Stress testing of banks

antrobus

cells wrote: »

the risk of lending to BTL is very low in my view. They often put down 25% or more and house prices crashes at that level do not happen. Also the 25% deposit only applies to a BTL mortgage taken out a day before the start of a recession. In this environment a BTL with 25% down has 40% equity in two years time so there would need to be a 40% crash before the bank takes the pain

in short 99.9% of the risk lies with the borrower and the bank takes on 0.1% of the risk imo

Of course if they were to offer 5% down BTL mortgages then things would be different but at 25% down its nothing to worry about imo

The Bank of England clearly disagrees with you, otherwise they would not have,

"warned that Britain's buy-to-let market poses an increasing threat to financial stability because rising property prices expose vulnerabilities that could magnify a housing market crash".

http://www.telegraph.co.uk/finance/bank-of-england/11890392/Buy-to-Let-economic-stability-Carney-Bank-of-England.html

This might be because they know things like;

"credit loss rates incurred on buy-to-let loans in the UK have been running at about twice those incurred on loans to owner-occupiers".

http://www.independent.co.uk/news/business/news/bank-of-england-voices-its-concern-about-vulnerable-buy-to-let-market-a6756676.html

chucknorris

I think the forthcoming tax and stamp duty changes will massively reduce the need for any action, new BTL investment will fall.

EDIT: Although according to a new thread larger deposits are on the way.

wotsthat

chucknorris wrote: »

I think the forthcoming tax and stamp duty changes will massively reduce the need for any action, new BTL investment will fall.

I had half an idea to sell my holiday home and buy a bigger place which I'd use as a holiday home and retire to at some point. That idea has been shelved due to the SDLT changes - I'm keeping the existing holiday place until moving down full time unless I can avoid the tax somehow.

Graham_Devon

cells wrote: »

the risk of lending to BTL is very low in my view. They often put down 25% or more and house prices crashes at that level do not happen. Also the 25% deposit only applies to a BTL mortgage taken out a day before the start of a recession. In this environment a BTL with 25% down has 40% equity in two years time so there would need to be a 40% crash before the bank takes the pain

in short 99.9% of the risk lies with the borrower and the bank takes on 0.1% of the risk imo

Of course if they were to offer 5% down BTL mortgages then things would be different but at 25% down its nothing to worry about imo

BTL risk in this case is not about the equity one may have.

It's about whether a profit can be made on the rental each month, and the BOE or the PRA believes that rates of 3% would cause problems for the BTL sector.

A mixture of unprofitable rents and falling house prices would cause panic and it's that panic which they are trying to avoid as panic then leads to other problems.

They also believe that the very thing you talk about - risk taking - is increasing rapidly by BTL lenders.

Thrugelmir

cells wrote: »

the risk of lending to BTL is very low in my view. They often put down 25% or more and house prices crashes at that level do not happen. Also the 25% deposit only applies to a BTL mortgage taken out a day before the start of a recession. In this environment a BTL with 25% down has 40% equity in two years time so there would need to be a 40% crash before the bank takes the pain

in short 99.9% of the risk lies with the borrower and the bank takes on 0.1% of the risk imo

Of course if they were to offer 5% down BTL mortgages then things would be different but at 25% down its nothing to worry about imo

That equity soon evaporates once a borrower gets into default or comes under other financial pressure. There's plenty of people who have built a property empire on leveraged debt. Like a house of cards, pull away a supporting pillar and the remainder soon comes tumbling down. Seen it happen with plenty of non property businesses over the years. What appears impregnable in reality was built on sand.

cells

Thrugelmir wrote: »

That equity soon evaporates once a borrower gets into default or comes under other financial pressure. There's plenty of people who have built a property empire on leveraged debt. Like a house of cards, pull away a supporting pillar and the remainder soon comes tumbling down. Seen it happen with plenty of non property businesses over the years. What appears impregnable in reality was built on sand.

nominal house price crashes are rare the recession we just experienced was supposedly very bad and prices crashed a whole 10% before recovering. So a person with 25% down or even more in equity would not have fallen into negative equity

People do default on their mortgages (owners and BTL) but my guess is that in a lot of cases its got nothing to do with the mortgage being bigger than the value of the house.

chucknorris

Thrugelmir wrote: »

That equity soon evaporates once a borrower gets into default or comes under other financial pressure. There's plenty of people who have built a property empire on leveraged debt. Like a house of cards, pull away a supporting pillar and the remainder soon comes tumbling down. Seen it happen with plenty of non property businesses over the years. What appears impregnable in reality was built on sand.

There will always be people who think they know more than they actually do and end up losing, its a dog bites man story.

mwpt

cells wrote: »

the risk of lending to BTL is very low in my view. They often put down 25% or more and house prices crashes at that level do not happen. Also the 25% deposit only applies to a BTL mortgage taken out a day before the start of a recession. In this environment a BTL with 25% down has 40% equity in two years time so there would need to be a 40% crash before the bank takes the pain

in short 99.9% of the risk lies with the borrower and the bank takes on 0.1% of the risk imo

Of course if they were to offer 5% down BTL mortgages then things would be different but at 25% down its nothing to worry about imo

Could someone explain to me how someone like that Wilson character amassed a property empire in such a short time? I suspect the answer is by remortgaging, ie. the borrowing against the new value of the existing properties. If that is the case, nearly every one of his properties might as well have been purchased in bulk at roughly the time the last one was. (I realise not every BTL operates like this -> chucknorris).

A shift in interest rates or property values, immediately exposes empires like this to fall foul of banking requirements. Banks won't be worried about low levels of default, they will be worried about the sale of the properties en-masse and the early repayment of the income stream, leading to devaluation of the instruments (the CDOs or whatever they're calling them these days) and massive holes in their balance sheets. I just see this as a way to shore up that risk further.

chucknorris

mwpt wrote: »

Could someone explain to me how someone like that Wilson character amassed a property empire in such a short time? I suspect the answer is by remortgaging, ie. the borrowing against the new value of the existing properties. If that is the case, nearly every one of his properties might as well have been purchased in bulk at roughly the time the last one was. (I realise not every BTL operates like this -> chucknorris).

A shift in interest rates or property values, immediately exposes empires like this to fall foul of banking requirements. Banks won't be worried about low levels of default, they will be worried about the sale of the properties en-masse and the early repayment of the income stream, leading to devaluation of the instruments (the CDOs or whatever they're calling them these days) and massive holes in their balance sheets. I just see this as a way to shore up that risk further.

Must have been mewing

cells

mwpt wrote: »

Could someone explain to me how someone like that Wilson character amassed a property empire in such a short time? I suspect the answer is by remortgaging, ie. the borrowing against the new value of the existing properties. If that is the case, nearly every one of his properties might as well have been purchased in bulk at roughly the time the last one was. (I realise not every BTL operates like this -> chucknorris).

A shift in interest rates or property values, immediately exposes empires like this to fall foul of banking requirements. Banks won't be worried about low levels of default, they will be worried about the sale of the properties en-masse and the early repayment of the income stream, leading to devaluation of the instruments (the CDOs or whatever they're calling them these days) and massive holes in their balance sheets. I just see this as a way to shore up that risk further.

Even for someone following the Wilson model (which is a lot more dificult now as most lenders limit the number of mortgages. Eg BM-Solution you could get an unlimited number of mortgages with them now its 3 tops) they would still have at least 25% equity and more likely over 30% and both of those are well above the 10% crash we saw in this bad recession.

And more than anything else with internal migration at over 600,000 a year there are plenty of people who need to rent. So rents are at even a lower risk of falling than prices imo (government meddling aside)