Monday, January 5, 2009

20%, 30%, 40% deposit……..

Mortgage rationing gets tougher

Mortgage lenders are continuing to demand larger deposits as they ration home loans to their customers. In the past month the proportion of new mortgage deals requiring at least a 25% deposit has risen, from 54% to 60%. And 25% of all deals on offer in fact require a 40% deposit, according to the information service Moneyfacts.

Posted by phdinbubbles @ 12:33 PM (1873 views)
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11 thoughts on “20%, 30%, 40% deposit……..

  • japanese uncle says:

    I should like to repost the following (originally posted before summer/08):

    After all when house prices are likely to drop by 50%, you as a lender may wish to secure minimum 50%, which is only too logical. IMHO lenders must secure 70% deposit in London, which sounds rediculous, but logical given the current financial climate.

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    FTBs are in the best imaginable position right now, provided they have already saved some money with reasonably job security . All they have to do is to wait until this turmoil is blown over. Things are moving incomparably faster this time, than 1990 house market collapse in Japan. And I must mention that even at that time, 100/125% mortgage was seen in the market at the last stage of bubble, say for less than a year before the collapse started, as I recall it. Look what they have done here, 100/125% mortgage has been around for quite a while now, hasn’t it? How many hundreds of thousands of the financially naives have been caught in this toxic honey trap meanwhile? And many of them are operating on an incredibly thin ice, just a few weeks away from default in the event of financial contingency not least the job loss whose prospect is becoming bigger by the day in all industries, except default lawyers and the like, maybe. Mortgage is quickly becoming a very rare commodity and people will soon have to raise at least 50% deposit in normal mortgage arrangement. By that time, unemployment would certainly reach the level not seen since the 80’s while average salary might well be 10~20% lower than now. And again how many hundreds of thousands of the financially naives have squeezed thousands of pounds out of nowhere but their own houses in the name of ‘equity release’? They will be receiving fateful calls from their banks sooner rather than later, telling them that they will have to place their houses on the market. Flooding houses vs ultimately shrunk affordability. Better than average eleventh form student can tell the answer. There will be over 50% drop in house prices throughout the country, while as mentioned earlier, in places like London, up to 80% drop should not be ruled out. It actually happened in some areas in Tokyo, and the economic environment in Japan at that time was almost a Shangri-La compared to the UK now.
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    In view of the accelerating development of the credit crunch unfolding right now, none can predict what the market would be in the latter half of this year. As I mentioned earlier, 50% deposit requirement is no longer an imaginary nonsense. It’s the real possibility. And in that event, how many of the potential buyers can really raise such amount unless the house price itself is reduced by half?

    I must mention what happened in 1990 Tokyo was like a picnic in Lake District, compared to this. Remember Yamaichi Securities (equivalent to Bear Sterns in the US market) went bankrupt only in 1997, seven years after the collapse of the bubble started in 1990. Look how fast things are developing from bad to worse!
    Horrific!

    Thank God I am in no debt.

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  • mark wadsworth says:

    Excellent stuff. As others have pointed out, if the minimum deposit demanded goes up from 10% to 25%, then all things being equal, prices would have to fall by 60%.

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  • sold 2 rent 1 says:

    JU,

    “Look how fast things are developing from bad to worse”

    As I’ve said before, change is accelerating into a singularity.
    Expect things to change faster and faster as the change curve steepens into 2010 and again by a factor of 20 in 2011.
    But remember, as crazy as things may get, the instability is only local, the gobal system is stable.

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  • my goodness ju, for a foreigner you certainly can speak our language well! (i’ve been on the receiving end of this complement, but only in japan.) ”toxic honeytrap”. indeed. kirtsy allsopp was on the lip of that one, beckoning people in ... i remember yamaichi securities going bust - they were the elite of the securities industry too - everyone was in shock. not unlike bear stearns (except they were’nt the elite, i suppose). mark, i trust you’ve probably calculated that 60% drop on a 15% rise? out of interest, can you show your workings? and my tuppence - isn’t this simply a risk repricing mechanism because the normal one is broken (interest rates)?

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  • I would suggest this working:

    If someone has £20,000 deposit, then a 10% deposit allows them to have a house costing £200,000. If the deposit is 25%, then that deposit allows them a house costing only £80,000.

    Hence a 60% fall.

    However, I suspect this analysis is oversimplistic, as there are many other factors in play.

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  • As always JU, I am more than a little impressed at your foresight and accuracy. You are starting to become somewhat of a regular topic of conversation in our house of an evening! Bit worrying that my hubby and I spend quite so much time discussing the unfolding disaster that is the Great British economy. Like you, we are thankful that we have no debt, no mortgage (sold to rent) and a substantial chunk of money in the bank (although that’s starting to look less sizeable as the interest rates plummet).

    So, at the risk of looking like a bit of a suck-ass, I salute your postings!

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  • “…chunk of money in the bank (although that’s starting to look less sizeable …”

    I think we should all threaten to withdraw savings from banks in protest at this government theft from the prudent.

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  • mark wadsworth says:

    @ Karlos, thanks, you beat me to it.

    @ Paul, of course there is other stuff as well, but it does all point in the general direction of a 40%-plus fall. Another easy way is to look at price-earnings ratios, which also suggest a 50% or so fall from peak, assuming there is a slight overshoot like in the mid 1990s. Or you can look at rental yields (also point to a 50%-ish fall). And so on.

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  • I’m happy with karlos’ explanation. That’s a logical and useful yardstick.

    Another of my favourites is the % rise vs. % fall calculation – so often unappreciated by the innumerate meeja.

    An “x” percent rise: x/(1+x/100)
    An “x” percent fall: x/(1-x/100)

    So the current 17% fall has swallowed the gains from the earlier 21% rise in house prices. Gulp!

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  • I’ll add to the above with my favourite example of a young couple with a £15k mortgage in the days of 95% LTV’s having a budget of £300k (assuming their salaries afforded them the ability to cover the repayments).

    Reducing the LTV to 75% which doesn’t sound like much of a drop, reduces their budget with a £15k deposit to £60k (no I haven’t missed a 1 in front of the 6). That’s an 80% drop.

    See the look on peoples faces (especially estate agents) when you explain that to them !

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  • All good stuff, JU as always excellent. I remember that post when you first put it up – I liked it, but felt I couldn’t hope for it to be true. Now here we are and it’s all happening!

    STR2007 – love your extra example there. I’m going to use that maths for some people here!

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