Monday, April 14, 2008

This is huge!! BTL will have to inject extra capital into their homes, under an obscure clause in their mortgage contracts

House prices face threat from wave of buy-to-let selling

Both Bradford & Bingley and HBOS-owned Birmingham Midshires, the two largest buy-to-let mortgage providers, each with 20pc of the market, require customers to top up their initial deposits if falling house prices mean the size of their mortgage rises above 85pc of the value of the home. THIS IS [email protected]*KING GREAT NEWS!!

Posted by confused76 @ 01:07 AM (1652 views)
Please complete the required fields.



27 thoughts on “This is huge!! BTL will have to inject extra capital into their homes, under an obscure clause in their mortgage contracts

  • little professor says:

    Is this what is called a margin call in hedge fund circles? I think the leverage principle is similar.

    Reply
    Please complete the required fields.



  • In the past, I have noted the iniquity of the purchasing power of BTLers versus FTBers due to tax law. I have to admit that I overlooked this particular issue. Normal mortgages for occupier owners will permit the negative equity problem as long as you keep paying. Not so for some BTLers apparently. Great find C76!

    Reply
    Please complete the required fields.



  • This only occurs if/when there is a remortgage which gives a landlord a choice sell or pay SVR.

    Reply
    Please complete the required fields.



  • Excellent in principle, but hard to administer unless the owner fronts up.

    Reply
    Please complete the required fields.



  • This is not new news at all. The LTV must always be kept up, the question is whether this is proportionate or not and one would have to look at the smallprint to consider all these issues. This probably allows valuation and revaluation at any time by the mortgagee, (even driveby that I understood took place in the 1989-1992 crash when owners refused entry (I was in the CAB working at the time – what a battlefield)). I wonder if the mortagee can force sale under the mortgage deed or powers of foreclosure at Common Law? I suspect they will and that the Courts will protect the mortgagee’s right with all zealousness.

    Hence an £85000 mortgage on a property ‘worth’ £100000 is 85% and the original stake will be £15000 (assuming that they were not with the Crock or B & B where those munters allowed 100% mortgages) Assuming it drops to £90000, not at all unlikely as even the mortgagees (and CMLR) now have to admit this is very likely) then 85% on £90000 is £76500. Therefore actually the difference in equity will have to be £13500 on a £90000 property. Assuming you have ‘used up’ £10000 of the original difference (10%) leaving £5000 of the original ‘stake’, then a further £8500 ‘only’ will have to be found. Quite where one finds this I don’t know because of repairs and voids etc. (at least 25% of the rent for the year) as well…

    Boy oh boy have we got some sub prime in the system…. (Sorry Mr. Smith, Economist Laureate) it’s true….

    Am I right Greenbay (and are you still in it for the long term)?

    Reply
    Please complete the required fields.



  • Bertie Bunfest says:

    If the lender specifies valuation by their surveyor at the end of the fixed term then its not up to the borrower to decide to have a valuation done.

    Reply
    Please complete the required fields.



  • I wonder if this was leaked to the press by the said lenders in order to prepare their customers.

    ALISTAIR – more money over here please, it’s leaking again.

    Reply
    Please complete the required fields.



  • Most BTLers who are coming to the end of their fixes will get stuck on their original lenders SVR.

    The BTL mortgages available now may say a maximum LTV of 75%, but the need to prove rents will cover 125% of the interest payments means that in practice, few properties qualify for more than 60% LTV – so no chance of a cosy new deal on that 85% 2yr fix.

    Those going on to the SVR will typically be paying 6.75%, so a property with a mortgage of £150k will have annual interest payments of just over £10k. If the property was 85% borrowed it would have a market value of £176k and, on average, command a rent of about £700 pm. after voids, management costs, maintenance, and all other expenses are deducted, the net return is likely to be about £5k p.a.

    This leaves a £5k p.a. shortfall. Multiply that up for a portfolio of 10 properties and the need to liquidate part of the portfolio to raise funds becomes obvious.

    No smug faces now…

    If the mortgage lender demands a top-up payment because prices are falling, many BTLers will judge it as the final straw – and sell the lot.

    However, there is one teensy little problem – who the hell is going to buy?

    Reply
    Please complete the required fields.



  • Incidentally the lenders who doubtless seeded this story are under severe attack in the stock markets – they may have been trying to reassure investors that they were not complete morons.

    Noting Orwells comments, I think the system will fall overboard to find ways to help homeowners avoid eviction, but will throw the BTL brigade to the dogs..

    Reply
    Please complete the required fields.



  • It’ll be intersting to see how this is going to pan out.
    The downsides as UT explains are just enormous.
    I guess it depends how vigorous the lenders are in requesting top ups.

    Whilst it is in the lenders strong interest to enforce this promptly, as soon as they do, these losses will be identified.
    We know that BTL’ers cannot afford significant top ups.
    It’s Catch22
    Do the lenders let it go unchecked and hope the market recovers – unlikely.

