Tuesday, July 14, 2009

How to get even deeper in debt……

What Nationwide's 125% home loan means for the property market

''To qualify, you have to be an existing Nationwide borrower...[and]...there's the fact that it's very, very expensive indeed. For a start, you still have to cough up a deposit of 5% on the new home from your own funds. The charge on the loan for the other 95% is a painful 6.73% if you want to fix for three years, or 7.48% for five.''

Posted by hpwatcher @ 06:57 AM (1398 views)
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25 thoughts on “How to get even deeper in debt……

  • “Negative equity is a pretty scary-sounding phrase. But in fact, it’s not a huge problem in itself. All it means is that the loan secured against your home is bigger than the property’s value.”

    All depends on how big the NE is. If someone bought an average house at peak for £200k and falls of 50% leave them with a NE of £100k then this is a big issue, even if it is only perceived as a ‘paper loss.’ People who MEW’d will have a huge pile of NE too.

    It is good that the Nationwide are allowing people to move house via this scheme, but the premium they are charging is pretty brutal.

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  • phdinbubbles says:

    @mrfibble
    That premium would be the deposit then? – which would be an indication of their financial competence (in that they’ve already had to save this money whilst simultaneously paying for their nationwide mortgage) and also reduces the potential NE of the bank.

    “So it’s expensive; and it’s not open to first-time buyers, which means that it won’t help seduce any more fresh blood into the property market. That’s not a return to the days of easy credit. In fact, it looks much more like a very canny lender spotting a highly profitable if risky niche and pricing the product accordingly. ”

    Quite. As several people pointed out the other day.

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  • Am I the only one really concerned about this? This seems to me an extraordinary and worrying development, and one that other lenders will look to “improve” on over time.

    This is clearly an attempt to make the market more liquid and allow people in – Eq to move and move up, without having to save or earn their way out of the predicament, or without having to wait until all prices adjust down.

    I sense the hand of government (who will do all in their power to reflate) incentivising this, also there is now a explicit message out here that large lenders don’t need to worry about the remaining technically solvent (they are already insolvent) as they will keep being bailed out whatever, except this time the bail out won’t be a bail out but ongoing transfusions of £.

    It is the first time that my complacency that house prices will fall and keep falling has come into question. The government can keep he bubble going if they are determined enough. This would leave a bond strike as our only hope. I’d add election as a hope, although I’m not sure if the T’s will do any differently and if prices were recovering GB would get relected anyway.

    I wonder if the government is at play here. If you remove

    IThis sounds to me

    t doesn’t make the lending any more responsible because it is to someone in negative equity, esp

    like a first step towards

    JS seems blase about this.

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  • I’d add that I don’t think long term this will work ie you can’t falsify your wealth forever without being found out, but the time frame for the real denouncement could be stretched out for years.

    I guess I can add to my reasons to be hopeful rising unemployment and shirking wages, not that I want to see either, but it is some of that reality now or a lot more of it later.

    This is so bad because we falsified the recession we should have had in 2001, if we don’t have it this time it will be truly devastating next time.

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  • This is clearly an attempt to make the market more liquid and allow people in – Eq to move and move up, without having to save or earn their way out of the predicament, or without having to wait until all prices adjust down.

    Absolutely. An expensive mini stimulus…but what happens if house prices continue to drop?

    I think, this Nationwide deal, it is partly based on a belief that the worst price drops are well and truly over. And if they are wrong, others will be carrying the debt.

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  • 125%…and if house prices continue to drop?

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  • happy mondays says:

    @ 3, this is a global downturn, i would think we cannot isolate ourselves from depreciation on our overly inflated house prices as prices fall (globally) no more than when they rose. Especially as you say with unemployment on the rise, energy bills set to rise, deflation of wages, now i am not one of the smart people that have made this country great, but even i can see that is surely simple economics ! Forgive me if i am missing something here, and i am sure the government can bulls**t and twist numbers to create illusions to fool us all (after all we are at war with Terror in Afghanistan to make the streets of London safe) not for strategic positioning in the middle east..But can the government keep pulling rabbits out of hats and the audience become a little bit suspicious ? Rhetorical !

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  • @bellweather – this is a piece of the puzzle missing from the article – it fails to mention that Nationwide are now lending at sensible multiples of salary (i.e. 3.5 x with existing loans taken into consideration). So those wishing to move up probably wont be able to as their salaries wont stretch to the required amounts.

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  • we’re witnessing a long slow crash drawn out by state and bank intervention… it’s probably better in a way… clearly this move is an attempt to let the bubble down gently rather than popping it outright.. but right now i can’t see what other option.. ok we could just eat the debt but as morally satisfying as that might be it’s probably going to be worse for all.

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  • still renting says:

    We had a long debate about this new product on Thursday. 43 comments, no less.

    http://www.housepricecrash.co.uk/newsblog/2009/07/blog-hmmm-24276.php

    I think phdinbubbles gave the best summing up:

    “Ray Boulger at mortgage broker John Charcol described the case of a family who sell a house for £180,000 with a £200,000 mortgage on it to move to a property costing £250,000. Under this deal, Nationwide would lend them 95% of £250,000, £237,500, plus £20,000 of negative equity, which adds up to £257,500.”

    So the lucky couple stump up £12,500 cash and reduce Nationwides NE to £7,500. It’s not like the 125%ers of old – weren’t they lent to people with £12.50 in cash?

    and another thing…
    isn’t 257,500/250,000=103%
    isn’t 200,000/180,000=111%
    so the nationwide have actually decreased the LTV from 111% to 103%

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  • bellwether: I think you are right to be worried. The word is that the banks are preparing to significantly ramp up their mortgage lending from September onwards. My information is only “a mate of a mate told me”, but I have now heard it from several banking sources and I think it is pretty reliable.

