Friday, October 1, 2010

The Bank of England has warned that obtaining a mortgage is about to become even more difficult

Bank of England warns of tougher curbs on mortgage lending

A very hopeful article on reality finally biting in the mortgage market. It's surprising people are still talking about the 'property ladder'. Although it's not yet a property snake, house prices are on average the same as they were in 2005.

Posted by monty032 @ 08:46 AM (2788 views)
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30 thoughts on “The Bank of England has warned that obtaining a mortgage is about to become even more difficult

  • Tougher curbs on mortgage lending, but cheaper interest rates.

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  • Interest only deals are the perceived bogeymen – nearly 3m households have IO mortgages without any savings plan to pay off the principal.

    If inflation doesn’t let rip (I’m not betting on that, but the bond markets seem signed up to it) there will be a crisis in 2030 as millions go into retirement with nowhere to live..

    However, making repayment mortgages the norm again brings the underlying unaffordability of UK property into sharp focus.

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  • Another nail in the coffin for private home ownership.

    As you can see, the puzzle is slowly fitting into place.

    If prices dropped 25-30% but the bank won’t loan, how you gonna buy ?

    The cost of housing and financing housing is being gradually be made so high that most people won’t be able to afford it.

    The banks are now out of control, austerity measures, taxpayer bail outs, bonuses.. I sense a riot.

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  • I sense a riot.

    …and they have just cut back on the armed forces and police too.

    Beans, guns and gold.

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  • “Another nail in the coffin for private home ownership.”

    Not sure how you arrive at that conclusion – and however much you may dream, private home ownership isn’t about to curl up and die..

    ..thinking more constructively about Ireland’s woes, it does occur to me that they could do worse than to actively encourage migration from England, selling off their surplus housing stock at ultra low prices, on condition that the buyers move over and live in the properties concerned; thereby contributing to the Irish economy..

    – Sell off new 5 bed detached homes for £50k each maybe – that would get some takers..

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  • mark wadsworth says:

    Uncle Tom 5, that is a splendid plan, but would of course collapse house prices over there even more (which you may or may not see as A Good Thing).

    As to IO mortgages, my new cunning plan is that people with IO mortgages (or any mortgage) should repay the banks in their own currency! Don’t forget that bank bonds are a sort of bank-issued currency – although denominated in sterling, their value fluctuates up a bit and down a lot from par. So if you have a £100,000 nominal mortgage due for repayment in 15 years time with Lloyds and their bonds maturing in 15 years are trading at 70p in the £, all you have to do is buy up £100,000 nominal Lloyds bonds for their market value of £70,000 and hey presto, in fifteen years time, you owe them £100,000 and they owe you £100,000.

    What’s not to like?

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  • MW,

    Not sure it would collapse prices further – give people a five year lease for their money, with a promise of the freehold for a token amount if they live there for the full term and don’t claim any state benefits. Might hack the local population off a tad, but even they would probably recognise that it’s better to fill empty homes than leave them to rot.

    – Agree that loans in non-domestic currencies are insane..

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  • Beans…. another bubble right there

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  • Mark W,

    Where would you get the £70,000 with which to buy those bonds? You’re already up to your ears in mortgage debt.

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  • uncle tom..

    thinking more constructively about Ireland’s woes, it does occur to me that they could do worse than to actively encourage migration from England, selling off their surplus housing stock at ultra low prices, on condition that the buyers move over and live in the properties concerned; thereby contributing to the Irish economy..

    What are they going to do for work ?

    We have family in Ireland and it is tough, with a capital T.

    You gotta know people to get the work in, lots of tradesman without work… who are Irish. You think an Englishman is going to get a heads up when nearly 14% are unemployed ?

    Ireland is 2nd on the chart for increase of unemployment after Spain, both construction and housing bubbles doing the damage, take that away and there is not much variety for employment.

    So before you accuse me of dreaming, I’d suggest you take a look at your own fairytale theories.

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  • What are they going to do for work ?

    grow beans?

