Sunday, October 31, 2010

37% of mortgage holders would struggle to pay their mortgage if interest rates rose by just 2%

Rate rise threat for 3m home owners

So why did they take on the mortgage then? The really shocking statistic in the article is that the FSA believes that 45% of all mortgages out there were granted with no proof of income. That's an awful lot of demand for houses that has gone away for good. Demand as in terms of wanting to pay and being able to pay.

Posted by monty032 @ 08:29 AM (2967 views)
Please complete the required fields.



28 thoughts on “37% of mortgage holders would struggle to pay their mortgage if interest rates rose by just 2%

  • The article also goes on to point out that 45% of recent mortgages were self cert.

    The storm clouds gather.

    Reply
    Please complete the required fields.



  • Interest rates are not going to rise anytime soon if similar historical scenarios are anything to go by.

    All the indicators from Japan’s experience are that post credit boom, low interest rates quickly become baked in to the economy. Now that its not just the UK but the world economy that is in the doldrums, there’s every reason to believe that interest rates are even less likely to rise. One of the most critical indicators for the Bank of England to consider before making interest rate rises is how many people would have unaffordable mortgages according to the FSA’s measures.

    So while this article points out the dangers of an interest rate rise, it also points to that exact scenario not happening. It’s not very palatable but I’m just saying that it is the most realistic scenario.

    Reply
    Please complete the required fields.



  • notyethomeless says:

    I would hate to be a homeowner right now…

    I have friends on middle incomes, or even high, who have effectively 0 equity and can’t afford to sell or re-mortgage. Carnage and heartache awaits.

    Reply
    Please complete the required fields.



  • note that in japoan despite low interest rates they suffered from asset deflation…19 years later houseprices are up to 70% lower in actual terms and 90% lower in parts of central tokyo.

    And their debt has effectively doubled

    20 years of depression deflation crops up often in history

    Reply
    Please complete the required fields.



  • I think that the government has shown it’s cards with respect to interest rates and ‘homeowners’. I think they will try their hardest to inflate and keep rates as low as possible – they can’t afford for the banks to go bust again or the political fallout when ‘hardworking families’ can’t afford the mortgage (especially judging by the backlash last week when it was suggested that scroungers shouldn’t live in Kensington). They don’t care about moral hazard.

    It’s a gamble, but I’m in the process of buying a house. You’re damned if you do, but probably more damned if you don’t as your savings will be obliterated.

    Reply
    Please complete the required fields.



  • If your savings are for a property and property prices se falling then your cash is relatively safe.

    They will try and support home owners to a degree, but not at the cost of loosing the next election.

    It’s widely acknowledged that house prices are unaffordable. If they correct 20% over the next 2 years and then they largely stabilise, then they may have a reasonable chance at the next election as the falls can be justifiably put down to clearing up labours mess.

    What they don’t want is to support prices now only to find they start falling in 2-3 years time on the lead upto an election.

    Reply
    Please complete the required fields.



  • Misasacasa

    I’d hold off buying a wee while if I were you. Or at least make sure you’re not going to need to change the house for the next 5-10 years if atall.

    You don’t want to get stuck in a flat.

    Reply
    Please complete the required fields.



  • Long Time Lurking says:

    @5 they cant afford the banks to go bust

    Why do so many think the banks will go bust if there is a large drop in in the UK , as Spain ,Ireland ;USA have all had 30-50% falls and are still falling with no more banks going bust ? did they not stress test the UK banks for a 50% fall in price and they subsequently past the test.

    The way I see it is a lot off what this government have done so far is designed to lower the cost of housing ,but i do believe they are going to try and lower the cost by letting the bubble deflate and at the same time try to keep the over indebted heads above water with low interest rates ,but that’s a fine line to be walking in my book

    Reply
    Please complete the required fields.



  • we watched doomsday 2210 last night the comparisons with the roman empire and today are quite amazing

    Reply
    Please complete the required fields.



