Question for any Mortgage people

[MacFan]

I'm hoping to move home later this year and finally get myself on the
property ladder.

I've seen a few builders offering a 'pay the remaining 25% back when you
sell on' deals, which as far as I can gather means that 25% of the
equity is held by the builder until such time as you sell the property.
Now, I'm aware of the pros and cons of such a thing from a buyers
perspective, but what I'm not totally sure about is how a mortgage would
work in this instance - would I be applying for a 75% mortgage, or 100%
(assuming I wasn't placing any cash deposit myself, which I will be).

Anyone done this themselves, if so any comments about how things worked out?

 

[john boyle]

I'm hoping to move home later this year and finally get myself on the
property ladder.

I've seen a few builders offering a 'pay the remaining 25% back when
you sell on' deals, which as far as I can gather means that 25% of the
equity

No. Not 25% of the equity, 25% of the value of the property. Whether it
is the value of the property now, or the value when you sell it will
depend on the deal.

is held by the builder until such time as you sell the property. Now,
I'm aware of the pros and cons of such a thing from a buyers
perspective, but what I'm not totally sure about is how a mortgage
would work in this instance - would I be applying for a 75% mortgage,
or 100% (assuming I wasn't placing any cash deposit myself, which I
will be).

It will depend on how the builder is going to construct the deal. If it
is by way of a second mortgage over the property, then it will be a 75%
Loan to Value. If it is a 'shared ownership' arrangement then it will
100% (being 100% of the 75% that you will own).

In any event, you must advise your mortgage company of what is happening
at the application stage (they would find out later anyway)

Anyone done this themselves, if so any comments about how things worked out?

To help further, can you find out if it is 'shared ownership' or '2nd
mortgage'?

 

[MacFan]

john boyle wrote:

Thanks John,

To help further, can you find out if it is 'shared ownership' or '2nd
mortgage'?

It's a 2nd charge on the property, definately not shared ownership
(nothing is payable until it is sold on).

 

[Ronald Raygun]

john boyle wrote:

Thanks John,


It's a 2nd charge on the property, definately not shared ownership
(nothing is payable until it is sold on).

Are you sure? The bit in parentheses does not imply it's a 2nd
charge; if anything it would imply shared ownership.

 

[MacFan]

Are you sure? The bit in parentheses does not imply it's a 2nd
charge; if anything it would imply shared ownership.

I don't have the info to hand at the moment, but I distinctly remember
it saying something along the lines of being a 2nd charge.

My understanding of shared ownership is that you pay a 'rent' on that
portion you don't own, which is definately not the case in this instance.

 

[Ronald Raygun]

I don't have the info to hand at the moment, but I distinctly remember
it saying something along the lines of being a 2nd charge.

Fair enough.

My understanding of shared ownership is that you pay a 'rent' on that
portion you don't own, which is definately not the case in this instance.

Fair enough, but it could be that the "rent" is rolled up into the capital,
or is waived by being commuted into the expected capital gain, so that
when you sell you'll owe 25% of the larger of the original price and the
sale proceeds.

Or the "rent" can be substantially included in the 25% already, and the
whole deal is just a marketing gimmick to make you think you're getting
what looks like a 25% discount, when in fact the property really is
only worth 75% of what they're asking in the first place.

 

[MacFan]

MacFan wrote:




Fair enough.




Fair enough, but it could be that the "rent" is rolled up into the capital,
or is waived by being commuted into the expected capital gain, so that
when you sell you'll owe 25% of the larger of the original price and the
sale proceeds.

Or the "rent" can be substantially included in the 25% already, and the
whole deal is just a marketing gimmick to make you think you're getting
what looks like a 25% discount, when in fact the property really is
only worth 75% of what they're asking in the first place.

Well, from what I recall, when it comes to sell, you repay 25% of the
sale price - so if I was to sell in 25 years time (when presumably it
would be worth much more!), I would be repaying more than the original
charge. I'm not entirely sure whether it can work the other way though,
i.e if the property drops in value.

From a comfort point of view, I wouldn't commit to it unless there was
an option to 'buy out' the remaining 25% (presumably subject to valuation).

 

[Andy Pandy]

Well, from what I recall, when it comes to sell, you repay 25% of the
sale price - so if I was to sell in 25 years time (when presumably it
would be worth much more!), I would be repaying more than the original
charge.