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  • drewster – my thoughts also, no doubt MW will explain further. The interest only debacle was also highlighted sometime back by Tom McPhail of Hargreaves L’Down regarding the danger of using your home as a pension. I dont have the stats to hand but there is a significant number of people who would effectively all need to sell more or less at the same time which would very likely forces prices down.

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  • “What are they going to do for work ? ”

    Over 90% of the work I do (and the same goes for countless others) can be done anywhere on the planet that has an internet connection.

    A friend does a maintenance nightshift for a credit reference agency’s computer system – except that now he’s moved to New Zealand so he can do the job during the day..

    Sure if you’re a factory worker, tradesman, work in an area that demands face to face contact with your clients; or don’t have the self-discipline to work un-supervised; then it may not be such a good idea – but there are hundreds of thousands, possibly millions; who could do their current jobs in a different country with little difficulty.

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  • Over 210 million people across the globe are estimated to be unemployed at the moment, an increase of more than 30 million since 2007. Three-quarters of the increase in the number of unemployed people has occurred in the advanced economies and the remainder among emerging market economies. Within the advanced countries, the problem is particularly severe in the United States – the epicentre of the Great Recession and the country with the highest increase in the number of unemployed: an increase of 7.5 million unemployed people since 2007.

    This is a major problem with no current solution. If China is making everything and jobs are being shipped abroad due to cheap labour and lower taxes… seriously though, what are people going to do ?

    Have a good think about it.. and ask yourself, what jobs are being created and paying enough to keep up with the ever rising cost of living ?

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  • I respect your answer Uncle Tom, where can you apply for jobs like the ones you mention ?

    Can you provide a link ?

    Thanks

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  • debtfree & others,

    This argument about “where are the jobs going to come from?” has been going round for centuries. In the 15th century the printing press put book-copiers out of business. In the 19th century the mechanised loom put cloth-makers out of business. In the early 20th century the typewriter killed off traditional letter-writing; later, computers and photocopiers decimated the typing pools. Yet here we are today with an unemployment rate of less than 10%.

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  • Good-o.
    House prices back to going up forever again.

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  • mark wadsworth says:

    Uncle Tom, 7 and Jack C, Drewster, perhaps I didn’t explain that properly.

    Completely made up example: You owe Lloyds £100,000 in sterling, due in 15 years. Lloyds has sterling denominated bonds maturing in 15 years, which are trading at 70p in the £. So you can either pay them £100,000 in sterling, or spend £70,000 in sterling on buying Lloyds bonds, and on the appointed day, you owe Lloyds £100,000 in sterling BUT they also owe you £100,000 in sterling, because on the maturity date, the bonholders entitlement against Lloyds is the full face value. Even if Lloyds is bankrupt at that date (or any earlier date), creditors have a right of set-off if they also owe the insolvent business money.

    So it’s not a question of “where does the borrower get the money from” it’s a question of “would you rather repay your mortgage at a cost of £70,000 or £100,000?”

    This has nothing to do with “foreign” currencies.

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  • It maybe cheaper to pay them back with an actual £100,000 in 15 years time as the way were heading it’ll be the price of a Mars Bar by then.

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  • drewster said :

    Mark W,

    Where would you get the £70,000 with which to buy those bonds? You’re already up to your ears in mortgage debt.
    Friday, October 1, 2010 10:34AM

    I thought you were renting Mark?

    What made you change your mind to buy (if indeed you have)?

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  • mark wadsworth – I must be missing something here, I’m paying interest only to LTSB on a monthly basis against £100K (lets assume on a fixed rate of interest for the remaining term). This means I pay them say £417 per month. I’m making no inroads into the capital and make no provision elsewhere to accumulate any other capital. At the end of the term LTSB demand £100K – so I guess what you are saying is sell the house and buy the bonds as selling the house is the only way of raising the capital?

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  • “I respect your answer Uncle Tom, where can you apply for jobs like the ones you mention ?”

    Look around you – look at the staff in any office, and ask yourself “how many of these people actually need to be here?”

    As the paperless office finally becomes a reality, so the need to gather people in one place to do the work is becoming an anachronism.

