despite still high purchase price. And are these companies taking on significant risks themselves? If so, why? Billy Shears Quote Share this post Link to post Share on other sites
BuyingBear Report post Posted March 10, 2006 A long term fixed rate mortgage at what looks like a low rate IMHO benefits the buyer, but to me it looks like a sizeable risk for the building society. Could anyone explain what happens if interest rates rise to 7-8% while the buyer is relatively safe on the fixed rate? Surely someone must lose out if that happens? The MBS market, the bond holders which are mainly pension funds get shafted, sorry, even more shafted Quote Share this post Link to post Share on other sites
non-FTBer Report post Posted March 10, 2006 The main "inducement" offered was a guaranteed 7% gross yield until 2010. Like the fixed rate mortgage, this could feasibly end up costing the developer nothing if suitably rich tenants can be found, but otherwise it could cost them dearly. Won't cost them anything, but it could make them lots of money. Guaranteed yields are just another incentive package/reduction by another name. They already know they are asking silly money for these apartments and need to shift them quickly. I suspect if you add up what a 7% yield would be over 4 years then the flat in question is probably over valued by at least as much, and the developer knows it. Quote Share this post Link to post Share on other sites
BillyShears Report post Posted March 10, 2006 The MBS market, the bond holders which are mainly pension funds get shafted, sorry, even more shafted But surely the bond holders will buy the debt at different prices depending on the risk. If a very long term fixed rate mortgage is risky, then the debt has less expected value, and anybody purchasing it won't pay as much as they would do otherwise. So if the mortgage company is doing this as an inducement as they are desperate to get FTBs on board, then they'll lose out immediately when they sell the less valuable debt. Billy Shears Quote Share this post Link to post Share on other sites
apom Report post Posted March 10, 2006 Kent Reliance Building Society has launched a 25-year fixed rate mortgage. The Chatham-based society, recently judged Best Regional Lender in a magazine poll, offers two interest rates according to the percentage of loan to value. The rate is 4.98 per cent (5.2 per cent APR) for anyone borrowing up to 75 per cent of the property's value. For borrowers taking out a 95 per cent loan, the rate is 5.5 per cent (5.9 per cent APR http://firstrung.co.uk/articles.asp?pageid=NEWS&cat=44 Yup. next to no one will be able to get it though.. its designed for headlines, to reduce worries that people have about the world wide IR boom.. Perhaps, or perhaps, or perhaps.... Yay, I am 32 years old and instead of having a home and a family I sit on this site patiently waiting for another moron of a chancellors damn policy to finally go belly up. I will do many things in this life, but I swear on all that is that i will never forgive Labour, Gordon Brown et all for this period of turd that they have injected into the country... We did not need a boom, solid growth would have been fine... But why a debt boom.. a boom in debt... Why.... Why ??? If a thousand experts spent a thousand years perfecting the best insult.. that would go 10% of the way to describe brown Quote Share this post Link to post Share on other sites
BillyShears Report post Posted March 10, 2006 Won't cost them anything, but it could make them lots of money. Guaranteed yields are just another incentive package/reduction by another name. They already know they are asking silly money for these apartments and need to shift them quickly. I suspect if you add up what a 7% yield would be over 4 years then the flat in question is probably over valued by at least as much, and the developer knows it. I haven't looked into how much the flats cost. If they cost £160K, which is probably conservative, then assuming (again pretty random) that a realistic rent in Leeds for a 2 bed new build is 600pcm, then the 7% yield is £933 per month, so the builder is in effect paying back £15840 over the four years. This effectively reduces the price, and does cost the builder. Note that this assumes no voids, so the real "cashback" could be more. If the prices of these flats had been boosted over comparable flats just for this offer, i.e. they were, say 14K more than they "should" be, then it's costing the builders nothing. If they haven't gone up, which I suspect, then in real terms the price has come down. Though this is a canny move if this is a disguised "cashback" as it creates the image that the developer is very confident that the obtained rents will be good. Similar for the long term fixed rate mortgage, it creates an impression that the mortgage company is very confident that rates will not rise much in the long term. Could this long term mortgage be a loss-leader? I.e. sell it to some people, but sell the "cheaper" tracker mortgages to people. "Are you worried about interest rates going up? We'll fix your mortgage at 5% for 25 years if you like? It would mean your repayments are more, and you're already stretched. But this mortgage here...." As discussed in another thread, I believe that these flats are so overvalued compared to potential construction costs that they could probably be sold for half asking, and the developer would still make a profit. But selling them in this way, assuming a similar asking price to before, gives a complicated, misleading, but sizeable discount, which won't show up on the land registry figures. But I think these offers are pretty telling. If it's just a bit of money off, then it's normal competition. But both of these offers address very basic properties of the market. The fear of FTBs that they will lose their house if interest rates go up, and the fear of potential BTLers that they won't be able to rent the flat for a decent return. Assuming that its the companies that are dipping into their own pockets for these inducements, in some way, shape, or form, then it says a lot about the current state of the market. Billy Shears Quote Share this post Link to post Share on other sites
