Repossesion And Ltv Ratio

[PunK BeaR]

This is my first post so a big hello to everyone out there.

As you may have guessed i am a bear with no intention of buying. 100 grand for a crap flat is not my idea of a good investment. Most of my friends however have jumped onto the property ladder recently and i am constantly hearing them tell me how stupid i am not to buy and how i will be priced out of the market etc etc. They seem to feel that because they have a long term fixed rate mortgage they will be safe during HPC as long as they can hold their job (or their parents will cover it if they should find themselves holding their P45) However, they don't seem to understand the danger of negative equity on a mortgage with a high LTV.

As i have never had a mortgage i aint too clued up on the finer details of what happens when the amount owed on the mortgage exceeds the house price so i would be grateful if someone could fully explain it. The way i understand it is you must cover the deficit immediately or face repossession. Also, how does this work with IO mortgages, 125% mortgages and MEW?

[ae589]

The way i understand it is you must cover the deficit immediately or face repossession. Also, how does this work with IO mortgages, 125% mortgages and MEW?

I believe that is strictly true, but would only be the case if you defaulted - the bank are not going to demand the diffenrence for no reason.

Your friends are right - as long as they have a job, and dont want or need to move, they can wait out the dip. It's up to individual cases whether they would actually lose money (for example, if they were on an IO mortgage, they would definitely be losing money, but if they were on repayments, it depends on how much they save on rent versus their interest, price depreciation, etc.

[OnlyMe]

As i have never had a mortgage i aint too clued up on the finer details of what happens when the amount owed on the mortgage exceeds the house price so i would be grateful if someone could fully explain it. The way i understand it is you must cover the deficit immediately or face repossession. Also, how does this work with IO mortgages, 125% mortgages and MEW?

As long as you keep paying the mortgage nothing will happen.

You may/may not be able to move though or make significant changes to your mortgage if your circumstances change. If your own lender or another will allow you to transfer the mortgage to another property your costs could chnage significantly baed on the N/E and consequential size of loan and ratio of despoti to mortgage needed - in this case likely to be no deposit, no equity and needing a 100% mortgage. Most people in these circumstances are then stuck. Probability is the cost of any other financing/loan could well go up too as there is no equity to snatch back as collateral.

When you say "They seem to feel that because they have a long term fixed rate mortgage" what are we talking here for this sample - 15/25 years?

Edited April 9, 2007 by OnlyMe

[maricopa]

exactly, it depends on individual scenarios. if the capital is being brought down early, thats a very different scenario to overstretching on an IO.

getting ahead 'should' really be a combination of rising equity and reducing total loan, but it seems somewhere along the lines, the reducing of the loan has been forgotten, and people are told rising equity alone will get them ahead, hence laughable IO mortgages (or capital repayments without overpay, leaving you still high and dry)

the reducing of the loan has to be thought of as the best way of getting ahead, and equity rises as a 'bonus' that cant be relied on or budgeted for. if you cant bring down the loan, you risk being left high and dry.

[JustYield]

As long as you keep paying the mortgage nothing will happen.

This is true in practice (why would the lender rock the boat if the loan is performing?).

However, the OP is right to be cautious: you should be aware that lenders do insert clauses into the mortgage contracts to give them the power to decide for themselves what is in their best interests in each situation (whether to turn a blind eye at one end of the scale to forcing a sale to recover their loan at the other). Mortgage contracts are one-sided: you don't get any say. (This is my conjecture, but if for some reason the benign climate changes substantially you might see some aggressive enforcement of contracts by lenders to recover the principal even if the loan is being serviced - they can call the loan at any time.)

They also get to say what the "value" is at any particular time in the LTV calculation: their word is final.

Edit: I forgot to mention they can also insist on a "top ups" from the borrower if the LTV goes the wrong way.

Edited April 9, 2007 by JustYield

[the_duke_of_hazzard]

This is true in practice (why would the lender rock the boat if the loan is performing?).

However, the OP is right to be cautious: you should be aware that lenders do insert clauses into the mortgage contracts to give them the power to decide for themselves what is in their best interests in each situation (whether to turn a blind eye at one end of the scale to forcing a sale to recover their loan at the other). Mortgage contracts are one-sided: you don't get any say. (This is my conjecture, but if for some reason the benign climate changes substantially you might see some aggressive enforcement of contracts by lenders to recover the principal even if the loan is being serviced - they can call the loan at any time.)

They also get to say what the "value" is at any particular time in the LTV calculation: their word is final.

Edit: I forgot to mention they can also insist on a "top ups" from the borrower if the LTV goes the wrong way.