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  • Noted Flash. The question is appetite but then nothing seems to jade the brits’ palate for property, and so I wouldn’t discount the appetite being there.

    Concerns me that many on site get worked up about a monthly survey from Halifax but seem to discount this sort thing. An essential point here is how much consumer spending is predicated on house prices even if longer term higher property prices will strangle spending. Short termism wins at every turn.

    Long term it must end in tears, currency collapse, import inflation, consumer cruxification when interest rates rise, but what many on site forget is that long term we will be dead too. It could take longer than we think

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  • mark wadsworth says:

    PhD & StillRenting, exactly.

    If this family knew what they were doing they’d use the £12,500 to repay some of that £20,000 nequity, bearing in mind that interest rates can only go up from here. So if they really want to move, what’s so terrible about taking out a small personal loan for £7,500, using that to pay the mortgage as well, selling the £180,000 house and just renting the next place?* Even if you think house prices have stabilised, the SDLT on their new house would be 3% x £250,000 = £7,500, so that personal loan is neither here nor there?

    Surely they can rent somewhere nice for £10,000 a year, which is a saving of £7,844 compared to 6.93% interest on a mortgage of £257,500, so that pesky loan will soon be paid off.

    Well, that’s what I’d do.

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  • But Mark it’s not what most people would do. The views on this site remain out there for most, and the UK’s obsesssion with property (which is related to our obsession with status) and our belief that property is a one way bet. Neither of which seems to have been destroyed and both which may take very little to rekindle.

    If the government can’t keep this bubble going they are dead and the ecomomy too. For me thinking that the government might succeed in keeping the bubble going is a u turn but the article about 125% mortgatges (which mirrors what is happening in the US) begs the question. I mean why are these loans available on any basis at all, and do they represent the thin edge of the property ramping wedge.

    Comparisons with the 1990’s are not that helpful I suspect then, unlike now, keeping prices high was not a life and death struggle. We only really discovered how getting prices high can boost GDP. This incidentally is where the focus in banks etc is misguided, it is what the government is explicity and implicity telling them to do that horrifies me.

    Also I would not assume that interest rates must rise. The government will follow the US on this and the US will keep rates low for a long time. Perhaps only a debt/ hyper inflationary currency collapse will stop the madness.

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  • 9. still renting said…We had a long debate about this new product on Thursday. 43 comments, no less.

    The difference is that now there is more information about how barmy the idea is…..especially in a market where house prices are continuing to fall

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  • I don’t really see a problem with this. If a Nationwide mortgage holder goes into NE and then loses their job, they are a big default risk. But if they then get offered another job which needs a home move, Nationwide would reduce their chances of default by giving the new mortgage. Common sense, and not a return to casino lending IMO.

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  • HPW, noone cares about how barmy it is, you are overestimating your fellow countrymen and women

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  • Timmy if in 6 months time it is the ony product out there doing only as you suggest then fine. I fear not however where it is critical to the government that we return to casino lending.

    Time will tell.

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  • BW – I very much doubt it will be the only product out there – but like you I hope it will be kept purely for the scenario I described. I think the govt know they’ve reached the end of the line with banks, and the only way to keep inflating is to go the same way as Zimbabwe. If they think being unpopular and losing an election is bad, they will surely recognise that QE to that extent would be far worse. Won’t they…?

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  • phdinbubbles says:

    @Bellwether

    But it isn’t casino lending (or barmy in the slightest) if the loan is being limited to certain people. For example, a couple where one stays at home and the other is a GP earning £100k a year. Original salary ratio = x 2, new ratio = x 2.575. Hardly a risk considering the security of the job. If they bought their house 2 years ago and want to move to somewhere slightly bigger, they wouldn’t be able to without taking out a loan. To me this loan arrangement just seems like a niche business opportunity for Nationwide (a mutual that didn’t indulge in the kind of casinio lending of NR et al.)

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  • still renting says:

    @Hpwatcher

    There doesn’t seem to be any new information in the article. It’s an opinion piece making many of the same points some of us were making on Thursday. If I may quote rather selectively from this article:

    “So it’s expensive; and it’s not open to first-time buyers, which means that it won’t help seduce any more fresh blood into the property market. That’s not a return to the days of easy credit.”

    This deal benefits Nationwide by seeing some negative equity paid off immediately and profiting from much higher rate of interest. It must also benefit the borrower, if they are choosing to take it up despite the high rate.

    @mark w

    Agreed, that’s what I’d do too. But many people continue to place a considerable premium on owning their own home, despite renting making more sense from a purely economic perspective.

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  • 21. still renting said…
    There doesn’t seem to be any new information in the article. It’s an opinion piece making many of the same points some of us were making on Thursday. If I may quote rather selectively from this article:

    ZZZZzzzzzzzz Yawn. Look, I am against it in principle, because it is very very expensive and in a market with falling house prices is likely to be more than enough to push people over the edge. Please stop trying to ”sell” this daft idea.

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  • I don’t get what the fuss is about this – surely if it allows people to move who otherwise would have stayed put (waiting for house prices to rise again – ha ha!) then it frees up supply = lower prices? Besides, take up will be miniscule surely with those rates and applicants being cherry picked by NW.

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  • In a strange way, this is actually good news; as it reduces the need of some vendors to hold out for unachievable sale prices.

    But I’m not sure that a generation of perpetual NE mortgagees will actually stay the distance – the govt might feel the need to toss them some sweeteners..

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