  • @str 2007
    Had my arm bent by the missus, I held out as long as I could.
    It works out slightly cheaper than renting for us at the moment (needs work but it’s a decent size and we got 20% off), so if prices in the area drop less than 10% a year, I won’t loose any sleep.

    Reply
    Please complete the required fields.



  • Sounds like you’ve got it covered, good luck.

    Reply
    Please complete the required fields.



  • Well you are either giving it to a Landord each month or a Bank, take your pick, either way you will be out on your ear if you cannot pay.

    Reply
    Please complete the required fields.



  • Mark Wadsworth says:

    “So why did they take on the mortgage then?”

    Because bricks and mortar is a long term investment that can only go up because we have no space for new housing? To have the security of owner occupation? To take a stake in Britain’s economy? Because the capital gains will always be more than the interest? Because renting is throwing money away?

    Or possibly because they gambled, so far correctly, that the government would always bail them out if things got icky?

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Mica: “I think [the government] will try their hardest to inflate [house prices] and keep rates as low as possible – they can’t afford for the banks to go bust again”

    You have fallen for one of the Big Fat Home-Owner-Ist lies. I checked Bank of England stats on LTV and negative equity, and if we make two extreme assumptions:
    a) House prices fall by half.
    b) Everybody in negative equity refuses to pay and declares himself bankrupt (and has no other assets etc)

    then total write downs on UK mortgage debt would be around 15%, call it £200 billion. Quite simply, 59% of borrowers have less than 50% borrowing (at current values), and so on and so forth.

    That £200 billion can easily be recovered if banks did a debt-for-equity swap on one quarter of their outstanding bonds (over £800 billion).

    Job done.

    Reply
    Please complete the required fields.



  • unsecured borrowing is £1.45 trillion

    If your case is true then why is the government so worried

    Reply
    Please complete the required fields.



  • tenyearstogetmymoneyback says:

    Interesting statistics MW.

    I have commented before that I would love to see the distribution curves for debt.

    I know someone who although having a mortgage wouldn’t need to take any action if interest rates went back to 5% as she
    has about 90% equity and hasn’t changed her repayments since they were at that level before.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Taffee 12, whoever said unsecured borrowing was £1,450 billion? In round figures, residential mortgages £1,250 billion, credit card debts and other ‘unsecured’ £200 billion, business borrowing £500, at least half of which is ‘secured’ on land and buildings, plus other bits and pieces, total borrowing in UK according to BoE is £2,200 trillion.

    BoE figures on distribution of loans to value taken from table 2.17 from latest Financial Stability Report
    http://www.bankofengland.co.uk/publications/fsr/2010/fsr27.htm

    0 – 25% LTV 27%
    25 – 50% LTV 32%
    50 – 75%LTV 22%
    75 – 100% LTV 14%
    > 100% LTV (ie. in nequity) 5%

    In other words, if prices fell by 25% (which is quite possible/probable) and EVERY household in nequity declared themselves bankrupt and handed back the keys (which is highly unlikely) then total losses to the banks would be…

    27% + 32% + 22% of mortgages (those currently less than 75% LTV) would be entirely unaffected

    14% of mortgages currently have LTV 75 – 100%, call it average LVT 87.5%. Of those only 50/87.5 would be recovered so losses would be 37.5/87.5 x 14% of all mortgages = 6% of total mortgages currently outstanding

    5% of mortgages currently have > 100% LTV, call it average 110%. Of those only 50/110 would be recovered so losses would be 60/110 x 5% = 2.7% of total mortgage currently outstanding.

    To sum up, a 25% house price crash would mean banks losing rather less than 10% of all mortgages. But once the crash had happened, they could merrily hike interest rates by 2%, and apply that to the 95% of mortgages that haven’t gone bad, and they’d get their money back in three or four years.

    Reply
    Please complete the required fields.



  • “(those currently less than 75% LTV) would be entirely unaffected”

    Erm.. Well they would because there mortgages would now be 100% LTV and so on sown the equity chain. This would make those currently safe 75%+ mortgages more prone to defaulting and riskier.