I'd be astounded if that actually happened though - you can imagine the headlines!

[HPC Convert]

This is my first post so a big hello to everyone out there.

As you may have guessed i am a bear with no intention of buying. 100 grand for a crap flat is not my idea of a good investment. Most of my friends however have jumped onto the property ladder recently and i am constantly hearing them tell me how stupid i am not to buy and how i will be priced out of the market etc etc. They seem to feel that because they have a long term fixed rate mortgage they will be safe during HPC as long as they can hold their job (or their parents will cover it if they should find themselves holding their P45) However, they don't seem to understand the danger of negative equity on a mortgage with a high LTV.

As i have never had a mortgage i aint too clued up on the finer details of what happens when the amount owed on the mortgage exceeds the house price so i would be grateful if someone could fully explain it. The way i understand it is you must cover the deficit immediately or face repossession. Also, how does this work with IO mortgages, 125% mortgages and MEW?

Miss a single payment on a mortgage and the borrower is in breach and the lender has the right to demand immediate repayment at any time afterwards. However in practice they do not do so. As for the suggestion that they would demand top ups if loans exceed property value i have never heard of this.

[PunK BeaR]

When you say "They seem to feel that because they have a long term fixed rate mortgage" what are we talking here for this sample - 15/25 years?

The best anyone has managed is switching a variable rate onto 5 year fixed rate. The problem is though that most of them have just bought flats as starter homes and will be looking to move in the next few years with impending marriage, kids etc

[DaggaDagga]

Here's an interesting term from the smallprint of my IO mortgage, the stuff that most don't bother reading...

If at any time during the Mortgage Term:

The Lender reasonably determines that by reference to its tracking of the Halifax Property Index over a consecutive three month period, that the original value of the Property at the date of the offer has been reduced such that the Principal sum exceeds 80% of such value, in such case the Lender may without the consent of or notice to the Borrower (or Guarantor, if any) convert an Interest Only Mortgage into a Repayment Mortgage for the remainder of the term of the mortgage or for such period as the Lender may decide.

The mortgage was originally 85% LTV, but if it exceeds 80% then they have the right to do make you repay the capital. So I guess they give you a bit of a gentle start, counting on rising prices reducing it by 5% within the first couple of years or so. It's probably now just under 80%. I don't know whether this condition is widespread - mine is from Capital Home Loans, a fairly small company. They give a very good interest rate that more than makes up for a few dodgy conditions.

It's also noteworthy that this condition doesn't include any value you may have added by spending on the property. The calculation is entirely based on the valuation at the time of purchase.

If this applies to many people then a few could be in for a nasty hike in their bills if a crash does happen - especially if in addition to high interest rates.

[tenroom]

The problem is though that most of them have just bought flats as starter homes and will be looking to move in the next few years with impending marriage, kids etc

Hardly a problem . . . the solution's colloquially referred to as "contraception" heaven forbid that anyone shouldn't have everything they want, right here, right now, eh ?

[redgenieuk]

Hardly a problem . . . the solution's colloquially referred to as "contraception" heaven forbid that anyone shouldn't have everything they want, right here, right now, eh ?

If they are talking on the mortgages like this and HPC happens, there personal financial situation may well be enough to act as contraception!

[Ah-so]

Here's an interesting term from the smallprint of my IO mortgage, the stuff that most don't bother reading...

If at any time during the Mortgage Term:

The Lender reasonably determines that by reference to its tracking of the Halifax Property Index over a consecutive three month period, that the original value of the Property at the date of the offer has been reduced such that the Principal sum exceeds 80% of such value, in such case the Lender may without the consent of or notice to the Borrower (or Guarantor, if any) convert an Interest Only Mortgage into a Repayment Mortgage for the remainder of the term of the mortgage or for such period as the Lender may decide.

The mortgage was originally 85% LTV, but if it exceeds 80% then they have the right to do make you repay the capital. So I guess they give you a bit of a gentle start, counting on rising prices reducing it by 5% within the first couple of years or so. It's probably now just under 80%. I don't know whether this condition is widespread - mine is from Capital Home Loans, a fairly small company. They give a very good interest rate that more than makes up for a few dodgy conditions.

It's also noteworthy that this condition doesn't include any value you may have added by spending on the property. The calculation is entirely based on the valuation at the time of purchase.

If this applies to many people then a few could be in for a nasty hike in their bills if a crash does happen - especially if in addition to high interest rates.

Interesting, but not surprising if you think about it. A bank should be most worried about protecting the principal and if the loan is no longer secured, will want to ensure that the principal starts to get paid off.

This condition would definitely hasten the sell-off of interest-only BTL mortgages if a crash occurs.

