Saturday, March 28, 2009

Buyers pay much higher interest rates if insufficient downpayment

Hidden charges hit UK home buyers

Buyers not able to make a downpayment of 25% are being charged interest rates ranging from 13-17 per cent on the amount they borrow above 75 per cent of house’s value.

Posted by mountain goat @ 01:52 PM (1726 views)
Please complete the required fields.



6 thoughts on “Buyers pay much higher interest rates if insufficient downpayment

  • mountain goat says:

    Full article since FT often block access:

    Hidden charges hit UK home buyers

    By Norma Cohen, Economics Correspondent

    Published: March 27 2009 20:34 | Last updated: March 27 2009 20:34

    Home buyers are being charged steep double-digit interest rates on part of their mortgages if they are not able to come up with a downpayment of at least a quarter of the purchase price of their properties.

    Those buyers who do not make such a downpayment are being charged interest rates ranging from 13-17 per cent on the amount they borrow above 75 per cent of house’s value, a new analysis by Société Générale of mortgage offers has revealed.

    Bijal Shah, economist at Société Générale, said the very high rates were not part of mortgage advertising and required a mathematical analysis before they became apparent.

    But the Société Générale study suggested the difference, for example, between a 4 per cent two-year fixed-rate mortgage offered by one leading bank for a 75 per cent mortgage and the 6.8 per cent it offered on a two-year fixed-rate 90 per cent mortgage was substantial.

    It found a buyer who could make a downpayment of only £20,000 on a £200,000 property was actually paying 14 per cent interest for two years on the £30,000 difference between that and the size of deposit required to get the lower rate.

    “The marginal extra cost of trying to borrow the additional 10 to 15 per cent of the purchase prices is very high,” said Ray Boulger, head of mortgages at brokers John Charcol. “And it is not clear, no.”

    Brokers say the high costs may be one reason why the average loan-to-value ratio in January had dropped from 89 per cent in May last year to 76 per cent.

    Reply
    Please complete the required fields.



  • There is nothing new in this, 20 years ago if the house you were buying was in the opinion of the lenders valuer was not worth what you were paying for it less the deposit you had to purchase an insurance policy to cover the difference in case of default. This cost was upfront at the time of purchase, now it has just been included in the mortgage rate. The title of the article is therefore disingenuous and the mortgage providers are just covering their backsides (risk management) as they know full well that there is a high degree of risk that any property currently being purchased will end up worth less than 75 percent of it’s purchase price.

    Reply
    Please complete the required fields.



  • Thanks MG.

    I’d disagree that this is really a “hidden” cost – as someone keeping an eye on the market it’s pretty clear you need a 25% deposit to get any kind of deal. Still I guess I’m quite a numbers guy so if it helps others then all the better.

    Two personal observations HPCers might be interested in. Sorry they are stat heavy…

    1) My girlfriend is trying to remortgage a 1 bed flat in southwest London. Bought at £225k in 2006, valued at £290 last June. Despite paying off a massive whack of equity she’s been told by A&L her LTV is just over 75% and therefore rates are well over double her current SVR. I take from this their valuation is around £210k, a 27% fall so far over 9 months.

    2) Been looking at my area and hers (curiosity, and too much spare time). Someone prepared to buy now, with a high deposit (say £40k) and a salary over 2 times the “average” (£60k) could buy something worth around £250k on 3.5 times multiple. That’s currently a 1-2 bed flat in SW London or a small 2 bed house where I live. But they could only buy something worth £160k at the low rates. Sure there are richer people, but I wonder how many people there are even this well-off? Suddenly the A&L valuation looks pretty optimistic……….

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    These stinkers!

    I did the calculations three weeks ago showing that people with 90% mortgages were paying a marginal rate of 16% interest.

    Ah well.

    Reply
    Please complete the required fields.



  • mountain goat says:

    Looks like they nicked it without crediting you Mark. Well done for the discovery.

    Reply
    Please complete the required fields.



  • Tenyearstogetmymoneyback says:

    The question is where is all this interest going.

    The Britannia have just published there latest savings interest rates and at a glance the average looks to be
    about 0.5%.

    There again if other people have invested in the same way as the Dumfermline then maybe we know the answer.

    :- Duncan

    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>