Saturday, Oct 17, 2009

Keeping Browns bubble inflated....

Mail: You can STILL get a mortgage for five times your salary

''Banks are offering crippling mortgage loans of up to 5.5 times salary in a further sign that the lessons of the credit crunch have been forgotten.
Reckless lending to first-time buyers remains endemic in the financial services industry, according to a study of the practices of leading banks and a mortgage broker.
An investigation by the housing charity Shelter found a worker with an income of £28,000 could borrow more than £153,000 from one high street bank. The repayments would have put an impossible financial squeeze on the buyer, bringing a serious risk of repossession.''

Posted by hpwatcher @ 07:39 AM (1449 views)
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14 Comments

1. tenant super said...

I earn more than £28 k and I wouldn't borrow that sum on my own. In fact, it is about the sum Mr. TS and I would be looking to borrow jointly as a 2.5 x 1 + 1 multiple. On £28 k you *could* manage the payments outlined in the table. Not that 153k would buy you anything decent anyway where I live. But once you add council tax, utility bills, travelcard; you have a disposable income of about £200. That's £50 per week for food, clothes and entertainment (less than JSA)! Why do people put themselves in a situation where they are worse off than a dole claimant?

Saturday, October 17, 2009 10:19AM Report Comment
 

2. drewster said...

"That would leave £781 a month to cover all other living expenses. This is just £53 more than the minimum required for a single man to keep their head above water, according to the Joseph Rowntree Foundation."

So in other words, it's a perfectly serviceable level of debt and it wouldn't leave you in poverty. Honestly, some people earn less than £781 a month! Just make sure you take out a fixed-rate mortgage - rates can only go up from here!

"The exercise by Shelter involved Tom Marshall, a single computer programmer of 26 from London with an income of £28,000 a year and a deposit of £27,000."

What can you get for £180,000 (£153,000 + £27,000) in London? Mainly ex-council properties, which lenders are cagey about (it's not snobbery; just the build quality is so poor that you can't be sure whether the building will still be standing in 25 years time). Nevertheless there are some half-decent private properties in places like Norwood, Woolwich, or Tottenham.

In the comments below the article, somebody writes: "I'm on £28,000 a year, the same as the guy in this sting operation. I pay more than £1000 a month on rent (in London), and yet the writer thinks it would be difficult/impossible for this guy to manage £989 a month for his mortgage."

Daily Mail = Daily Fail.

Saturday, October 17, 2009 10:32AM Report Comment
 

3. mark wadsworth said...

I like this comment:

"Another lazy hatchet job on the mortgage market . How long before I see a DM article berating the banks for not lending."

This article is just a write up of a press release by Shelter, who are in fact a fakecharity, bullet point 5 here, even though I'd probably broadly agree with their overall aim, which is to improve housing standards in this country.

Saturday, October 17, 2009 10:40AM Report Comment
 

4. mark wadsworth said...

@ Drewster, sure the guy can afford £1,000 a month in rent. That rent figure is unlikely to go up significantly (rents being the most stable variable in the housing market) and if the worst comes to the worst and he loses his job and gets evicted, he won't be made bankrupt as well.

Conversely, if you have a mortgage of £989, that might easily become £1,500 or £2,000 a month, which isn't so funny. If that happens, and/or you lose your job and/or house prices fall, then you are in deep doo-doo.

Saturday, October 17, 2009 10:43AM Report Comment
 

5. drewster said...

@tenant super,

A zone 3 travel card costs £116 - leaves our mythical buyer with £665 a month.
Council tax on a band C property in Norwood would be £1100 a month, but our mythical man is single so gets a 25% discount. He's now left with £595 a month.
Average gas bill is £834pa (just google it); I'll deduct 25% because our buyer will be living in a smaller-than-average house. He's now left with £543 a month.
Average 'leccy bill is £441pa; again deduct 25% for single buyer in a small house. He's now left with £515 a month.

That's nearly £120 a week to live on for food, clothes, holidays - perfectly achievable!

Saturday, October 17, 2009 10:46AM Report Comment
 

6. greenshootsandleaves said...

'Why do people put themselves in a situation where they are worse off than a dole claimant?'

If what is in the article is true we know only that people are given an opportunity to put themselves in that situation. The only 'reason' I can think of for actually doing so is the EA mantra about the mortgage costing no more than the rent. You have to compare like with like, however, not a mortgage on a slum and rent on a decent property, and therein lies one of the benefits of renting.