[nohpc]

Negative equity is only a problem if you need to sell or if you want to remortgage. If you are in negative equity and on a fixed rate and suddenly find yourself on a much higher standard variable rate you are stuck with it for better or for worse. You will not be able to remortgage while in negative equity.

There is no way the banks would suddenly ask for the money to make up the difference if house prices dropped in value.

As per usual, the advice from anybody with a little bit of sense is to pay off as much of the mortgage as fast as you can and increase your equity. Even tiny amounts help.

Edited April 10, 2007 by nohpc

[JustYield]

I simply dont get it- are people here brain-dead?

There wouldn't be many cycles for you to profit from Bubba if everyone thought as you do. This cycle will drag on longer than it should because of the unthinking stupidity of the masses.

I originally put something in my post above about it being better not to buy something in the first place that is likely to fall in value than worrying about the small print on a one sided legal document, but I thought it redundant and removed it. Perhaps it needed to be said!

[tenroom]

RIGHT.

So basically, you are TRAPPED:

Trapped with that mortgage, and trapped in that property.

That could "be a problem" for many who want to change jobs, locations, or move into other, more suitable housing.

Saying it is "not a problem", doesnt mean that inflexibility will not create a future problem

So what you're saying is never buy a place cos if it goes into negative equity, you'll be trapped with the mortgage and trapped in the house. You'll be unable to move and every waking moment of your life will be spent self flagellating because you were foolish enough to buy and not rent.

Frankly, if i found myself in the unenviable situation of being in neg-eq and I needed to relocate for work, I'd rent the place out and er . . . go ! If on the other hand, I wanted to stay put, I'd do what countless others in similar circumstances did last time round - namely carry on paying the mortgage as usual. Not everyone is obsessed about what price their home would fetch because the most important thing to them is its value - that's riiiiiigghhhhtttt . . . they actually like where they live.

Similarly, out in the real world where speculation on the potential fallout from UK sub prime lending, dissection of MPC minutes and discussions on M4 money supply hold little interest, not everyone is going to feel suicidal and stop paying their mortgage because they've either gone into negative equity or because the market says their property has dropped in price. I suspect that's because, for those people, there's a lot more to life.

[eightiesgirly]

So what you're saying is never buy a place cos if it goes into negative equity, you'll be trapped with the mortgage and

Frankly, if i found myself in the unenviable situation of being in neg-eq and I needed to relocate for work, I'd rent the place out and er . . . go ! If on the other hand, I wanted to stay put, I'd do what countless others in similar circumstances did last time round - namely carry on paying the mortgage as usual. Not everyone is obsessed about what price their home would fetch because the most important thing to them is its value - that's riiiiiigghhhhtttt . . . they actually like where they live.

Similarly, out in the real world where speculation on the potential fallout from UK sub prime lending, dissection of MPC minutes and discussions on M4 money supply hold little interest, not everyone is going to feel suicidal and stop paying their mortgage because they've either gone into negative equity or because the market says their property has dropped in price. I suspect that's because, for those people, there's a lot more to life.

Finding out your home is in negative equity is the most awful feeling. Your home suddenly feels like a giant millstone. I'ts a bit like paying a lot for a car, then finding out it's unroadworthy and you can't drive it but you still have to keep making payments on it,for ages. And yes your very trapped it ,becomes a buyers market ,they want your house for next to nothing when you try to sell. Renting out in this enviroment is very difficult, people can buy for less than rental costs. Baisically they can buy your property for far,far less mortgage payment than your tied into ,at a time when your finding it difficult to make payments.

[tenroom]

Finding out your home is in negative equity is the most awful feeling. Your home suddenly feels like a giant millstone. I'ts a bit like paying a lot for a car, then finding out it's unroadworthy and you can't drive it but you still have to keep making payments on it,for ages. And yes your very trapped it ,becomes a buyers market ,they want your house for next to nothing when you try to sell. Renting out in this enviroment is very difficult, people can buy for less than rental costs. Baisically they can buy your property for far,far less mortgage payment than your tied into ,at a time when your finding it difficult to make payments.

Well I'm afraid you're in a minority as you'd obviously bought yours as an investment rather than as a place to live. You car analogy is inappropriate as anyone who's bought a new car will tell you, it's losing money the moment it's driven outta the showroom. It still works though and will provide you with years and thousands of miles of loyal service if it's not a TVR or Alfa Romeo

If you're saying your house is only a home when it's benefitting from HPI thenI guess you shoulda bought when the prices were on the floor like some of us did. I was fortunate enough to but even if the price plummeted, it'd still be my home.