Wednesday, May 7, 2008

Downward spirall gathers more momentum

Woolwich lops loan to values to avoid negative equity

Woolwich has cut the maximum loan to value (LTV) it will offer mortgage customers to 90% from 95% in response to falling house prices. The Barclays subsidiary said it was prudent to cut back the proportion it will lend against the value of properties to avoid homeowners seeing their equity eroded by falling house prices. ‘The market is constantly changing and we have seen in recent weeks that there has started to be a decline in property prices,’ said a Woolwich spokesman.

Posted by jack c @ 02:30 PM (1268 views)
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11 thoughts on “Downward spirall gathers more momentum

  • stillthinking says:

    As some astute chap pointed out on this site a while back, 95% to 90% LTV means the price of the house you can get halves. i.e. 20K deposit used to buy a 400K house on 95%, but now only buys 200K (or a small flat in London).

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  • If the deposit is the limiting factor.

    For example, someone might have a £20k deposit, but if they earn less than £57k per year, their income will limit the amount they can borrow to below both those figures.

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  • How long does it take for Mr & Ms Average to save another 5%?

    Six months perhaps.. after which they will be in ‘wait until the market bottoms out’ mode

    And when the market does bottom out, the lenders will be looking at an unprecedented default rate, and will have little or no money to lend..

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  • LTV’s cut, negative this, oil that, EA’s dead

    regurgitation, regurgitation, regurgitation

    bring it on!!!

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  • “The Barclays subsidiary said it was prudent to cut back the proportion it will lend against the value of properties to avoid home owners seeing their equity eroded by falling house prices.”

    What a load of Piffle. Cutting back on lending will not see home owners equity eroded in the slightest: all falls in house prices will erode equity. What higher LTVs does is offer the bank a larger buffer against the bank itself suffering erosion of equity. When the house is worth less than the mortgage then essentially that’s a loss for the bank until it is able to recoup any deficit. Losses which have to be declared, imparing ability to lend further.

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  • What’s the HPC equivalent of a 125% mortgage?

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  • cornishman says:

    “The Barclays subsidiary said it was prudent to cut back the proportion it will lend against the value of properties to avoid homeowners seeing their equity eroded by falling house prices”

    What that should say – to make things perfectly clear – is:

    The Barclays subsidiary said it was prudent to cut back the proportion it will lend against the value of properties to avoid the bank seeing its security eroded by falling house prices.

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  • yorkshireman says:

    Well said Cornishman.

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  • stillthinking said…
    “As some astute chap pointed out on this site a while back, 95% to 90% LTV means the price of the house you can get halves. i.e. 20K deposit used to buy a 400K house on 95%, but now only buys 200K (or a small flat in London)”

    Since cheap credit corresponds to high prices this suggests that the true “market value” of the 400K house is now 200K !

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  • japanese uncle says:

    mken

    True value in this example is 150K rather than 200K.

    Believe me!

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  • Well unless there was another astute chap talking about it I think it was me discussing LTV’s and the leveraged effect of reducing them.
    And it is surprising how much difference a small change in LTV makes.
    Although as jonb quite rightly pointed out the earnings need to be there to support the loan.
    Where I think we will see the biggest effect to the housing market caused by reduced LTV’s is in the Self Cert and BTL area.
    Areas which have arguably fueled the bubble.
    I believe Woolwich have reduced to 65%LTV on New Build Flats.
    An investor with £30k deposit could have previously shopped with a total budget of £200k based on an 85% LTV (assuming they could make the rental returns equation add up).
    Reducing the mortgage to 65% LTV means that same investor has a total budget of £85k instead of £200k.

    Small difference in LTV BIG difference in budget.

    Leverage in reverse.

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