With further increases (in just about everything, including unemployment) on the way, there can be only one conclusion: prices are still way too high!

Saturday, October 17, 2009 11:10AM Report Comment
 

7. drewster said...

MarkW, I agree that if you lose your job as a homeowner you're in trouble. However our mythical buyer should take steps to ascertain how stable / secure his job is.

As for interest rates rising, let's break it down. It looks like he's paying 5.9% for a repayment mortgage. If interest rates hit 12% then the repayment will be a clearly-unaffordable £1,625pcm. However Alliance & Leicester are offering that 5.9% rate fixed for four years, so it's less of a risk.

Now, are interest rates really likely to rise that much? This is not 1992 - Norman Lamont isn't trying to defend the Pound against the Deutsche Mark (sadly for us FTBs). Japan kept interest rates near 0% for a very long time; Britain would clearly love to do the same.

The main risk is if other countries raise their interest rates first (Australia has just done so). Investors would sell pounds and buy whatever currency provides a better return. This would cause a shortage of gilt-buyers, forcing the government to offer better gilt yields. Higher gilt yields would push up mortgage rates too (it's all one big money market ultimately). Furthermore the higher interest payments would leave less dosh for public spending; jobs would be cut and nobody would get a pay rise for years. Needless to say house prices would tumble too. What's the likelihood of this scenario? Likely enough to dissuade me from buying just yet....

Saturday, October 17, 2009 11:29AM Report Comment
 

8. mark wadsworth said...

I picked up this leaflet in an RBS branch yesterday. They've squared the circle by "spreading your mortgage over 35 years":

Saturday, October 17, 2009 11:57AM Report Comment
 

9. mander said...

But Buy to Let can borrow to buy 900 properties regardless of their income or they can even be jobless just because it is a business loan. If credit worthy people do not step in banks must make sure others somehow buy as many properties up off the market so people believe in a housing shortage.

Saturday, October 17, 2009 12:03PM Report Comment
 

10. quiet guy said...

Drewster,

So have you bought a property yet?

Saturday, October 17, 2009 12:34PM Report Comment
 

11. drewster said...

MarkW,

It's hard to make a case for long-term mortgages, unless rates are ultra-low. On a £200,000 mortgage, the difference between 25 years and 35 years at 6% is £154 per month.

Put another way, if you can afford £1000 a month and repayments are 6% over 25 years it lets you buy a house worth £153,000; but over 35 years you can buy a house worth £174,000. If everybody followed suit, that would be 14% house price inflation.

Let's face it though, by the time 25 of those 35 years are up, inflation will have eaten away so much of the debt that it will hardly matter any more. (Unless you bought a house in Japan 25 years ago...)

Saturday, October 17, 2009 12:43PM Report Comment
 

12. drewster said...

quiet guy,

No. My job is too insecure. My employer has recently made 6% of the workforce redundant, and from conversations overheard it sounds like the company isn't doing too well at the moment. We haven't seen the end of this recession yet, not by a long chalk.

Saturday, October 17, 2009 12:46PM Report Comment
 

13. bystander said...

What can you get for £180,000 (£153,000 + £27,000) in London? Mainly ex-council properties, which lenders are cagey about (it's not snobbery; just the build quality is so poor that you can't be sure whether the building will still be standing in 25 years time). Nevertheless there are some half-decent private properties in places like Norwood, Woolwich, or Tottenham.""@drewster
............I own an ex council flat that is almost 60 years old and has much, much larger room sizes that the rabbit hutches being built today and as for build quality, new builds are absolute garbage in comparison. I would much rather own and/or live in an ex council flat in a good area, than a soon to be squalid, shiny new build.

Saturday, October 17, 2009 05:55PM Report Comment
 

14. tenant super said...

Thank you Drewster for doing the maths and correcting my lazy estimate which was significantly off the mark (mea maxima culpa). This is, as you say achievable, especially in the regions. Though I would add, in London, you're unlikely to get a freehold property for that sum so would have to pay service charge and ground rent (which was £100 pcm on my 1 bedroom). Plus TV licence, broadband, mobile, the fictional single Londoner then has £85 pw which is manageable but I sure as hell wouldn't like to be in his shoes!

Ex council houses are okay but I wouldn't buy an ex-council flat because councils are notorious for using leaseholders as cash cows. Charging high service charges and hideous sums for repairs which are often carried out to a poor standard. Leaseholders up in arms often make the local rag here in Southwark.

Saturday, October 17, 2009 07:11PM Report Comment
 

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