    Were the BTL mortages re-sold into the investment markets aswell ?
    In which case who will be enforcing this ?

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Orwell, I think the maths is correct. Buy for £100, loan £85. Price falls to £90, max loan £76.5. So £8.5 of loan has to be repaid to get back down to £76.5.

    Minesapint, you may be correct, but BTLers have to re-mortgage all the time – or, as you say, pay SVR of over 7%.

    Reply
    Please complete the required fields.



  • Less political fallout in chasing BTLers for more cash. If you bankrupt a few of them, repo the property, auction it to get some ready cash, keep chasing the BTLer for the difference – it makes perfect sense.

    Less political fallout from doing this. Less bad press. Provides much needed liquidity to be able to carry on business (lending to much better risks this time). I also think the banks know that BTL is subprime, so the race to the bottom should start with this bunch of over-leveraged, over-indebted leeches.

    I think BTL will be thrown to the dogs.

    Reply
    Please complete the required fields.



  • Str 2007:

    Remember what Marx said about profit, 50% interesting. 300% the capitalists will kill for there is no one they will not trample over for this.

    But also remember the reverse multiplier as well. All that apparent profit evaporating? Who iwll be first to force a sale?

    Mr. Smith (Economist Laureate), I do hope you’ve managed to sell your BTL’s now and Rupert will let you back the right horse. If you need any advice….

    Reply
    Please complete the required fields.



  • I agree BTL will be toast before anything else…

    BUT, recall the last crash (lots of wannabe me me me’s don’t). Recall how expensive Income Support was for mortgage payments which is why they changed the rules (about 1994-5 when I was in the CAB) so that interest payments only would be met for 26 weeks then capital. That was expensive enough and hence the reason payment of interest was stopped for the first 26 weeks. Eventually the message was you will have to sell up. I wonder whether they really can turn the clock back. Imagine Crash trying to explain that to the party, we just feel like supporting greedy upgraders with interest (capital) to repay on a £500,000 mortgage in a place in suburbia. We’d rather do this than build decent stock for our natural electors because we only see this as ‘fair’. We know these very badly off mortgagees only earnt £25000 per annum (and hence should only have been able to afford a £75000 mortgage and they are naughty for taking a mortgage of 4 times that but this is our gift to them as they are more likley to elect us than working people…

    Errrrm no, I can’t see it. Not with the comments about being priced out on the blogs… unless they really do want to commit elctoral suicide of course…

    Reply
    Please complete the required fields.



  • The mortgage lenders are not known for being a force for rapid reaction, but it must be dawning on them that BTL is intrinsically toxic, and that their reputation would be enhanced by getting rid of it. They must also realise that the universal tightening of criteria for BTL is resulting in their existing customers not going away when their fixes end.

    A rigid enforcement of this condition could play to their advantage, pushing existing customers toward the exit door.

    Is the real message to the BTL’s “Jump – or we’ll push you”

    Reply
    Please complete the required fields.



  • Were the BTL mortages re-sold into the investment markets aswell ?

    In which case who will be enforcing this ?

    I appreciate it will effect new applications, but what about those who firstly haven’t got 2-3k to take out a new mortgage and decide its better to keep quiet and keep paying after their teaser rate has run out.

    Reply
    Please complete the required fields.



  • str 2007 – if the detail is in the small print, the first wave of BTLers to re-mortgage might not be aware of the condition and apply for a new rate unaware of the impending doom of doing so.

    Reply
    Please complete the required fields.



  • Assuming the BTLer in uncle tom’s example has got 10 such properties all on the same 2yr fix all running out at the same time then she has made (over the two years):
    properties[10] * months[24] * rent_after_expenses&voids_pm[£700*0.6]
    = £100.8K
    Facing the -£50Kpa prospect she would probably look at the numbers, and could break even by selling for 93.28% of the original value [=1-(100.8(10*150))].

    A distressed sale of the portfolio could be made right now (I have seen companies offering “85-90% current market value for distressed sales” on behalf of cash rich investors), so her p&l would be:
    original_price[£150K * 10 ] * ( delta_market[?!?!] * offer_rate[0.85 -> 0.9] – 1 ) + current_profit[£100.8K]

    1) Assuming the best offer from the range, 90%, and a market effect over the two years as per the nationwide monthly index (pre-inflation), 10.5% then her result would be:
    +£92.55K [=150*10*(1.105*0.9-1)+100.8]
    i.e. most profit made so far would be captured.

    2) Assuming the worst offer from the range, 85%, and no market effect then the her result would be:
    -£124.2K [=150*10*(1*0.85-1)+100.8]

    +£92.55K and -£124.2K are very different numbers and show the effect of leverage.

