As a FTB in Sept 03 in Hampshire I bought a small cottage and spent a year renovating to make it somewhere I wanted to live in. Now I have set about getting a very high valuation on the property so I can re-mortgage.

I have a flexible mortgage with nationwide and pay 5.99% but the benefit of this is that I can make unlimited over payments and drawdowns.

What I am doing is getting the top valuation at the top of the market in our area and taking out hopefully about 75k from "equity" then I can overpay this straight back in to the flexible mortgage. So I am not paying the interest on it but I do have the facility available to me.

Then hopefully if I am very lucky house prices will crash I will have somewhere to live and if they do crash I can walk into an estate agent and grab a bargain with my 75k of equity that doesn't exist at the time but did when NW agreed it with me.

I think all owners of small properties worried about the market dipping should do the same maximise the value now by getting it valued and hold out with the cash.

I don't need to STR with this stratergy and if the market doesn't have a sharp correction I win through anyway because I have the benefit of owenership in the meantime.

But with your flexible mortgate comes a flexible interest rate and prices will only crash when the rate goes up. When the rate goes up you will find it hard to service your borrowing and maybe lucky if you can weather the storm.

70K will go a long way towards the bargain but with high rates that bargain and your existing property will eat into your equity in no time at all.

laurejon: I'm not sure that rates have to go up for a crash to start. We've seen the jitters already with the mere threat of increases. I do think it probable that rates will go up in April though.

brendan: From what brendan has said, he can apparently afford to take a hit on the equity of his primary home - he does not mind if its value plummets and he thinks he can take on 75K more debt. Let's stay with this for a minute:

So, from that starting point, it would make sense to extract value now while prices are still high for deployment when prices are cheaper - he is gearing up and paying himself a special dividend at the top of the cycle. Whether lenders will lend to him for the second property is moot, even after prices fall considerably, if they look at his overall gearing.

The main flaw I can see with this aggressive gearing approach is that the economy will be terribly affected by a property price crash. Brendan should ask himself why he believes he would be insulated from the likely knock-on recession and why at this stage in the economic cycle he has not accumulated sufficient equity to carry out the plan with his own money.

Interested to hear more views on this one.

JY

He will not achieve what he wants to.

He bought at or near peak values, and even if he gets his 75K drawdown then I suspect he won't get a chance to use it.

If IRs on his variable rate mortgage hit 8% (only a 2% increase) could he still service the mortgage payments??

He'd better hope he earns a lot of money to cover all eventualities and that his job is secure.... recession proof - only time will tell.

When I bought in 2003 I went in with a strong offer 10k below asking even in a buzzing local market and got a deal because I could move quickly and presented my offer well. I didn't stretch beyond 3.5x income (I bought on my own) and further more I worked out if I could cope and still be ok if I borrowed this amount at 15% interest.

I only have a mortgage debt now (well I say only but it is a lot for a 1 bed of 100k add 75k to that brings me to debt of 175k.

At the moment I could sustain that 175k level at 15% no probs I haven't overborrowed against my income multiple so I am pretty confident I will be fine.

I could of course lose my job or the recession could hit our companies profits but over all I think on what I do a crash could increase profits and business so who knows.

I just thought an opinion from someone who is in the market at the moment makes for healthy debate.

I have seen people move in next to me paying just what their joint salaries could afford them on flats probably in 5 or 6X multiples which is crazy.

I will be looking to buy a house in the south east with land detached gated the lot for around 250k in a good area which I think is possible if the correction is sharp enough.

I am sorry for joint the crash wishes but to be quite honest although I have no regrets about buying my cottage. If it wasn't for all the buy to let wannabe's who say things like (I am not interested in yields property always goes up and I will make money from the capital value) or the FTB's like the one on that house price crash show who have gone to 100% when they can't service it and probably on huge income multiples too given the fact he has enough brains to sink 165k into a house on a main high street with a dump nextdoor that looked to be a converted commercial property!!

I bought my house for two reasons with a clear head:

1. Because I wanted somewhere to live and call my own.
2. Because I could afford it comfortably and not just the repayments @ 4.5% but at 15% too.

If people buy in circumstances other than this then I expect them to be worried. I feel for them but it is their own mass hysteria that created such high prices anyway and I have no doubt the masses will perform again in the next cycle when I pick up a dream house for 250k in the crash. But I will lose too and through no fault of my own I will probably be in negative equity and have to keep my cottage for longer than I would ordinarilly have to and that is a result of banks and building societies and their crazy schemes to lend to what I can only class as the highest risk of all the fickle british public.

For what it's worth I agree with JustYeild. I run a business and I don't think interest rates will rise probably not more than 5% base rate. The knock on affect has already started luckliy not here I am in one of the few localised areas in the south that is still growing.

