Saturday, October 28, 2006

Banks continue to prey on the foolhardy

Lenders increasing mortgage amounts

Two more mortgage lenders are increasing their lending multiples. Bristol & West and Bank of Ireland Mortgages (both part of the Bank of Ireland group) will now lend a single applicant up to 4.5 times his or her income - previously the standard "multiple" was four times income, and let couples borrow four times their combined income. In some cases they will even let a couple earning £60,000 between them get a loan of up to £270,000.

Posted by uncle chris @ 11:15 AM (658 views)
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24 thoughts on “Banks continue to prey on the foolhardy

  • A couple earning 60 thousand between them will not even break a sweat paying the interest on a 270 thousand mortgage. They should be able to repay the mortgage quite quickly taking into account wage inflation as well.

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  • So a single aplicant earning the ‘average’ UK wage can now afford to by a studio flat. Wahoo!

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  • Retiredbanker says:

    Nohpc-

    No way can a couple earning only £60k gross between them afford a mortgage of £270k.

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  • REF =They should be able to repay the mortgage quite quickly taking into account wage inflation as well.

    Wage inflation? In the UK? This decade? What?

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  • NoHPC – let’s just look at the figures.

    Joint salary of £60,000 will provide ~£3500 per month after tax/NI etc. Assuming they are FTBs, what are their likely monthly costs.

    Alliance & Leicester mortgage (5 yr fixed) : £1600 (rises to £1850 after 5 years)
    Work-related pension (assuming they pay into one) : £200 (for both)
    Council Tax (on average) : £100
    Utilities Bills (assuming warm blooded) : £100
    Student loan (likely if so well paid) : ~ £300 (for both assuming average £16,000 loan)
    Average costs for 2 cars (assuming they don’t work in same place) : £300
    Average Food Bill (based on our spending) : £200
    House maintenance/decoration : £100
    Christmas and Presents : £50 (I’m a cheapskate)
    Holiday costs (assuming ~ 5 weeks in UK) : £150

    Which leaves around £50 each per week for mobile phone, computers (brodband), sky TV (?), entertaining, meals out, clothes, electronics etc. And this all assumes they have no kids yet. Now that might not make you sweat, but I certainly wouldn’t like to take on that sort of commitment for 25 years. The problem comes if IRs go up or one of them loses a job , or has to go on maternity leave.

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  • £270k mortgage for two people with a joint income of £60k (about £40k (assuming they both earn around £30k each) after tax and the usual bullsh**t) sounds quite risky taking into account interest rate fluctuations. Even at probable interest base rates next year of 5.25%, the starting interest alone would be be no less than £15k. So with the repayments on the capital well over half the joint income is gone on the mortgage. What happens if base rates go above 5.25%, which they probably will as well. Then there is council tax and heating (another £6 -£10k a year gone straight away). Not much left by now for basic subsistence, a car or a holiday even. Oh no, one one of the couple have just lost their job. We’re in negative territory already and the other partner wants a baby as well. Doesn’t sound that safe to me and the base interest rate by this time is above 6.5%.

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  • Glorious Sunshine! says:

    Hello uncle chris,

    Your figures look about right to me. There will be no CRASH!

    Most on this web site post during ‘normal’ working hours so either work shifts or nights or dont work – They cant be that hard working if they can post messages/surf at work!

    Most think they have a God given right to buy the average price house on average single salary too – this has never been the case anyway – there is this thing called a PROPERTY LADDER you start with a 1 bed flat and work your way up over a lifetime.

    Nothing changes…renting only buys property for the rich that provides them a lifestyle working people could never afford by working.

    I’m off surfs up! …ooh, I wish they could all be Californian….

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  • japanese uncle says:

    As I mentioned before, year 2000 was probably the watershed whereafter housing investment was too risky for an average household to take on, given the likelihood of contingencies such as IR fluctuation, unemployment or divorce, all of which are pretty high at all times in the UK. In other word, property investment has become a potentially poisonous trap since the millennuim. Wild animals can by their natural instinct, tell whether the water in from them can be drinkable. Only if people are as sensitive as animals to such toxicity, they stop buying properties and the market will be adjusted/corrected to a rasonable equilibrium. The difference is animals do not read the crap like the Times, or see the rubbish like the BBC, while people do. So they drink those sewage water, even plunge to their necks and decay. Very sad story indeed.

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  • Nohpc….