    If the offer were 85% of market value then the breakeven would be implied by a change in market value of +9.74% [=0.9328/0.85-1]
    If the offer were 90% of market value then the breakeven would be implied by a change in market value of +3.64% [=0.9328/0.9-1]

    I would say someone in such a position has these three options:
    a) sell to attempt to lock in profit or minimise loss as above;
    b) hold their position (probably not a great idea as their profit will quickly be eaten up, but some people are willing to take all or nothing gambles)
    c) sell most of the portfolio and use any captured profit to pay down debt (this would be my aim in this position – keeping an income producing asset with little or no debt would be a good outcome!)

    The sensible options are (1) & (3), both of which involve property sales from BTLers to cash rich investors. The lower the market gos the more cash-rich investors will enter the market, but the lower their offers will become up to the point where buyer competition starts to kick in.

    RE: Government “homeowners” support – this is very political. It may depend on how much the BTLers who are donating to the labour party are worth ;p

    Reply
    Please complete the required fields.



  • str 2007

    If the contract they signed requires them to pay down part of the advance in the event of price falls then the lender can invoice them for the sum required, and follow that with county court proceedings leading to a possession order. The property can then be sold, even if it has a sitting tenant.

    It is not unusual for properties to go under the hammer complete with tenant, indeed if the tenant has been in residence for some time and is keeping the place in good order it can be seen as a bonus by prospective buyers. Most of the time however, the tenants have old assured tenancies paying minimal rent, and the properties sell for much less than one that is vacant.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    “It is not unusual for properties to go under the hammer complete with tenant”

    Let’s hope that this becomes the norm, else things will get awkward for the sell-to-renters!

    Reply
    Please complete the required fields.



  • Let’s see if they let my comment through… I’ll post here too:

    “””
    There is a way to turn the tables on your banking masters – albeit not legitimate – consider running a crack house. That may cover the mortgage, and provide you with enough extra income to both buy up the entire neighbourhood as prices come down and to line the pockets of politicians & police chiefs to ensure your neighbourhood gets cleaned up after you are done.

    I wish I’d thought of buying in Archway before, with this business model current prices are actually a bargain – how much do you want?!
    “””

    Reply
    Please complete the required fields.



  • ^^ OOPS wrong article

    Reply
    Please complete the required fields.



  • dohousescrashinthewoods says:

    WOW! Game over!

    Just ran some numbers for a 3-flat BTL at 85% LTV where the price was 250K and is now 150K (e.g. Liverpool).

    They would have stumped up about 38K in initial deposit, probably through equity withdrawal (and credit cards?) and then used the 15% below-market-value “Inside Track” special offer to get the next two scott-free.

    If all three are now worth 150K, they will be margin-called for an eye-watering 255K!

    Where do you get that kind of cash in a credit/motgage famine?
    Against what do you secure it?
    Where do you get the money to service the loan?
    Won’t see rental increase covering the existing mortgages, let alone the new debt.

    Gutted! Literally. Fish, knife, guts, spilled, dead.
    Ouch.

    Reply
    Please complete the required fields.



  • Uncle Tom:

    “…Is the real message to the BTL’s “Jump – or we’ll push you”…”

    Errrrm interesting. Never thought of that actually. The mortgagees may actually deliberately revalue lower than before a sort of reverse behaviour to what has been going on when they loaded up the Buy to Letters with the things in the first place? Very interesting!

    I hope this doesn’t get out. Mortgagees acting as cartels? No it just doesn’t happen…. I do recall reading when at the CAB in their ‘Adviser’ magazine about a case where a mortgagor was trying to postpone sale. The Mortgagee didn’t like the idea and the mortgagor had got an ‘independent valuation’. The mortgagor was having none of it and the Courts agreed that they would not postpone any longer.

    It therefore doesn’t take rocket science to see that in my example above (and the actual amounts/loans are likley to be much higher). The Mortgagor gets a bit twitchy. They think the local market is bad (or want the money for some other reason-they needn’t say, perhaps better terms offered elsewhere). They do a driveby and ask for the extra £8500. The Landlord can’t cough up. They then apply to foreclose and the Landlord does their own valuation and pays their own fees for solicitors (they won’t get Legal Aid as they are arguing about business assets and no one will want to do this on No Win No Fee (let alone Tesco)). Quickly what small savings they didn’t pay to the Mortgagors are eaten up and the Court agrees to the order for foreclosure.

    Oh dear oh dear… Greenbay?

    Reply
    Please complete the required fields.



  • Let the mayhem begin

    Reply
    Please complete the required fields.



  • The BTL brigade have strong links with MPs. Expect the House of Commons to fight tooth & nail to prevent any big fall.

    Reply
    Please complete the required fields.



  • When the BTL finds his or her mortgage deal running out and seeks a renewal, the lender will seek a revaluation (which may not have been required in an upward market), hence the BTL will only be able to take a reduced loan. This really will trigger the collapse! Yay!

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>