The Death Of The 100% Mortgage

Cliff, you are totally vindicated in your decision to sell up a couple of years ago. At the current rate of falls, house prices will be back at 2001 levels in less than a year.

Anyone renting an "average" property in the UK is currently avoiding a £13,000 capital loss AND saving money by paying less rent than a mortgage on an equivalent property. Not really the "dead money" people claim renting is, is it?

In the last paragraph, 'significant' has a relatively precise meaning in a statistical sense but the word may be used differently by journalists; there is not enough information in the first sentence to gauge what it really means.
If you want a 100% mortgage and you can't get one it hardly matters where on the housing ladder you are.

Nature is the root of housing crisis topped by stupid mortgage lenders then topped by the stupid government for not controlling the lending criteria.

First time buyers where offered the option to get on the housing ladder with to many multiples of their income,so its natural they buy semi or detatched property.

If lenders had been more sensible buyers would have bought a terrace property within their budget and probably now be in a position to ride this current finacial storm.

The lenders need regulation by the goverment to stop this happening in the future.

I agree with DIYfixer, I bought my house over 2 years. The house next door was up for rent at the same time, for £150 more a month than our mortgage. Even with our fixed rated coming to an end and fixing at a higher rate than in 2006, our mortgage is still lower than the rent, so paying our mortgage really isn't dead money, as it is still cheaper than renting. We also plan to stay in our house for at least 10 years and see our house as where we live, rather than an investment.

Enzyme76, how much of your mortgage payment is interest compared to capital repayment?

The place I'm renting is cheaper than the interest only payment on mortgage for an equivalent property.

It is for this very simple reason that I'm confident that the market has a LONG way to drop - bubbles are defined by price rises in one commodity (i.e. purchase prices) but no equivalent rise in adjecent commodities (i.e. rents).

We've got a bit of national obsession with "owning" property, but many people (those on interest only deals) are really just renting, albeit long term, from the bank.

100% mortgages were never a good idea and should not have been allowed. When I bought my flat at age 24 I had a 10% deposit. I saved 50% of my gross salary in 1 year for the deposit. That is discipline for you.

It makes me smile when innumerate contributors say that more people renting will make rents go up. Why should that be? One additional household renting not only increases demand for rental property by one, it also increases supply of rental property by one. Unless they had previously been living in a cardboard box, of course.

And since this article is about first-time buyers, all this "a house is a home, not an investment" talk is irrelevant. The question for potential FTBs is, "Can I afford a decent home?" Since the answer is "No" for the majority, house prices have quite a way to fall yet. As Cliff rightly points out, the market was inflated by ridiculous mortgages, the like of which we are unlikely to see again for ten years at least. Therefore, logically first-time homes will come down to a price that FTBs can afford with a 10% deposit and a 3.5x salary multiple. Do the math.

By withdrawing 100% mortgages, all the banks are doing is transferring risk, away from themselves and onto the individual. If house prices fall - through no fault of the owners - it is the individuals' deposits that are eroded first, while the banks' equity is protected, until the house price fall is greater than the deposit - by which time the individual has lost everything that they had saved and put into the deposit.
This might seem fair - except that it is the banks that have been most responsible for the 'credit crunch' and resultant fall in house prices, through their irresponsible lending policies - designed to make huge profits for shareholders during the 'good years'.
A classic example of the old song "It's the rich what gets the pleasure and the poor what gets the blame (or pain)."

To DIYFIxer

Yeah, right. Everyone was saying that the reason for the housing boom was a chronic shortage of housing supply, and that was what was driving house prices up. If that was true, tell me this - why didn't rents triple between 1998 and 2007 if there was such a terrible shortage of houses?

They didn't, because the bubble was caused by excessively low interest rates, not any particular shortage of stock. It's this condition that has allowed renters to occupy a house more cheaply than an interest only mortgage would allow on an identical property (and not be liable for maintenance either!). Prices, and thus mortgage costs rocketed. Rents rose, but nothing like as quickly.

Going forward, we'll probably see falls of 15-20% this year, and 20% next year as well. Prices will only stop falling when the market has bottomed out and all the forced sellers who can't afford their unremortgageable >100% LTV loans paying SVR at 8.5% puke their properties onto the market at a loss. There's a long way to fall yet before we get to that point.

Since when is renting "wasted money"? Just as not everyone wants to go to University, not everyone wants to own a house. Yet there's this perception that there's something wrong with you if you aren't pursuing your "right" to "get on the property ladder". I do wish this very unique British "stigma", for lack of a better word, would die once and for all.

Around 1990 everybody urged me to stop renting and take out a mortgage, so that I wouldn't miss out on the ever-rising trend of house prices. Came the Noughties, and everybody urged me to stop renting and take out a mortgage, so that I wouldn't miss out on the ever-rising trend of house prices. Rent is just one of life's expenses, like food and electricity. For investment, I chose pension funds instead of a mortgage. If you want to buy a house, there's nothing wrong with that; what's wrong is assuming without question that you must buy a house, rather than renting accommodation.

