Is 125% Mortgage an Endowment in Reverse?

MortgageMamma

NO ED I've not bothered looking at ANY credit cards lately As I don't sell them and only keep one for emergencies, its been used about twice in 3 years. fly into a panic if my borrowings exceed £1,000 and I don't have a mortgage either at the moment.

Keeps things nice and simple!

MarkyMarkD

david29dpo wrote:

i am a little confused, if a 125% mortgage consisted of 95% secured mortgage and 30% unsecured loan, how can it be a 125% mortgage? if you pay the first and not the second, they cant take the house can they?

David, that's a very good question which I don't know the answer to - maybe the advisers on this thread will know the answer?

I presume that the crafty lenders insist that payments are allocated either pro-rata to each part of the loan or (and if I was them, this is how I would do it) firstly to the unsecured, and secondly to the secured element. Rather like the way credit card payments are allocated to the lowest rate balance first.

So, quite likely, if you pay on time, your payments will be allocated pro-rata to both; if you get into arrears, the unsecured arrears would get cleared first whilst arrears build up on the secured.

ManAtHome

The 95% secured + 30% unsecured is probably a MSE invention to explain how you can flog a 125% secured loan. In practice, I suspect that if you miss a couple of payments they'll have you out on the streets to get their 95% (ish) back, then pursue you for the rest if you have any other assets.

I'd guess that they're banking (pun intended) that you're less likely to give up the house than if they'd just lent you unsecured cash.

meanmachine_2

Does anyone have a breakdown of the repayment schedule on a 125% mortgage?

As suggested above, I suspect it's weighted towards paying off the unsecured loan first, so that, five years' later, I haven't even touched the 95% bit.

lowis

i just tried to get a mortgage for £10k over the purchase price of the flat but none of the lenders my brokers approached would consider it, even though the purchase price of the flat is £92k and the flat was valued at £130k almost 3 years ago. might be because it is Right To Buy though...

dwight-van-man

Hi, a few answers to throw into the debate - 89% of this particular lenders lending comes from brokers and accross the UK sales areas, the 125% mortgage (as I take it we aren't naming names) accounts for between53% and 62% of mortgage products applied for, so there are serious nubers of these being sold by brokers. As regards the use of the unsecured portion, although it can be used for any legals purpose, the lenders own marketing centre around using it to consolidate debts prior to purchase, top up deposit (or in Scotland to overcome the offers over situ) or for home improvements. There are a good number of brokers (double figures) in my own sales area who encourage clients to use the unsecured to pay their broker fee. The current arrears ratio on this product is less than half the arrears ratio on this lenders standard product range (ie the sub 95% lending) and they have just reduced the income multiplier used for low credit passes and tightened underwriting as a result of stagnating property prices in many areas.

The repayment schedule isn't weighted to wards the unsecured; it is done prorata.

Re RTB- depending on circumstances they will consider lendiong above discounted purcahse price. They use open market value to determine the lending available and the purpose of the capital raising will determine the product offered, ie home improvements you can use the normal product range, debt consolidation, you need to use 125% product to apply the debt consolidation aspect to the unsecured portion as MOST local authorities are cool with this.

My own view, company hat off? As long as you take one out eyes open - and that is the responsibility of the client AND the broker, then they serve their purpose. FTBs need a solution to get the on the housing ladder - the argument about renting doesnt wash as traditionally the UK has had a very high level of home ownership and this isn't going to change. In any case, we need a steady flow of FTBs to keep the market moving. The industry currently is far too focused on what the next big mis-selling scandal is going to be - if you want a lenders perspective on that, then self-cert in its many guises is a good bet - but as with every type of mortgage product, if its sold correctly according to the clients circumstances at the time and with acknowledgement that it is impossible to predict house price growth,and documented as such, then whats to worry about?

lynzpower

My personal feeling about these are that they are bloody terrible. I worry that these products ( if Dwigt-van man is right- fab name BTW) in these numbers are nothng short of hairraising. :eek:

If over 50% of the mortgage products applied for is over 100% then 50% of these mortgages suggest NE. What will this do to our housing market over time? I dont know. but this idea "we need a throughput of FTBs" suggest to me that lenders by offering this product are stoking the market where its unneccasary. At the end of the day if people cant afford to buy as prices are too high, the basic laws of supply/demand have to bear out, surely? Im sure most of us would be able to say, I bought for 100, will sell for 130. If no one can pay the 130 then the "profit" to the vendor has to drop, making property affordable and forcing the correction that in my mind is overdue.

