Telegraph: Bring Back 100% Mortgages--Best Way to Wealth

chucky

Charterhouse wrote: »

If your affordability is that great, use it to save a deposit. It's not complicated is it? If you can apparently afford a 500k mortgage then you can rustle up a 10% deposit in no time at all...

i think you need to re-read the post again - especially the first paragraph.
the world has moved on - rightly or wrongly i don't know but times have changed.

chucky wrote: »

maybe before the Battle of Agincourt it did but times have moved since then - we're in 2010 now

don't you think that mortgage underwriting is determind by affordability, credit history, other debt commitments and even work experience too?

Charterhouse

My picture doesn't appear to work.

http://3.bp.blogspot.com/_pMscxxELHEg/S4RUo8KNNHI/AAAAAAAAHlU/ItUhUlOPXtU/s1600-h/NegativeEquityFig42009.jpg

The point is that default rates go up a lot at higher LTVs. By more than you would expect.

You never answered my question - do you understand the risk profile on a 100% LTV IO mortgage?

[e] before someone says "BUT THAT'S THE US", there are enough states that don't allow jingle mail to mean the chart still holds. The UK is obviously not identical but human nature is similar enough.

chucky

Charterhouse wrote: »

My picture doesn't appear to work.

http://3.bp.blogspot.com/_pMscxxELHEg/S4RUo8KNNHI/AAAAAAAAHlU/ItUhUlOPXtU/s1600-h/NegativeEquityFig42009.jpg

The point is that default rates go up a lot at higher LTVs. By more than you would expect.

that's a given though, your graph is the US (US sub-prime isn't UK sub-prime or even close to it) - but i agree with you and that's why they would be paying more for the privilege of a 100% mortgage to negate the risks to the banks as far as costs go.

Charterhouse wrote: »

You never answered my question - do you understand the risk profile on a 100% LTV IO mortgage?

yes - the underwriting should be much stricter than a 75% mortgage hence my point about not having a problem with a 100% mortgage but having issue with the underwriting for this mortgage.

Charterhouse

chucky wrote: »

yes - the underwriting should be much stricter than a 75% mortgage hence my point about not having a problem with a 100% mortgage but having issue with the underwriting for this mortgage.

OK, answer the question then. What is the risk profile for a 100% LTV IO mortgage? How does it vary over time? With regards to interest rates and house prices.

chucky

Charterhouse wrote: »

OK, answer the question then. What is the risk profile for a 100% LTV IO mortgage? How does it vary over time? With regards to interest rates and house prices.

i thought that you meant did i understand the difference, as i said the difference should be in the stricter criteria

it only works over time if your affordability improves (which is likely if the right person has the mortgage) and that house prices should go up long term 25 years (this is only highlighted now as a problem in the short term). with interest rates i don't know but it should be related to affordability.

but the answer to your question about the specifics is no i don't - what is it?

lightSwitch_3

25 years ago was 1985, four years later tens of thousands of homeowners felt the pain when they were repossessed. Twenty years later we have the same pain.

100% at 5 times salary. So at £100,000/yr gross income (or £60,000 net) means you get £500,000 mortgage and @ 5% interest that is ~£3000/month.

Your net income is £60,000 or £5000/month. A mortgage at £3000/month will be burning 66% of your available income leaving you with £2000/month after mortgage paid.
If you are a single person or married and both working then that actually looks affordable. However if you are the sole bread winner with two or three kids I don't know.

I did the same calculation with a £50,000 gross income and a £250,000 mortgage @ 5% that leaves £1300/month disposable income out of £2775/month net income after a £1475/month mortgage or you are burning 53% of your £2775 net income.

I don't think a family can live on £1300 a month however if the second spouse is earning then it is very viable. If the second parent isn't working then they shouldn't be taking out these sort of mortgages. I single person can easily afford this if they don't mind paying 53% of the earnings to the bank.

If people are sensible about taking out mortgages then we shouldn't be having house crashes ( except when there is mass unemployment).

I used 5% mortgage rate, is that realistic long term?

Charterhouse

The risk INCREASES. Because as you extend time the volatility of house price and interest rate paths increases by the square of time. That is why you need to have lower than 100% LTV. Anything higher than about 80% on LTV as IO is absolute madness. In fact, IO is total madness by itself, but that's another issue. There is virtually no interest rate (that would actually attract any borrowers) that would encourage me to do a 100% LTV IO mortgage right now, versus the alternative of lending on a conventional 75% repayment mortgage.

nembot

Words fail me....

Have we learn't nothing during the last ten years?

chucky

Charterhouse wrote: »

The risk INCREASES. Because as you extend time the volatility of house price and interest rate paths increases by the square of time. That is why you need to have lower than 100% LTV. Anything higher than about 80% on LTV as IO is absolute madness. In fact, IO is total madness by itself, but that's another issue. There is virtually no interest rate (that would actually attract any borrowers) that would encourage me to do a 100% LTV IO mortgage right now, versus the alternative of lending on a conventional 75% repayment mortgage.

that's the risk of a 100% mortgage

Charterhouse

Yes, but the point is that the house price fall that is needed to take you into negative equity is 0.01% at any point through the whole 25 year contract. Whereas after 5 years on a repayment mortgage at 75% LTV it's 25%+. So your mortgage lending becomes more and more in the money as the volatility of expected paths increases. With 100% you do not have that. The risk profile is so dramatically different that it is a miracle anyone was EVER stupid enough to do it.