Superskuller

Be careful not to make sweeping generalisations! I don't doubt that in some parts of the country rents are cheaper than an equivalent interest-only mortgage. However, where I live (Watford, Herts), rents are still more expensive for my type of property than an equivalent interest-only mortgage - in my case, the interest only element of my mortgage is £600, compared to £850 that I would have to pay in rent for an equivalent property. Given this plus the fact that at the end of the mortgage term I will have an asset, then it still made sense to buy rather than rent.

As ever, the motto "do your own research" should always apply.

Are you sure you are comparing like for like ruggerboy?

A quick search of property websites shows plenty of 2/3 bed houses in Watford to rent for £850pcm.

However you claim to be in a property where the interest only element of your mortgage is £600. Now lets assume you got lucky and are on a deal < 5%. Your 100% mortgage would get you c.£150,000 ..... except I can't find any 2 bed houses to buy in Watford for £150,000 or less. Now why is that?

I suspect that actually you have a good deal of equity in your property (for the time being) and you are not taking this into account in your comparison. Am I right? And when your fixed term comes to an end, what will you be paying then? Nearer £850? Oh and of course that arrangement fee as well (but hey, they’ll just add it onto the outstanding amount its not like you actually have to pay, is it?)

Enzyme76, I've calculated that in my area, people who bought a similar place to mine at the top of the market are paying a £11,000 p.a. premium on an i/o mortgage over those who are renting. Add to that the capital loss due to falling prices and they have paid about 30 grand over the last 12 months for the luxury of being able to do things like " making the garden nice, building a patio, undating your bathroom".

Personally, I just call the letting agent and say "your garden is messy, come and tidy it up while I'm at work".

Ultimately, it's a mindset thing. Some people will always believe the received wisdom whil others will challenge and examine.

Ruggerboy, an £850/month rental, assuming a relatively high 7% yield, gives a property price of about £145,000. Given that Nationwide thinks prices have fallen 6.3% year on year, your house would have been worth just under £155,000 12 months ago. If you add almost £10k onto the cost of maintenance and subtract the £3000 differential of mortgage interest over rent, just how much money have you wasted in 12 months by renting? If you want you can include the interest you'd have got from the equity in your home had you sold it.

Will things get any better in the next few years for owners? It's getting incredibly expensive to have the option of putting down a new patio yourself instead of selling up and renting a place that already has one.

Renting is freedom, negative equity is a trap. Even if you currently think you have no plans to move in the next 10 years you could still fall into that trap bbecause of circumstances beyond your control. I don't think the 85% equity quoted above is anywhere near enough to protect the mortgagee. And as for the 100% mortgage that helped them get the house in the first place, well what would the price have been if the highest LTV available was 85%?

In a similar vein to the two posts above it would be very interesting to find out what percentage of first time buyers took out a mortgage at above, say, 85% LTV. Perhaps this would give us some sort of starting point to estimate the reduced demand in that sector of the market.

Any ideas where we could find this out, Cliff?

It is not just about money, we bought a house because we wanted to start a family in a safe secure place. we were sick and tired of moving at the whim of landlords and agents every six months and paying an extortionate rent as well as all the rip off fees etc. We could never put up a shelf or paint a wall the colour we wanted it. At times I had lived in damp and substandard conditions that had been covered up with paint when I moved in and so on. A living hell a lot of the time. I moved 28 times in Brighton and Hove over 18 years! Rarely because I fancied a change! There is no social housing there unless your head has fallen off or worse.

SO, no matter how tough it gets now the mortgage is way cheaper than rent here and we can move when WE want to! It is worth loving our garden and our house looks like OUR house! My kids (and my husband and I) do not suffer from endless moves and we are HAPPY!

Hi

We have done a silly - we used house equity to pay for a property abroad - now we need to reduce our costs here and the property abroad cant sell so we are possibly in danger of losing both if the rates go up much more. It was instead of a pension because in our 40s it is too late to build up a decent pot. So I would advise anyone against a 100% as if circumstances change like ours have you could lose the lot.

I feel for those people on 100% mortgages, but they're not the only ones at risk. i bought a new build little flat in Jan 2007 with 6% deposit. I love my flat, but in the next couple of years I'd quite something bigger. Had I been clairvoyant/more financially aware, I would have rented and would still have my carefully saved 10k as a deposit for something bigger in a few months time.

But I wasn't so I guess I'm stuck and am not looking forward to the end of my 2 year fixed deal in 2009.

Even more scary - i notice that Nationwide will only offer 75% mortgages on new build flats now. That must be a pretty bad sign?