Interest rate decisions take at least a year to filter through properly with all the people on fixed deals and borrowing more to service an unservicable level of debt we won't see high bankrupcys until then I don't think.

Also where is 8% coming from!! the BOE is committed to a stable economy I can't see an 8% rate I think whilst is it very important to plan for that (I plan for 15% just in case) it is highly unlikely it will ever happen in the next few years. Just like JustYeild says we don't really need it anyway people have overstreched at 3 and 4% rates now the market is charging 6+ to the average joe that is the 2% you need to make people feel the pinch.

Remember borrowing is much higher now. I think rates above 5.5% in the next 2 years would be unstable for the economy in fact I can see 4.75 for a while as long as we see monthly drops in house price values or sales. If they maintain growth then maybe 5% or 5.5% but I can't see it needing much more than that to but sharp breaks on and whilst I will get a better deal with sharp breaks I don't wish it on anyone and don't think it is good overall.

Nice to see some good comments.

If the value of your 1 bed drops to 125k , is it not possible or likely that the bank would come after you for some equity to support the mortgage of 175k?....a margin call.

Im not sure if this applies to mortgages, but would expect it would not be enough to merely service the debt ? Surely the bank would want the mortgage sufficiently secured , if not secured may want to reposses or adjust your rate upwards?

Any experts able to confirm that this will/will not happen.

In that case they shouldn't lend the 175 in the first place that is why banks should require deposits precisely to offset this risk of negative equity and why 130% mortgages are a crazy idea.

They would be silly to come after me if I was making repayments also banks don't re-posess lightly. They only do it if I people don't keep up the repayments so far as I know.

In my case I would so they wouldn't have the security they wanted but at the same time it would be their own fault for processing a high valuation. That is why revaluations are at 90% or 85% normally not 95% like a FTB's mortgage. Besides they would take the long view rather than panic in my case I imagine. If I am good for the loan why mess around and annoy me that is certainly how the business bankers work because they know I am a rate tart.

If my personal bank didn't act in the same way they would cease to be my personal bank.

Fair enough , it may work for you , but may not be a strategy that other owners can employ.

In theory a bank can demand that the negative equity be paid up by an Owner Occupier. If the OO does not pay up, the bank can repossess.

In order to repossess the case would be heard by a judge. If the OO has kept up all their repayments it is highly unlikely that the judge would take the banks side since this would involve throwing someone out of their home.

Even when you are in arrears with the mortgage, the judge will usually come up with some plan to clear the arrears (e.g. the OO must over pay by £5 per month).

The most important thing the OO should do is to turn up for the court hearing.


Of course, if the bank asked for the shortfall on a BTL mortgage, who knows what the judge would rule?

See http://www.home-repo.org/ for more info on repossessions...

You say you have a flexible mortgage if you down pay the mortgage at the moment that would leave some 'credit' ie a 100k mortgage reduced to £60k would give you £40k credit however if we do have a houseprice crash the banks will tighten their loan books and you could find that the £40k 'credit' will be restricted to maybe £10k.
You also seem to be trying to trying to extract money from your house before it falls in value but by taking out another loan sadly you will still owe the money !

I think he's sufficiently clued up to realise that. And you've missed the point, the money is sitting there available, based on the current value of the house, to be used at some time in the future when the house won't be worth as much and the mortgage extension won't be available.

I think there is some confusion here....

We're talking about a "Current Account" offset mortgage, such as are offered by Intelligent Finance and the Woolwich.



The idea of these accounts is that you have two "Pots" or "Jars". One is your Mortgage, and the other is your Current Account.

You do not earn any interest on the money in your Current Account.

Instead, the balance of your current account is subtracted from what you owe on the mortgage, and you only pay interest on the difference.

So if you have a £200k mortgage but £50k in your current account, you only pay interest on £150k.

If Brendan were to MEW £75k and leave the 75K in his Current Account, he would not have to pay any interest on the £75k, but would have instant access to £75k whenever he felt the time was right.

If Brendan were to MEW £75k and leave the 75K in his Current Account, he would not have to pay any interest on the £75k, but would have instant access to £75k whenever he felt the time was right.


I thought when you MEW you had to pay interest on the MEW !

He is pre-arranging a facility which he may or may not draw-down against to buy a property when/if property prices fall. He is doing it now while credit terms are better than they are likely to be in the near future. The facility costs him nothing (assumption), it is therefore a free option.

He is trying to buy a straw hat in winter and I'm interested to see what is the fatal flaw (other than taking on too much debt as the economy tanks). Will others try to do this too in large numbers?

JY

But his MEW interest will be higher than the flexi account.

I'm sure the following figures are not exactly the case but assuming that your current property is "worth" £200k with a mortgage of £100k you currently have £100k equity.

