Sunday, April 15, 2007

It’s official: the 10x salary mortgage is here!

Borrowers offered 10 times salary

Verbatim from the Sunday Times: "Wealthy borrowers are being offered “super size” mortgages of nearly 10 times... The reason for this increased generosity is that a growing number of mortgage providers now base their lending decisions on affordability... The other option is to go for a self-certification mortgage. This is where you state your salary without having to prove it." In the article, the US-style "liar mortgages" are called "self-cert"... but "things are different here" or at least have different names!

Posted by confused76 @ 12:35 AM (2006 views)
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14 thoughts on “It’s official: the 10x salary mortgage is here!

  • David20040_0 says:

    Is this surprsing? No, it will be 12 times salary soon as prices rocket even further.

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  • Whiteknight says:

    These models are worse than useless.

    “affordability models…” . I love how people justify this stuff. Its good to watch a bubble close up and inside and understand how they happen.

    Figuring their way through all the data like Poirot through a case from scratch. I can tell them who dunnit and i am not any smarter than them except that I watched this episode in Japan in the 1980s. In the South Sea Bubble, in the Nasdaq bubble.

    Makes things simpler than trying to pick your way through a multi-variate scenario doesn’t it.

    Wonderful thing history. Fortunately man learns less than nothing and therfore its a great set of complex reality simulation data

    Has the first test case come in yet to test whether the lender is both negligent aswell as the borrower committing fraud in the case of a misrepresented salary? I must admit i haven’t been watching closely.

    “He told me that was his salary so i lent him £2 million your honour”.

    Sounds a little weak even at this distance doesn’t it.

    “I am a poor fool who didn’t understand what i was signing your honour, its his fault for lending me into this disaster”

    Oh.. this one is going to be just one of the class actions rolling shortly. I can’t wait.

    Heres to the next bubble.

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  • I am annoyed by this – but my rational brain says so what – damn confusing this.

    On the one hand – it’s your money and you take your choice – but on the other – we are not talking about business or commodities or common purchases – we are talking about homes – and not a lifestyle choice – homes are necessities – like food or water.

    Oh well – this is surely more sign that the housing market has become speculative and investment driven.

    This 10 x multiple for wealthier people shows that mortgages are not ways to own a house anymore but a vehicle for financing your commodities portfolio.

    As with the ‘private’ bank for posh people story this week – the chasm between rich and poor is geting wider and deeper.

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  • More news indicating the absolute certainty of the HPC:
    http://observer.guardian.co.uk/uk_news/story/0,,2057491,00.html

    Buying a house has become the national obsession in the Country, but there will be a general awakening which will kick off the crash – and that s clear!
    But look at the story of Olivia, a 24-yo PA paid JUST £24k!!!!!! Poor her, she can t afford a flat in London. Of course, 6x24k = £144k, you can t buy a one bedroom anywhere inside the M25 with that kind of money.
    But that s not the point. The real issue is that £24k-per-year PAs with little experience are going to be the first heads rolling during the next wave of layoffs in London (which will not take ANY downturn of the economy to happen, but just a mild slowdown of profit outlooks of UK companies). So my advise to her is sit tight and keep renting and consider to save for maybe a business degree she can take during the next downturn.
    It’s the CAREER LADDER, not the f******g PROPERTY LADDER that these young people should worry about.

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  • dohousescrashinthewoods says:

    (reposting from the 9 x post:)

    There was an article a while back that mentioned power laws – the idea that people don’t understand exponential trends (in relation to US “money-printing”). Well this looks like one to me, with the increase in multiple doubling every 6 months. Unchecked, it gives the following progression:

    1 year ago: 3 x salary
    6 Months ago: 5 x salary (+2)
    [now]: 9 x salary (+4)
    6 months’ time: 17 x salary (+8)
    12 months’ time: 33 x salary (+16)

    When is the curve so steep that we fall off? 😉

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  • dohousescrashinthewoods says:

    Hmm: “it is based on net disposable income so is very different from gross salary.”

    I find I only have 5-10% of net income which is disposable, so this seems like less of a big deal.

