Savers 'lose' £43bn, Mortgagees 'gain' £51bn.

Thrugelmir

StevieJ wrote: »

Not if you can only secure a punitive deal (if that), and what sort of deal do you expect to secure with 50% NE? especially if you are self employed in todays economic climate.

NE resolves itself in time. Far worse previously than now.

The issue is peoples impatience. After such a long period of economic growth. There's a whole generation that have never had to tackle issues on head on. Always had it easy.

StevieJ

Thrugelmir wrote: »

NE resolves itself in time. Far worse previously than now.

The issue is peoples impatience. After such a long period of economic growth. There's a whole generation that have never had to tackle issues on head on. Always had it easy.

It may resolve itself in time but it doesn't help you move to a larger place in the forseeable does it?

julieq

I've a horrible feeling that what Graham is trying to do by saving a deposit to reduce LTV is to fit some sort of arbitrary prudence criteria - standard bear operating procedure I understand.

The only sensible reason to pay a large deposit is to access a low rate. There is no practical advantage to owning 30% of a house nominally than owning 10%, you still get repossessed if you can't pay. All you're doing is decreasing the risk to the lender without substantially decreasing your own risk. Otherwise you're better off setting up an offsetting arrangement and hanging onto the cash.

It's difficult to see any beneficial effect from negative equity, because the effects aren't clean and insulated from each other. Theoretically if you have a 100K 100% mortgage and are targetting a 200K house, a like for like fall of 50% gives you a 100K saving on the next house. With 50K savings (which you'd need to move), a 100% mortgage on 100K would get you double the house for the same theoretical mortgage payment. You'd have spent 50K in NE, you'd have a £100K house, so you'd have spent £150K to get to a £100K house. Neat trick.

However you'd be up against a few additional problems:

1) You'd burn your deposit on the NE and potentially lose a beneficial rate on the next mortgage
2) You'd now be in competition for the next house with more people, because more people can afford it. Those who could previously only afford your old house could now afford the next house
3) That level of negative equity would prevent people putting their house on the market, choice would reduce, and competition for what is available would increase.
4) Negative equity would destroy lending security and rates would rise or cease. Which might cause rates to come down, but as we've seen they tend not to for new mortgages, and deposit requirements tend to increase. And you've just blown your deposit on paying off your negative equity...

And so on. You'd also have some losses due to EA fees, legal fees and stamp duty.

It's difficult not to conclude that the best outcome for most people is stagnation in prices or falls not outstripping the rate at which debt is being paid. That maintains security on lending and provides no disincentive for sales. It is almost impossible to argue that negative equity helps anyone at all (negative equity here defined as a loss relative to outstanding mortage). If you're outside the market then it's different, but that's not the situation we're discussing.

That's not to say it NE can't or won't happen, or that it's a bad thing overall, it's just a case of "beware of what you wish for".

Graham_Devon

julieq wrote: »

I've a horrible feeling that what Graham is trying to do by saving a deposit to reduce LTV is to fit some sort of arbitrary prudence criteria - standard bear operating procedure I understand.

The only sensible reason to pay a large deposit is to access a low rate. There is no practical advantage to owning 30% of a house nominally than owning 10%, you still get repossessed if you can't pay. All you're doing is decreasing the risk to the lender without substantially decreasing your own risk. Otherwise you're better off setting up an offsetting arrangement and hanging onto the cash.

Prudence criteria!? That's a new one!

And no other reasons for paying a larger deposit?

Independance? Lower mortgage payments? Less interest over the life of the mortgage?

None of those at all "sensible" reasons?

Thrugelmir

julieq wrote: »

You'd burn your deposit on the NE and potentially lose a beneficial rate on the next mortgage

Have no idea what you are suggesting. Ones net worth is only ever assets less liabilities. Putting "money" into a different bucket is merely a mirage.

StevieJ

Graham_Devon wrote: »

Prudence criteria!? That's a new one!

And no other reasons for paying a larger deposit?

Independance? Lower mortgage payments? Less interest over the life of the mortgage?

None of those at all "sensible" reasons?

I thought that was the exception she mentioned, I not sure where independence comes into it?

The only sensible reason to pay a large deposit is to access a low rate.

julieq

You have more practical independence with 30K in cask and a 100K mortgage than you have with no cash and a 70K mortgage. You can also use the 30K as a direct or indirect offset so your net payments are the same. The optimum is probably an interest only mortgage with repayments going to yourself, but that's a little bit advanced for most bears and often their heads explode in worry at the idea it'll knock the world off its axis via "loose lending".

I'm going to stop at that point, because it's actually a better point than I was making about negative equity being a bad thing where I made a fundamental error. It is a bad thing, but not for the reasons I gave. I thought the calculations looked a little too bad to be true...

Thrugelmir

julieq wrote: »

You have more practical independence with 30K in cask and a 100K mortgage than you have with no cash and a 70K mortgage. You can also use the 30K as a direct or indirect offset so your net payments are the same. The optimum is probably an interest only mortgage with repayments going to yourself, but that's a little bit advanced for most bears and often their heads explode in worry at the idea it'll knock the world off its axis via "loose lending".

I'm going to stop at that point, because it's actually a better point than I was making about negative equity being a bad thing where I made a fundamental error. It is a bad thing, but not for the reasons I gave. I thought the calculations looked a little too bad to be true...

That's a sign of over imagination as no such product exists.

Also why borrow a £100k when £70k would give a better LTV. The smaller LTV would result in a lower interest charge on the same net amount borrowed.

Graham_Devon

Ok then Julie, answer this...

House at 200k. Forgetting fees etc for a min.

A) I pay 100k in cash and the rest on a repayment mortgage at 5.5% over 25 years. The loan costs me £84,226, therefore, in total the house has cost my deposit (100k) plus the mortgage (184,226) totalling £284,226

I pay 5k in cash, and the rest on a repayment mortgage at 6.5% (due to lower deposit). The loan costs me £199,996, therefore, in total the house has cost me my deposit (5k) plus the mortgage (394,996) totalling £399,996.

The 95k left over in example B will make interest, but it won't even mount to half the savings made with example A.

So to sum up.

You are telling me that it is better for me to pay £115,000 more for the same house? If I want to pay less, I have prudence issues?