    – Business is waking up to this – the change is happening right now..

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  • Clive Goggins says:

    Anyone know what % of Uk mortgages are IO? I’d like to compare to where I live as its been reported that its 80% – that seems crash territory to me.

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  • @Clive Goggins

    Around 30% of all home loans taken out between April2008 and March 2009 a total of 358,000 – were interest-only + it is claimed that upto 5 million people have this type of mortgage. I’ll see if I can get more info on this subject.

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  • mark wadsworth says:

    Alan 540, comment 20, I am very much renting. I won’t be buying for years.

    Jack C, comment 21, I am assuming that the person concerned intends to build up some money to pay off the £100,000 in 15 years’ time, entirely separate to the interest payments. If £417 a month is all you can afford then you are scr*wed anyway.

    If this is too complicated a concept, let’s imagine your IO mortgage has only one year to run and you owe £100,000, and Lloyds Bonds maturing in one years’ time are trading at 90p in the £, and you have (for simplicity) £90,000 in your bank account earning ZIRP.

    What is the more sensible course of action – buy the Lloyds Bonds now for £90,000 and do a mutual debt cancellation in one year’s time, or somehow scrap another £10,000 together and give Lloyds £100,000 in a year’s time?

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  • mark wadsworth – thanks for the response – sadly the majority of those on interest only are not making any alternative provision to repay the capital at the end of the term hence the FSA wobbles around 18 months or so ago. I now fully understand what you are getting at which would work great for those of us who are financially astute – but not retail borrowerrs in general.

    I have countless examples of people down the pub/round the dinner table etc telling me “oh such and such is doing really well having 2 cars on the drive, 4 bed detached and 2 holidays per year”. What they dont know and that I have subsequently discovered (but cant say anything due to client confidentiality/data protection) is that the whole foo*ing lot (cars included) is on interest only and dependent upon ever rising house prices. As I have said before it’s a time bomb ticking.

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  • jack c – Clive goggins,

    If you read the article you’ll find the answer..

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  • uncle tom – thanks (I’m off to specsavers – seriously)

    There are 3.57 million outstanding mortgages that are interest-only, worth £470 billion. Three quarters of them are understood not to include a planned way of paying off the loan.

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  • At the risk of sounding boring, Endowment Mortgages or Interest only Mortgages are another greedy way of making money for the financial institutions. I worked for the biggest building society on the High Street in the early 80’s when they really became popular, in fact we were told to sell endowment mortgages above all others, the dictact was “it’s better for the customer, cheaper monthly repayment and at the end of the mortgage term a cash free lump sum to pay off the loan AND cash left over”. When I was taking out my own mortgage with them, I told them I wanted a repayment mortgage, and was cajoled, laughed at and called foolish when I said “But what if the sum assured doesn’t cover the debt” and was told “But it will, it will” as though I was a total numpty. I came to realise why these mortgages were so popular, not only did the BS get the interest payment, they also received a nice fat commission on the policy from which ever Assurance Company the policy was with. When in 93 we got a letter saying our sum assured would not be enough to cover the mortgage debt, I could have laughed if I had not been so pissed off about it. Needless to say, we reverted to a repayment mortgage that month, but I know others that are not so lucky. I feel sorry for people if, like me, they were told to take out an endowment mortgage and felt they had no choice.

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  • Hi Mark, your plan could work, and in fact works better than you think but there is a catch.
    When the sub bonds were trading at 70p, the subbonds carry a coupon of 6-7% (these bonds a yield at 10% against market value, but only 6-7% against the nominal 100k value) or so, but, so you get the bond coupons (after tax, unfortunately), to pay off the mortgage interest. If you can get a 3% mortgage, you will also make a profit from the bonds interest payment.

    There is a catch, unfortunately. The debts don’t get set off as there is no agreement in the mortgage deed to say such set off is agreed. So, if LBG goes burst, its senior creditors get the claim, and you still owe them £100k (secured again the house) and your sub bonds may worth.
    zero.

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