    In your world wages only go up and interest rates never rise;no one ever loses a job; there are no babies born; no divorce; no illness; house prices only increase; further there is no inflation of ultilies, council tax, food prices, petrol, health cover. And although you sell this world on the basis that the poor chap will ultimately “own” something, you also call an interest-only mortgage a fine thing. Interesting that none of the rest of us inhabit your world, which I have been noticing from the detail of your comments on this site, probably makes you either a heavy VI in the London area or a property show host. How trippingly, for instance, you quote and defend Kirstie and her clones, whom you apparently admire for their sales job to the unwitting.

    Japanese Uncle….

    Poisonous trap is an excellent way to put it. Baited with dreams of status and lies. It is terribly sad that people can come to such a condition just trying to nail down a stable home. In an age when we’re making it a priority to perform osteopathic surgery at zero-gravity conditions in space and teach six month old babies to read and communicate with chimpanzees, this is a disgrace.

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  • japanese uncle says:

    The other factor is people have been constantly fed with junk food for the past couple of decades, resulting into general obesity whch considerably helps to create slow minds. When people are investing 5 x income into housing, they may be thinking “Damn it I am a sharp investor!” without realizing the stupidity they are commiting. This unprecedented level of national obesity cannot help exerting some influence on the nation’s minds. 30 years ago, a typical Briton, weighing 2 stones less than now, would neve have undertaken such a silly risky investment, I guress. Pushing unbalanced diet to the public is another way to create an army of lamb to the slaughter.

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  • Japanese uncle…..

    Agreed. The other issue is ingesting so much alcohol, which is just as addicting as food chemicals, far more fattening, and literally kills brain cells with every drink. This seems to be quite recent a phenomena. Having visited for six months in 1994, and again in 1998, {before permanently moving here in 1999} and having stayed in various venues North and South on both occasions, I can attest there was no binging in evidence. Now it is taking over people’s lives and generates crime and antisocial activity in every hamlet. This addiction surely contributes to making people mindless drones who can easily be convinced by the media to follow all the other lemmings off the cliff. Where did it come from?

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  • sold 2 rent 1 says:

    Nohpc,

    In response to your comment in posting http://www.housepricecrash.co.uk/newsblog/2006/10/blog-boe-worried-about-hpc-rather-than-inflation-1574.php

    I agree, maybe you shouldn’t compare a repayment mortgage with rent. You are quite right that a repayment mortgage will decrease over time.

    As seen from the postings on this site there appears to be many localised differences within the UK market regarding house prices/rents going up or staying flat.

    I can only tell the picture of my local area.
    I will redo my figures for interest only mortgage v rent

    My house in April 2006 (based on similar houses sold)
    Value: £210
    Interest rate: 4.5%
    Monthly interest only 25y mortgage: 787.50

    My house October 2006 (sold)
    Value: £225
    Interest: 4.75%
    Monthly interest only 25y mortgage: 890.62

    My house April 2007 (estimated)
    Value: £235
    Interest: 5.25%
    Monthly interest only 25y mortgage: 1028.12

    My house October 2007 (estimated)
    Value: £245
    Interest: 5.75%
    Monthly interest only 25y mortgage: 1173.95

    If the rent stays flat at £850 a month (because of over supply of BTL) then the rent goes from being 7% BELOW mortgage payments in April 2006 to 38% MORE than mortgage repayments in October 2007

    The key thing here is the speed at which the figures deteriorate.

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  • Japanesse Uncle . . .

    I agree. I’ve put on a vast amount of weight over the past five years. It’s got so bad I now have to be weighed on the lorry weighbridge on site. I feel my IQ decreasing in direct correlation to weight increase, showing a regression coefficient, r-squared of -0.097.

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  • japanese uncle says:

    I agree Indiablue

    A few weeks ago, as I went into the local council pool, a little girl no more than 11 years old, tried to block my way, jokingly. I think smelled wodka or gin, so I asked her “Are you drunk?”, in response to this she just stretched out a bottle of mineral water, as if suggesting that I should smell it to check it is alcohol or not. I smelled it, to find that it was no more than water. But I strongly suspect that she was using it as a chaser, because she was definitely flash with alcohol and smelled like liquor. 21 century Britain has come to this state! I think Stanley Kubrik had an incredible foresight when he made ‘Clockwork Orange’ in the late 60’s.

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  • Sold to rent, you said “You are quite right that a repayment mortgage will decrease over time.”

    But to be honest it won’t. It is calculated so that if interest rates remain static, payments will remain the same for the full 25 years after which there will be no more repayments. The only thing that changes is the proportion of that payment that makes up interest repayment as opposed to capital.