Living in the South East I'd guess the property you describe as wanting to buy would be "worth" in the region of £500k, so roughly speaking prices would have to halve.

Bang goes your current £100k of equity and you will have debts of £350k in total to own both properties.

Good luck!

Don't follow...

But he's OK up to 15%.

None of this makes any real financial sense.

Why on earth would you arrange a potential loan advance secured against an asset which is presumably going to fall in value. The additional borrowing isn't free money which I'm sure we're all aware. But this guy is behaving like it is. You still have to pay it back.

If you want to borrow to buy something in the future just wait until the right time when you find something, and make a mortgage application in the usual way.

How does arranging the financing now help ? Surely if you can afford for interest rates to rise to 15% then you have plenty of 'borrowing potential' left in you at your currently salary, with interest rates at 4.75%. So when the time comes you can just borrow whatever extra you need when the time comes.

And, also, interest rates on these flexi accounts are normally charged at the bank's SVR so you will be paying excessive interest while you wait for your chance to effectively MEW, while not taking advantage of any discounted variable rates available to you, and losing hundreds of pounds in the process.

Why would he paying interest while he waits? He's arranging a facility based on the value of his property now. He only starts paying interest when he draws down and buys the 2nd property.

The interest on the existing 'already drawn down' element of the loan, which was needed to purchase his current residence will accrue interest at the SVR rather than at a discounted rate (as well as any MEW later).

Looks like you in a strong position if you can afford 15% IR. better than most!
Maximising your homes equity could turn your home into a prison, it might
be sometime in the future before you will be able to sell.

How confident are you that your income/job will be secure, that’s the main issue?

I could be wrong but I get the impression you are young with no dependents yet?
The one thing I found in life is how having children spoilt all my grand-plans.

If you’re that financially comfortable I’d recommend that you pile all your effort
into finishing the mortgage early. Debts no place to be.

Doesnt happen as long as no arrears develop. Even if they repo'd and sold at £125 they dont recover any loss.

Got you. I assumed he was already on a SVR so this would make no difference.

Even if he was already on an SVR, it would still make more sense to switch to a dicounted 2 year deal now, and separately borrow as and when is needed in the future.

Why not take a flexible FIXED rate. Many lenders offer decent fixed rates where you can have a 'facility' or 'reserve'. Other fixed rates allow you to borrow say £175000 now, then repay £75000 the next day (without charge) which then may be 're - drawn' at your leisure.

Know quite a few investors doing exactly this. They are ready to pounce particularly at auctions.

I heard that a builder just got 2 converted flats (in 1 building) for a total of £150000 in Southend. I dont know the area but it sounds like hes bought a bargain.

If the crash appears, it takes a brave person to buy. All around you will say your mad. This happens throughout history and throughout the world. Buying at the bottom is an easy way to make money yet its quite surprising just how few actually do it.

Lenders do seek to recover shortfalls.

Nothing wrong with 'steady as she goes' advice like this, but I would point out that if you really want to leap - frog your financial station in life, you must confront and take a few risks. There is never a right time.

The people I know who focused thier efforts on mortgage repayment, tend to be reasonably secure but have not built life changing assets that set you free at a youngish age.

The best time to take risks is before family etc.

He won't be able to borrow in the future - his existing house (the security) will have gone down in value and the available credit is likely to be much tighter. So he wants to strike the deal with the bank now.

Apparently he can afford £175K total debt at up to 15% (if he had to), but he thinks he won't be able to borrow the additional 75K at a later date if his property value falls.

I know what the fatal flaw is, but I'm interested to hear if this is a widespread strategy being adopted by OO's who want to average out the cycle to their benefit.

JY

Paper shortfalls? I'd've thought they'd be too busy going after real arrears to be able to 'mark to market' the good payers.

What happened last time - did those in NE have to stump up more equity?

No that did not happen last time.

But a lesson learned from last time was that the longer the bank wait to repossess, the less money they recover. So they can minimise losses by repossessing sooner.

Thats just an opinion - think I read it on this forum somewhere...

brendan,Mar 9 2005


So do you call the boom in house prices part of the "stable economy"

The BoE are doing the dirty work for Mr Blair but soon market forces will take hold and then the $hit will hit the fan

Got all my £ converted to Euro's now so i should be safe

BOE independant !

dogbox,Mar 9 2005, 04:56 PM



Bargin is it ?

£75k + stamp, agtents fees and having to do the place up means he will need £100k each when he sells one. i don't think i would see that as a bargin.

Last crash no one want to buy flats as they could leap frog this rung of the ladder and get 3 bed semi's.

i've got an old T reg ford escort, Bargin you can have it for only £2,200 if you want it .