apom Report post Posted March 10, 2006 Oh, and also.. longer term fixed rates.. We have no inflation, (all time low managed inflation) That means the loan is worth more to them for longer.. thats why it hurst you more Quote Share this post Link to post Share on other sites
BillyShears Report post Posted March 10, 2006 Yup. next to no one will be able to get it though.. its designed for headlines, to reduce worries that people have about the world wide IR boom.. You posted (I think) while I was writing my previous post. I didn't think about it being made "difficult to get". I sort of suggested it might be a loss-leader, but what you suggest is certainly plausible. The same may apply to the 7% guaranteed yields, there might be something tricky in the fine print. For example maybe if the owners sell the flat within the first four years, then they have to pay back the difference between actual rent (if any :-) ) and the guaranteed 7%. Billy Shears Quote Share this post Link to post Share on other sites
Numani Report post Posted March 10, 2006 They will offset the risk through issuing a Mortgage Backed Security. Probably yielding about 4.8% at issue. With Strict Multiples and LTV criteria of course. If they can get more seasoned loans in with a lot of more equity than 25% even better Prepayment risk is limited " Over-payments of up to £500 in any one month are allowed without penalty but all other early repayments are charged at three per cent of the amount repaid." Quote Share this post Link to post Share on other sites
Bingley Bloke Report post Posted March 10, 2006 Can someone explain why there are two interest rates, one in brackets? One is APR but what is the other... and which is relevant to what you'll actually pay? If I'm putting it into a mortgage calculator which interest rate do I put in? Quote Share this post Link to post Share on other sites
2005 Report post Posted March 10, 2006 The cynic in me suggests that very few, if any, first time buyers would be able to get this mortgage. Is it not just a ploy to get people with equity in their homes to transfer their accounts to them and take out further loans (mew) in the process? Quote Share this post Link to post Share on other sites
Numani Report post Posted March 10, 2006 (edited) But surely the bond holders will buy the debt at different prices depending on the risk. If a very long term fixed rate mortgage is risky, then the debt has less expected value, and anybody purchasing it won't pay as much as they would do otherwise. So if the mortgage company is doing this as an inducement as they are desperate to get FTBs on board, then they'll lose out immediately when they sell the less valuable debt. Billy Shears The Building Society need only worry about getting the bond away at issue after that its no concern of theirs how it trades. All they do is the servicing - collect the mortgage payments minus a servicing fee and pass the rest onto the bond holders. The holders of bonds will trade it in the market as they see fit. The buyers of the bond. Will see limited risk based on lowish LTV. limited prepayment risk - due to restrictions on paying capital off. The Building Society could get this away at 4.8% Yield. Get all the loan capital back at issue of the bond. plus the 0.2 % maybe more servicing fee and get about finding some new borrowers. Also remember the building society gets its capital from its savers who they pay something like 4% or borrow at Libor etc. See the spread they make about 1% of the total mortage book and offset all risk. Edited March 10, 2006 by Numani Quote Share this post Link to post Share on other sites
Warwickshire Lad Report post Posted March 10, 2006 Well, I can understand the scepticism here. However - I will run the numbers and get back to you all later... Quote Share this post Link to post Share on other sites
lowrentyieldmakessense(honest!) Report post Posted March 10, 2006 Kent Reliance Building Society has launched a 25-year fixed rate mortgage. The Chatham-based society, recently judged Best Regional Lender in a magazine poll, offers two interest rates according to the percentage of loan to value. The rate is 4.98 per cent (5.2 per cent APR) for anyone borrowing up to 75 per cent of the property's value. For borrowers taking out a 95 per cent loan, the rate is 5.5 per cent (5.9 per cent APR http://firstrung.co.uk/articles.asp?pageid=NEWS&cat=44 were in a bond bubble also - investors are buying these mortgage backed securities at really low yields - be interested to see if this carries on now a lot of the world is increasing interest rates. Quote Share this post Link to post Share on other sites
Converted Lurker Report post Posted March 10, 2006 were in a bond bubble also - investors are buying these mortgage backed securities at really low yields - be interested to see if this carries on now a lot of the world is increasing interest rates. Guys they genuinely do want FTB business. I still have a hunch that eyes are on the Euro thinking that`s were rates are headed. Quote Share this post Link to post Share on other sites
BuyingBear Report post Posted March 10, 2006 But surely the bond holders will buy the debt at different prices depending on the risk. If a very long term fixed rate mortgage is risky, then the debt has less expected value, and anybody purchasing it won't pay as much as they would do otherwise. But we have broadly flat or inverted yield curves Quote Share this post Link to post Share on other sites
thunderbird900 Report post Posted March 10, 2006 Galliard Homes are also offerring this guaranteed yield until 2010 on the flats they are building at Highbury, near the new Arsenal Stadium. One bed flats START from £235,000. you do the maths. Cashback by any other name. Quote Share this post Link to post Share on other sites
