Home Equity increases by 2.7% in 2011

RenovationMan

House Prices according to the Halifax fell by 1.3% in 2011, according to the Halifax Index.

http://www.bbc.co.uk/news/business-16438846

Given that people on a typical 25 year repayment mortgage repay 4% of their capital each year (increasing homeowner equity by 4%), the net effect of the 1.3% drop and the 4% equity gain on home owners is therefore an increase in their net equity wealth of 2.7%.

Not a bad return in these difficult times.

Kennyboy66

1) People don't typically pay 4% of their capital each year on a mortgage. It depends how many years they have left. Even if you are assuming an even spread, the actual number is 2.8% as you should be using compound rather than simple interest.

2) Approx 1/3 mortgages taken out between 2003 and 2010 were interest only - the majority with no repayment vehicle.

3) what about all the people with no mortgage ?

RenovationMan

Kennyboy66 wrote: »

1) People don't typically pay 4% of their capital each year on a mortgage. It depends how many years they have left. Even if you are assuming an even spread, the actual number is 2.8% as you should be using compound rather than simple interest.

I did state on my OP that it was applicable to a typeical 25 year mortgage. You're right though, some people have shorter mortgage terms and so the repayment is a higher percentage each year than for a 25 year term. For example, a 10 year mortgage term would result in 10% of the mortgage being paid off each year.

Kennyboy66 wrote: »

2) Approx 1/3 mortgages taken out between 2003 and 2010 were interest only - the majority with no repayment vehicle.

It's a fallacy, prevalent on here, to assume that an interest only mortgage has no repayment vehicle and that no overpayments take place. I have an interest only mortgage and have made a significant increase in my equity holding.

Kennyboy66 wrote: »

3) what about all the people with no mortgage ?

Most of these will have bought pre-boom and are sitting on 300% HPI. I doubt that they care too much about house prices.

Thrugelmir

RenovationMan wrote: »

Given that people on a typical 25 year repayment mortgage repay 4% of their capital each year (increasing homeowner equity by 4%), the net effect of the 1.3% drop and the 4% equity gain on home owners is therefore an increase in their net equity wealth of 2.7%.

Depending on the average rate over the term of the mortgage.

People will still owe somewhere between 28% to 35% of their original mortgage advance with 5 years to go.

Graham_Devon

RenovationMan wrote: »

It's a fallacy, prevalent on here, to assume that an interest only mortgage has no repayment vehicle and that no overpayments take place.

Equally, it's a falacy to assume they do, when all evidence surrounding you suggests a larger proportion of those with IO mortgages, don't have repayment vehicles.

The repayment vehicle was often the house and it's increased value. Pretending otherwise is a little short sighted.

ManAtHome

Even if the numbers are correct, you reckon paying out 4% of your (overall) wealth to 'increase' your (equity) wealth by 2.7% is any sort of a return? (even before inflation).

[edited] should have been 4% of overall wealth, not non-equity.

DervProf

RenovationMan wrote: »

For example, a 10 year mortgage term would result in 10% of the mortgage being paid off each year.

It is my understanding (although as, you have suggested in the past, maths isn't my strong point) that mortgages don't work as you describe.

A 10 year mortgage does not get paid off 10% each year. Likewise, a 25 year mortgage does not get paid off by 4% per year. In the early years, a larger proportion of the monthly payment is going on interest, rather than repayment of the capital. As the years go by, a larger proportion of the capital is paid off each month (due to the interest on the outstanding loan being reduced). If anyone who has only being paying a mortgage for 1 year asks the lender what they still owe, it will not be much less than they borrowed (unless they made overpayments, or their interest rate is 0%).

I am assuming that you are describing a "normal" repayment mortgage.

macaque_2

RenovationMan's 3Yr 50% Equity Challenge (May 2010 - June 2013)
Date.........Valuation...Mortgage....Equity.......Equity %
May 2010...£450,000...£300,000....£150,000...33.33%
May 2011...£400,000...£270,000....£130,000...32.50%
May 2012...£350,000...£250,000....£100,000...28.60%

shortchanged_2

macaque wrote: »

RenovationMan's 3Yr 50% Equity Challenge (May 2010 - June 2013)
Date.........Valuation...Mortgage....Equity.......Equity %
May 2010...£450,000...£300,000....£150,000...33.33%
May 2011...£400,000...£270,000....£130,000...32.50%
May 2012...£350,000...£250,000....£100,000...28.60%

Nasty macaque. Renoman's house price is resilient to price drops.

RenovationMan

Graham_Devon wrote: »

Equally, it's a falacy to assume they do, when all evidence surrounding you suggests a larger proportion of those with IO mortgages, don't have repayment vehicles.

The repayment vehicle was often the house and it's increased value. Pretending otherwise is a little short sighted.

Can you supply details of this evidence that a larger proportion of IO mortgages don't have repayment vehicles than do? I'd be amazed.

RenovationMan

macaque wrote: »

RenovationMan's 3Yr 50% Equity Challenge (May 2010 - June 2013)
Date.........Valuation...Mortgage....Equity.......Equity %
May 2010...£450,000...£300,000....£150,000...33.33%
May 2011...£400,000...£270,000....£130,000...32.50%
May 2012...£350,000...£250,000....£100,000...28.60%

LOL, hardly. But if you like to believe that then go ahead, though I'll have to prepare myself for large HPI gains if this is anything like your other predictions macaque. You have pretty much the worse predictive record on this forum.