new lending crackdown means lower UK house prices

Thrugelmir

michaels wrote: »

I don't understand - I would rather lend to a borrower with 40% equity and no repayment vehicle than one with 10% equity paying back a fraction a year of equity over 30 years. I can't see why the former is considered to be the most risky thing a bank could ever do and the later business as usual.

There seems to be a general consensus that I am wrong but no one has explained it to me yet.

What's the benefit to the lender of interest only lending? With a repayment mortgage the lender never has to deal with the borrower ever again. By default the debt will be cleared.

michaels

I thought the whole business model of a bank was to borrow cheap from depositors (probably short) and lend more expensive to borrowers (generally long) and make a profit on the 'turn'. Whether the loan payments look like a series of interest payments followed by a lump sum or a gradual amortisation shouldn't make any difference?

Thrugelmir

michaels wrote: »

I thought the whole business model of a bank was to borrow cheap from depositors (probably short) and lend more expensive to borrowers (generally long) and make a profit on the 'turn'. Whether the loan payments look like a series of interest payments followed by a lump sum or a gradual amortisation shouldn't make any difference?

Stating the obvious. Its the potential cost to the lender of obtaining settlement of the debt at the end of the contractual term. Debt recovery is expensive and non profit making.

michaels

But offset against that for the first 15 years of the deal the borrower has more equity in the property so the lender is at lower risk of loss on default.

Thrugelmir wrote: »

Stating the obvious. Its the potential cost to the lender of obtaining settlement of the debt at the end of the contractual term. Debt recovery is expensive and non profit making.

Thrugelmir

michaels wrote: »

But offset against that for the first 15 years of the deal the borrower has more equity in the property so the lender is at lower risk of loss on default.

A repayment mortgage reduces the lenders chances of losing money on the transaction every month that passes. As equity by default increases.

As the LTV improves then the lender is required to retain less capital reserve. So is able to make money available to other borrowers. Thereby increasing profitability within the business.

The issue facing the lenders is the borrowers with no repayment plan. Who were lent excessive sums in the boom credit years and have no spare cash to fund the capital debt (in its entirety).

Many based their decisions on HPI and downsizing. Only 1 in 3 houses on the market is selling at current transactions levels. So which ever way you look at the situation. The market isn't functioning normally. Will continue to adjust until factors fall back into equilibrium.

The-Joker

michaels wrote: »

Could you not post exactly equivalent figures and bubble claims for house prices? Kettle and pot.

The difference is property was a bubble, it still has not popped yet here in the UK.

Monetary precious metals are no where near a bubble yet, but they will be

The-Joker

michaels wrote: »

I thought the whole business model of a bank was to borrow cheap from depositors (probably short) and lend more expensive to borrowers (generally long) and make a profit on the 'turn'. Whether the loan payments look like a series of interest payments followed by a lump sum or a gradual amortisation shouldn't make any difference?

That is a very good assessment but is it still true these days? I genuinely would like to know.

With interest rates so low most people are pulling their cash out of savings accounts and looking for somewhere better, there seems to be a real worry about big inflation down the road with all the printy printy.

wotsthat

The-Joker wrote: »

With interest rates so low most people are pulling their cash out of savings accounts and looking for somewhere better, there seems to be a real worry about big inflation down the road with all the printy printy.

Is that true?

If most people are pulling cash from savings accounts where is that cash going?

FTBFun

wotsthat wrote: »

Is that true?

If most people are pulling cash from savings accounts where is that cash going?

They're all putting it in silver - don't you know? Silver is the best investment as it is running out and there are many industrial uses etc etc.... (cont. p94).

Thrugelmir

wotsthat wrote: »

Is that true?

If most people are pulling cash from savings accounts where is that cash going?

Cash always returns to the banks.

The asset its used to purchase, is only as valuable as the cash someone will hand over to acquire it.