    Question is, why would you think we have sound market conditions, secure enough to justify a highly leveraged purchase? Just because private equity is doing it doesn’t mean it is a good idea.

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  • I cannot believe it has come to this. Whatever you do, do not buy. This is all an act of desperation by the few to rob the many. One of you said before that “people who behave like sheep deserved to be fleeced”. The crash will happen. 8,9,10x salary mortgages are dangerous. The slightest change in interest rates will finish people off.

    I think that confused76 has a good point. Educate yourself and advance your career. Despite the obvious reason of being able to earn more money, it looks better on immigration applications if you decide to leave this god forsaken island.

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  • What is affordable one month can very easily be unaffordable the next, there is always a certain amount of finanancial inertia and it is very easy to assume that your earnings have not peaked. This is a basic mistake many business owners make and is quite often the reason for their rapid downfall when their good fortune turns.

    As Forest Gump’s mother said to him ‘You only need so much, the rest is showing off’, so why overstrech yourself at the top of the market especially on a property you may not realistically need.

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  • someone on a high salary in middle management is unlikely to repeat that amount if he loses the job,then stuck with a £1 million mortgage on no income will have you rapidly repossesed or suicidal

    risk has gone out of the market.

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  • Fair point taffee – would be wiser to set your mortage re-payments at % of max – rather than borrow more than you can realistically afford without wage inflation – then find with only small rise in interest rates you cannot afford the repayments as they are way over your max.

    That is sound advice – but sheeple don’t realise this and see buying houses like buying a car or a holiday – nice one-off payments. Also, makes things worse when 5% mortgages go up to 8% – an increase in repayments of 60% – so if you are already paying £600 then this goes to £960.

    Oh well – you could always tighten that belt – mm – but if everyone does it – who’s going to buy stuff and services?

    Big problem when 60% of people are employed in direct services and retail.

    What ever happened to a responsible and sustainable economy?

    We’re all doomed I tell thee!!!!

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  • tony marshall says:

    “The bank added that lending 8.9 times income is highly unusual. In that instance, the borrower had a very high salary, a 50% deposit and a guaranteed large annual income. ”

    So he’s rich pickings for an unscrupulous lender – they are taking no risk and no responsibility either. 8.9 times a “high income” is presumably an extremely high figure – let’s say he earns £200k and borrows 8.9 times this at 6%, ie interest £106.8kpa. £200k after tax (ignoring NI, if he’s taking it as dividends..) gives him £128.8k leaving only £22k of net income to meet his other living costs.

    Now let’s say his income is £500k and he borrows 8.9 times this at 6%, the cost is £267k whilst net income is £308.8k, leaving him £41.8k for everything else – not really enough for a guy earning half a million… At £1m pounds income (and a loan £8.9m) the amount left after paying the mortgage is just short of £75k – hardly enough to pay the maintenance costs on a house worth close on £18 million (50% deposit don’t forget..)

    And so it goes on – with mortgage rates at 6%, this guy’s going to be struggling with 8.9 times income, whatever that income is. But if the interest rate rises to 7%… it wipes him out, full stop. Take any income figure, say £400k, deduct tax (approx £151k), leaves around £249k ‘take home’. £400k x 8.9 x 7% = £249,200.

    From there, there is no escape – if we assume his income is higher by £100, then after tax that’s £60, but the extra mortgage he borrows is £890, which at 7% is £62.30. The people lending these multiples are as capable of doing this calculation as I am – they must take their share of the blame when the guy goes under.

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  • HPI is around 10% – more than mortgage rates, so repayments and affordability are an academic consideration – the house will pay for itself. We need “nothing to pay till 2037 mortgages” where the interest rolls up for thirty years while you live in luxury. Live for today – don’t worry about tomorrow; income multiples are just a throwback to Victorian values.

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  • george monsoon says:

    For decades, the measure was always 3x salary. Why have the margins moved? There is no way on earth I could contemplate borrowing more than 3x my salary for a mortgage and still be able to pay for all my other bills.

    Its a complete SHAM and I truly hope the sh*t hits the fan very very soon.!!

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  • To me, the figures don’t add up. Still more fool them. Don’t people realise that if you’re borrowing 10x salaries that house prices might be overpriced?

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