Can anyone explain....

Shupufski

..why banks used the restrict lending to multiples of income?

What was it 3.5x single and 2.5x joint?

Why did they used to do that?

Cleaver

Shupufski wrote: »

..why banks used the restrict lending to multiples of income?

What was it 3.5x single and 2.5x joint?

Why did they used to do that?

They still do that. We got a new mortgage a few months ago and the first thing they asked me was our income, second was how much we wanted to borrow and then told me that it was inside their acceptable lending multiple. If it was over we wouldn't have been able to even apply.

It's rather obvious why they do it, but I can't be bothered to explain. I'm sure someone will be around soon who will go through the basics with you. Bottom line is that when you lend someone money there are a number of criteria you put in place that helps you ascertain whether they are able to pay it back, and this is one of those criteria.

abaxas

Shupufski wrote: »

..why banks used the restrict lending to multiples of income?

What was it 3.5x single and 2.5x joint?

Why did they used to do that?

Mortgage rates are variable over the period of the mortgage (unless you take out a 25 year fix!).

Hence you cant regulate IRs over 25 years, you regulate via a function of affordability and hence multiples was used.

Mortgage lending used to be based on the ability to pay the amount back. It then moved to churn model (1999-2007) where repayment was not worried about as all the money was made from fees. It has now moved back almost to the original stance. Ie lending people money that they can pay back.

The difference in the aberration period (1999-2007) was the wide use of brokers to shield banks from selling loans people couldn't afford. The same people who sold you a dodgy pension or endowment mortgage simply moved into the new gold rush of being a 'mortgage broker''.

Salary multiples has been proven to work, hence it's a system we'll be keeping for the long term.

Cleaver

abaxas wrote: »

Mortgage rates are variable over the period of the mortgage (unless you take out a 25 year fix!).

Hence you cant regulate IRs over 25 years, you regulate via a function of affordability and hence multiples was used.

Mortgage lending used to be based on the ability to pay the amount back. It then moved to churn model (1999-2007) where repayment was not worried about as all the money was made from fees. It has now moved back almost to the original stance. Ie lending people money that they can pay back.

The difference in the aberration period (1999-2007) was the wide use of brokers to shield banks from selling loans people couldn't afford. The same people who sold you a dodgy pension or endowment mortgage simply moved into the new gold rush of being a 'mortgage broker''.

The vast majority of mortgages given between the period you state were still based on salary multiples of between 3x and 4x salary. There was obviously an increase in more 'dodgy' products and rather lax lending during this time, but the majority of mortgages from the majority of lenders in the UK for the dates you point out were still based on sensible lending multiples. We got our first mortgage in 2003 and the first questions our lender asked us was our income, what we wanted to borrow and then talked us through multiples.

Shupufski

abaxas wrote: »

Mortgage rates are variable over the period of the mortgage (unless you take out a 25 year fix!).

Hence you cant regulate IRs over 25 years, you regulate via a function of affordability and hence multiples was used.

Mortgage lending used to be based on the ability to pay the amount back. It then moved to churn model (1999-2007) where repayment was not worried about as all the money was made from fees. It has now moved back almost to the original stance. Ie lending people money that they can pay back.

The difference in the aberration period (1999-2007) was the wide use of brokers to shield banks from selling loans people couldn't afford. The same people who sold you a dodgy pension or endowment mortgage simply moved into the new gold rush of being a 'mortgage broker''.

Salary multiples has been proven to work, hence it's a system we'll be keeping for the long term.

Thus the "churn" model was based on the idea that the actual risk of default had been "dealt with" by selling the debts on in packages.

Thus the fundamental principal of repayment which dictated who could be lent to and how much was destroyed. In other words, banks started lending to the previously unlendable?

Cleaver

Shupufski wrote: »

Thus the fundamental principal of repayment which dictated who could be lent to and how much was destroyed. In other words, banks started lending to the previously unlendable?

Pretty much all financial institutions started to lend to people who they shouldn't have lent to over the past decade, and I think we can all agree on that. But we need to remember that the vast majority of mortgages given out in the UK were based on sensible multiple levels to people who could afford to pay. Hence the very low repossession levels in this country, which is one factor you could use to measure how sensible lending has been.

Before anyone jumps down my throat with 125% mortgages, liar loans, self cert, 7x multiples etc. I fully appreciate that these happened and probably shouldn't have. But I'm just saying that they were still very much the minority of the mortgage market.

Shupufski

Cleaver wrote: »

Pretty much all financial institutions started to lend to people who they shouldn't have lent to over the past decade, and I think we can all agree on that. But we need to remember that the vast majority of mortgages given out in the UK were based on sensible multiple levels to people who could afford to pay. Hence the very low repossession levels in this country, which is one factor you could use to measure how sensible lending has been.

Before anyone jumps down my throat with 125% mortgages, liar loans, self cert, 7x multiples etc. I fully appreciate that these happened and probably shouldn't have. But I'm just saying that they were still very much the minority of the mortgage market.

Given that the new paradigm in lending was to remove repayment as the primary focus then the emergence of interest only mortgages becomes a natural consquence? Agreed?

And if you follow that line of reasoning, the amount lent in terms of affordability moves closer to the function of interest rate x amount borrowed (i.e. ignores repayment of principal).

And if interest rates are low then the inevitable ouctome is increase in amount lent? Agreed?

PasturesNew

We agree nothing until you take those pink glasses off.

Shupufski

PasturesNew wrote: »

We agree nothing until you take those pink glasses off.

Eh? Please make sense.

abaxas

Cleaver wrote: »

Pretty much all financial institutions started to lend to people who they shouldn't have lent to over the past decade, and I think we can all agree on that. But we need to remember that the vast majority of mortgages given out in the UK were based on sensible multiple levels to people who could afford to pay. Hence the very low repossession levels in this country, which is one factor you could use to measure how sensible lending has been.

Before anyone jumps down my throat with 125% mortgages, liar loans, self cert, 7x multiples etc. I fully appreciate that these happened and probably shouldn't have. But I'm just saying that they were still very much the minority of the mortgage market.

It all depends on definitions.

The FSA stated that in 2007 almost half of all mortgages were defined as 'subprime'. Ie outside what people beleived to be normal lending practices. But the question is, what is normal lending? Anyone actually know?

Also mortgages are not the main problem in terms of 'subprime'. Second charge is by far the worst part of it. Why churn once when you can churn twice as often.

Cleaver

Shupufski wrote: »

Given that the new paradigm in lending was to remove repayment as the primary focus then the emergence of interest only mortgages becomes a natural consquence? Agreed?

If you read my posts again you'll see that I said that I didn't think that there was a 'new paradigm' in lending and that repayment wasn't removed as the primary focus.

Just to say again, it's my opinion (and I'm sure someone more detailed than me can back it up with the stats) that the majority of mortgages over the past decade were given out the same as they've always been: an individual or a couple are employed in jobs, the lender looks at their income, agrees in principle to lend them somewhere up to around 3.5x their income, arranges them to repay capital, does credit checks and gives them a mortgage. The vast majority of people, even over the last decade, have borrowed money on these terms. There were some IO mortgages, but they were very much a minority.

As we all know, a lot of lenders became a bit too lax with a minority of mortgage products. But I don't think we saw a 'new paradigm'.

Shupufski wrote: »

And if you follow that line of reasoning, the amount lent in terms of affordability moves closer to the function of interest rate x amount borrowed (i.e. ignores repayment of principal). And if interest rates are low then the inevitable ouctome is increase in amount lent? Agreed?

I can't agree with this really, as I don't agree with your initial comment. Most people over the last decade borrowed money for houses in much the same people have always borrowed money for houses.