    A more useful comparison is to say that interest only mortgages are effectively the same as rent in the sense that you never own anything, but have the responsibility of maintenance.

    Comparing capital repayment and rent, you would want to apply compound interest to the amount saved by paying rent rahter than mortgage and maintenance. For example you may pay £50 a week less in rent than the equivalent repayment mortgage + maintenance. Over 25 years = 1300 weeks = £65,000. Compounding the interest this would be a lot more. Obviously it has to be compared to the value of the house in 25 years time.

    So basically what I’m saying is that if we have a soft landing – i.e. prices stop going up rather than crashing, they can drop slightly over the next 25 years and sell-to-renters will be able to buy the place outright after 25 years – exactly the asme time that the buyers get to own it!

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  • Most worrying thing about this article is that I would expect banks to be tightening their lending criteria – not loosening it. Thankfully I have no money with the Bank of Ireland.

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  • What is this nonsense about obesity and alchohol having to do with the price of chips? Fortunately we live in a (slightly) free country where people who choose to eat and drink too much are free do do so without moral tut tutting from the fascist food police, and tee-total christians. Many of us will fight to preserve the the right to destroy ourselves in any way we might choose to do so, however illogical, or uneconomical it may appear to our ‘betters’.

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  • sold 2 rent 1 says:

    Nohpc,

    It is good that you are providing a constructive debate on HPC.

    Your statement from a previous posting:-
    “The property market, like the stock market will have it’s roller coaster ups and downs, it’s bull and bear runs but it will return more than any savings account over the longterm. That’s why I don’t care if the property market crashes just now because I am in it for the long run. I will only be in it for the short run if the London property market booms again in which case I might try and sell once I make 20% profit”

    It sounds like you are a HPC believer but reckon the market still has some steam left in it. These are my thoughts too.

    Everyone on this site believes that property is a fantastic long term investment. But there is a time to own and a time to rent. I am a great believer in the 18-year land market cycle. In a typical 18 year time-span you should probably be owning for 13-14 years and renting for 4-5. These figures are not exact but as a guide they wont be too bad as an investment strategy.

    I see you are trying to guess the top of the market and sell before a crash. This is an extremely tricky game and my advice is don’t get too greedy. Once sentiment turns the market will be flooded with sellers and no buyers.

    Good luck and welcome to the HPC club.

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  • sold 2 rent 1 says:

    inbreda,

    Good points.
    My hangover has not fully gone yet from the “New Order” gig at Wembley Arena last night.

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  • Nohpc

    Your kidding right? We earn more than 60k and have 2 young children. The most we could stretch to at present is a 2 bedroom ex-council flat in Croydon. This is exactly why we are gving it a miss. Our time will come:)

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  • More bad news for you ‘sold 2 rent 1’…try a google search on ‘America: From Freedom to Fascism’…better still, try watching ‘The Money Masters’…puh hangover, you’ll need an oxygen mask!

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  • I’m not trying to guess the top of the market. If the market bottoms out I will either wait for it to pick up. Sell up and buy a bigger flat instead which will have crashed more in value than mine. If it picks up I may sell if I fear crash imminent.

    I suppose I do have a VI as I own a property but I don’t think you should go life thinking that you might lose your job, get divorced, have an unexpected baby etc etc. As in all investments with a good return risk is high. If you don’t want to take a risk then you shouldn’t invest. I think it is right that people should be aware of the potential risks before they invest as many don’t seem to be.

    I am not trying to make people make poisonous investments. I would recommend to my family and friends to get onto the housing ladder if they can afford it including possible interest rate rises. But I am a gambler at heart and many people aren’t. I like a flutter, the bigger the better and I try to take calculated risks. I may win I may lose . Long term I think it highly likely I am going to do very well. I am quite keen to start a property portfolio which I cannot afford to do because house prices are so high and at the same time I am happy with my positive equity so I have not decided if I want a house price crash or not yet. I think overall it would be a good thing as far as I am concerned but I still just don’t see it happening.

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  • This misguided couple taking on a £270K mortgage will end up paying (if they make it to the end of the term) over £485K for their ‘investment’ That’s assuming rates stay at around 5% for the next 25yrs.

    I genuinely feel sorry for people entering the property market at this late stage of the cycle, unfortunatley their herd mentality and poor financial accumen/advice will prove to very a very costly mistake.

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  • Check out AOL’s front page. A voting bit about the future of house prices. Boom 1%, Crash 66%. I think it’s coming.

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