    This is what is happening today over in the US.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Khards, at the very margin, they might be affected. But don’t the Home-Owner-Ists always say “I didn’t buy my house to make a capital gain and I don’t care what it’s worth. It’s a long term investment. Etcetera.”

    What reason do you have for assuming that somebody with a £150,000 whose house is currently worth £200,000 would change his behaviour particularly if it fell in value to £150,000? Why would he suddenly stop paying the mortgage? What about all those people with 125% mortgages. Did they buy the house, do it up to their own taste and then promptly default? No, of course not.

    So feel free to recalculate my figures assuming that another couple of per cent of total mortgages go bad, people default and declare themselves bankrupt. Whichever way you calculate it, the results will not be devastating in particular.

    Reply
    Please complete the required fields.



  • general congreve says:

    @14 – See what your saying Mark, but if the risks are so low, how come you’ve got Bank’s like Allied Irish tapping the Irish tax payer for a second bailout at 40Bn Euro recently? Also, banking is international now, our banks have a lot of exposure to problems elsewhere, the whole system was in a right state as a few sub-prime mortgages went t1ts. The foreclosure process in the US is only 25% of the way through, the losses to come are huge.

    Reply
    Please complete the required fields.



  • Thanks for all those figures Mark, as GC says they seem to have gone to extraordinary lengths so far to keep things inflated.

    My personal feeling is that 25% off from here should be achievable and likely, obviously subject to interest rates and unemployment levels.

    Reply
    Please complete the required fields.



  • I’d love to know the position all those in power had in property in 2007 and now.

    A bit like being able to see if directors of a company is buying or selling shares.

    I strongly suspect those in power were also up to their necks in property, which is why the bailout was as big as it was.

    I wonder if they’ve now reduced their exposure.

    Now this is a story I’d love the journalists to get their teeth into.

    Reply
    Please complete the required fields.



  • @MW “You have fallen for one of the Big Fat Home-Owner-Ist lies…”
    That may be the case, but its mob rule and I’m gambling that they will get their way even if the whole country goes bankrupt.
    Surely The Government would have wanted a crash early doors if they were going to let it happen during this term?

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    GC, 17, bail outs in Ireland were even more extreme because their house price bubble was bigger, the collapse quicker and because the establishment. politicians, banks, property developers is even more rabidly corrupt than in the UK. For sure, Uk banks invested indirectly in US sub-prime cr-p but there is not much that we can do to prop up US house prices, is there?

    Micas, 20, you are right it is mob rule and so far they have got away with it. But this theft is based on A Big Fat Lie. If the government really wanted to help ‘hard pressed borrowers’ from ‘the spectre of repossession’ they could simply change bankruptcy law to enable people to walk away from nequity and tell the banks that it’s their problem now.

    i.e. when I am in charge that is exactly what I will do. People will have the legal right to sell their house, even if in nequity and will only be expected to meet a small percentage of the loss, which the state will recoup from their future Citizen’s Income entitlement. I care about people, not banks.

    Reply
    Please complete the required fields.



  • I posted on this site that any rise of 2% would be electoral suicide just a few days ago. These projections just confirm that view.

    Reply
    Please complete the required fields.



  • tenyearstogetmymoneyback says:

    Mark Wadsworth said

    “What reason do you have for assuming that somebody with a £150,000 whose house is currently worth £200,000 would change his behaviour particularly if it fell in value to £150,000?”

    From the 1990s I think their behaviour would change, but only to the extent that they would rather try and get back to having some equity,
    than spending money on a new car / holiday / DIY / Home improvements or even moving up “the housing ladder”

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Tenyears, i wasn’t in England at the time, but if that is how people respond, I would count that as A Thoroughly Good Thing, good for balance of payments, work incentives etc.

    Reply
    Please complete the required fields.



  • I think the article came up with a good question… when will interests rise? It looks like growth will be weaker next year than this year… so interest rates might stay low… but it depends on if Quantitve easing mark 2 creates additional inflation or not… hmmm… if it does, then interests will have to rise if its the BOE remit still…. but i am not sure of that…

    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>