Or have i missed something here?

The other issue is that many of us know that consolidation seldom works so your FTB ( yes, I did it too) realises that they dont really have enough money ( WANT IT NOW!) to buy and furnush as they have debts left over from uni or wherever, and so those debts are cleared by the mortgage ( at a higher rate sometimes too) and voila out come the cards again to buy the sofa, plasma telly you name it. thats what I worry about is that you can have 125% mortgage, and then rack up morte debt on the cards and lets not worry about any of it. Until you start seeing more people coming onto DFW stressed and worrying about how they can afford to live.

Ahhhh If I knew then what I know now

Ian_W

lyn,
I think the only point you mixed up on was that dwight-van-man was talking about 50% of the mortgages of the one lender who does these 125% mortgages, not 50% of UK mortgages. Don't know why the name of the lender should be secret, my guess is Northern Rock, simply from posts on these forums - whoops, there it is - said it!! Hope I'm right.

I've been looking at this for a couple of days Andy and I'm not sure I see the analogy with endowments, other than in terms of ... is this the next?

I certainly think it is a risky & dangerous practice [which for many years, BTW, endowments didn't seem] and should come with a HUGE health warning to anyone considering them. I do take van's point that they have a lower arrears rate than "normal" products but isn't that a case of, watch this space? They're new, they're patently risky for both the lender and borrower and as a consequence are being more tightly underwritten than a normal <90% mortgage would be. Once they're bedded in and accepted, how long before the underwiting moves more towards the norm? If, as van states, the aim is to allow FTBers to keep coming to the market then I'm a little bit with lyn - it means the market is over-inflated and should be allowed to correct itself - otherwise where will loosening the criteria end? Are we headed for the US style "creative financing" - that's the logical next step if lenders feel they need to feed the market rather than starve it, to bring it more in line with earnings.

I go back nearly 30yrs as a mortgage holder and you had to have a savings account with the lender and could only borrow 2.5x salary. That's moved and moved and moved all to allow the market to expand, don't get me wrong I've benefitted from that in terms of equity in my property which no longer has a mortgage but at some stage lending criteria have got to reach a "thus far, no further" point, haven't they?

But if I was a broker at this point I'd be using my own health warnings and getting clients to sign that they understand:
1. You're in hock for far more than the props worth.
2. If prices fall you're in deep do do as even selling the prop wouldn't clear the secured element let alone the rest.
3. They must insure way beyond their eyeballs for sickness, unemployment, critical illness, divorce or separation and every other unforseen act of God that may mean you couldn't pay your mortgage.
4. [And here's the crux for the lender, IMO] You will be stuck with this lender, and be unable to remortgage for donkeys years unless house prices really boom.
I'd make the client write it themselves and sign in blood.

So, Andy to answer your question - Yes but, No but .....:rotfl:

MarkyMarkD

50% of NR's lending isn't that big a proportion of the whole mortgage market, so I don't think that NR can be accused of stoking up the housing market all on their own.

Nor do I think that any lender is particularly keen to artificially boost prices, as boom tends to lead to bust and it's mortgage lenders who suffer in bust times.

I agree with Ian that the incentive for the lender to offer these loans is that the customers are stuck with that lender for a LONG time, in most cases, and therefore stuck with paying over the odds.

dwight-van-man

Can I add a couple of points? Apologies for the 50% thing in my first post - I did mean 50% of NR lending - and thats a rough average across the UK, although you've also got to add in Mortgage Express' 130% fully secured deal and Coventry's MoreGage. Nr's is only fully 125% when the value/PP is 100k or less as the unsecured element is a max of 30k.

On a purchase of 120k, you could borrow 144k which, assuming 5% annual house price growth would allow you to break even in a little under four years (less on a c&i mortgage) or sooner still if the unsecured was used for home improvements which added to the property value.

As for being a new product, Coventry and Mex's are but NR's has been on the go since 1999 - if the arrears ratio had been poor, it would have been withdrawn long before now