Randall Herbert Report post Posted March 10, 2006 If nothing else it may attract a few takers and a lot of exposure from a rapidly diminishing field of customers. Probably not expecting a large uptake and the few that do will not break the bank when rates go to 7%. The losses will be weighed against the advertising they will get out of the 'Incredible deal' IMHO Lets face it they haven't given a stuff about bad debt up until now because the losses were being more than offset by the huge mugs tax gains they have been creaming off us since '96. Bet the deal would dissappear if there was huge uptake. Quote Share this post Link to post Share on other sites
pobby Report post Posted March 10, 2006 If nothing else it may attract a few takers and a lot of exposure from a rapidly diminishing field of customers. Probably not expecting a large uptake and the few that do will not break the bank when rates go to 7%. The losses will be weighed against the advertising they will get out of the 'Incredible deal' IMHO Couldnt agree more!Its called`dressing up a deal`.If,for example, I retailed mens clothing.I am selling a suit for £100,it cost me £25, I then price a shirt @ £30 {which cost me £6} but say that it is free with the suit some folks think they have a terrific bargain.Or trade is bad,I do the same deal but throw in a pair of shoes as well, it looks even better.These guys are giving nothing away. Quote Share this post Link to post Share on other sites
aussieboy Report post Posted March 10, 2006 (edited) I'm not directly involved in DCM, but have a bit of recent exposure. Bond yields are truly terrible at the moment. It's a loss leader for banks to manage such issuances from corporates: margins are paper thin even for BB- companies. And I banks are still very keen to provide economic capital. Now compare this risk to that of a debt on a person's primary residence. The risk of default is tiny, probably less than sovereign, and even then the lender has a nice tangible security. The main problems with these juicy debts are that they are (a) very small in the big scheme of things and ( b ) prone to early redemption. If anyone is really interested, Liars Poker provides a potted guide to Fannie Mae etc. Surprised it's taken the UK so long to catch up... this deal looks interesting given that it allows 500 pm repayment. Wonder what the other penalties look like. Edited March 10, 2006 by aussieboy Quote Share this post Link to post Share on other sites
Smell the Fear Report post Posted March 11, 2006 ... this deal looks interesting given that it allows 500 pm repayment. Wonder what the other penalties look like. 3% charge for early repayment at any time. Kent Reliance 25 yr fixed rate Quote Share this post Link to post Share on other sites
BillyShears Report post Posted March 11, 2006 But we have broadly flat or inverted yield curves Can you please explain further? Billy Shears Quote Share this post Link to post Share on other sites
BillyShears Report post Posted March 11, 2006 3% charge for early repayment at any time. Kent Reliance 25 yr fixed rate I see. Is this like those one year 0% finance deals you get on computers. The one where they calculate their profit from the expected number of people who will forgot to or be unable to pay off the computer at the appropriate time and pay interest over the whole term. Are they assuming that at some time during the 25 years people will want to change the mortgage and end up paying a big fee. Oh, and I re-read the advertisement about the 7% guaranteed rental on flats in Leeds until 2010. First the flats are "from 120K", so while my previous estimate of 160K might be accurate for some of them, not for all. And, the completion date is "completions from 2008". So I assume we're talking about a maximum "guaranteed rental period" of two years. Then it goes on to say "selected plots only. terms and conditions apply". Doing the figures again... If we assume an actual 5% yield for the cheapest flats, then a 7% yield is £8400 per year. If the actual yield is 4% (including voids) that's £4800 per year. So assuming this continues for two years, the amount the builder tops up the rental value is £3600 per year or £7200 in total. This would be a 6% reduction on the initial sale price. But the kicker is in the 'selected plots only. terms and conditions apply'. This would be a loss leader allowing flashy headlines (as in megabus.com's £1 intercity bus fares - though I have managed to buy some of these), except that at a 6% discount, they are probably not making a loss even on the 'selected plots', and who knows what the terms and conditions are. In short I got suckered in by not reading the details properly. At least I only got suckered in and made inaccurate posts to HPC, I didn't get suckered in and bought an overpriced flat. Billy Shears Quote Share this post Link to post Share on other sites
vicster Report post Posted March 11, 2006 3% charge for early repayment at any time. Kent Reliance 25 yr fixed rate I'm not financially savvy, hence I like to hang around here hoping to soak up some savviness, iykwim. So, if I got one of these mortgages, for £100k and I wanted to change provider in ten years how much would I have to pay, assuming I'd not made any overpayments (worst case scenario)? Sorry, I know this is a little OT but we're going to see a house this afternoon. Yes we're buying, soon. For the same reasons other people here have and have been gone into time and again - we want a family house for our son - who isn't going to be a kid forever, can't be doing with being moved on on a landlords' whim, can afford it, have thought about the prospect of it being worth £xk less in a couple of years, got a big deposit... Quote Share this post Link to post Share on other sites