So they basically waive interest on the 25% in return for the (potential)
increase in equity on that 25%?

I presume you've worked out the effect of this should you need to move (eg
relocation), or want to move upmarket in the future?

Say the house price is £200,000 and it increases to £300,000 in 10 years. You
then get a new job in another part of the country where house prices are about
the same. So to buy a similar house will cost £300,000.

When you sell you'll need to pay the builder 25% of £300,000 ie £75,000. The new
house costs the same as your old one so you'd need to find an extra £75,000
(plus probably over £10,000 in transaction costs), ie about £85,000 in either
cash or increased mortgage in order to move to a house of the *same* value. If
you want to move upmarket then you'll need to find about £85,000 *plus* the
extra cost of the new house to move.

I'm not entirely sure whether it can work the other way though,
i.e if the property drops in value.

If it doesn't I wouldn't touch it with a barge pole. It would multiply your
negative equity.

 

[Tim]

I presume you've worked out the effect of this should you need
to move (eg relocation), or want to move upmarket in the future?

Say the house price is £200,000 ...

Let's suppose that is funded by a "100%"
mortgage of 3 x salary of £50Kpa (making
the 75% of £200K required with no deposit).

... and it increases to £300,000 in 10 years.

Let's also suppose that salary increases from £50Kpa
to £75Kpa in the same time (not unreasonable).

You then get a new job in another part of the
country where house prices are about the same.
So to buy a similar house will cost £300,000.

When you sell you'll need to pay the builder 25% of
£300,000 ie £75,000. The new house costs the same
as your old one so you'd need to find an extra £75,000

OK, so £300K from the sale pays off the original £150K
("100%") mortgage, the £75K to the builder and leaves £75K
towards transaction costs and a deposit on the new place.

Let's assume that you can pay the transaction costs from "other"
funds, so the entire £75K goes towards deposit on new place.

Then new mortgage required is: £300K - £75K
= £225K = 3 x salary (now £75Kpa).

So, the new mortgage is still only "3 x salary" - the
same multiple as it was for the first house at the start.
No problem!

[And the OP gets to live in a house that starts at "4 x salary" when s/he
can only afford "3 x salary".]

 

[Andy Pandy]

Let's suppose that is funded by a "100%"
mortgage of 3 x salary of £50Kpa (making
the 75% of £200K required with no deposit).


Let's also suppose that salary increases from £50Kpa
to £75Kpa in the same time (not unreasonable).

A big assumption! Nevertheless....

OK, so £300K from the sale pays off the original £150K
("100%") mortgage, the £75K to the builder and leaves £75K
towards transaction costs and a deposit on the new place.

Let's assume that you can pay the transaction costs from "other"
funds, so the entire £75K goes towards deposit on new place.

Then new mortgage required is: £300K - £75K
= £225K = 3 x salary (now £75Kpa).

So, the new mortgage is still only "3 x salary" - the
same multiple as it was for the first house at the start.
No problem!

Well, yes, but normally someone would be expect to be able to move to a
bigger/better house after paying a mortgage for 10 years and having had a 50%
increase in earnings. That's what the "property ladder" is all about. Here
despite a 50% increase in salary and a 50% increase in his mortgage, the OP will
be no further up the "ladder" than he was before.

[And the OP gets to live in a house that starts at "4 x salary" when s/he
can only afford "3 x salary".]

With the associated extra costs of course (eg council tax, insurance, heating,
stamp duty etc).

 

[john boyle]

john boyle wrote:

Thanks John,


It's a 2nd charge on the property, definately not shared ownership
(nothing is payable until it is sold on).

OK, Firstly the main lender will have to give permission for there to be
as second charge on the property (they usually do) and will need
confirmation that there are no repayments due on the second charge (as
this would prejudice the affordability of the 1st mortgagees advance).

The only snags as far as I can see is the small print of the builders
second charge. E.g. what happens if the property goes down in value and
there is a shortfall on the 25% owing to the builder? Does the builder
have the right to call in the second charge in the future for any reason
at all? Will the buil der charge any interest even if you dont have to
pay it monthly? If the 25% is of the end value of the property then they
will get a big wodge. Are you happy about that? Be aware that the second
charge may prevent the 1st mortgagee form lending you more money later
by way of a further advance.

 

[Tim]

A big assumption! Nevertheless....

Not really - house prices and salaries do, after
all, tend to rise at similar rates over the longer
term (you suggested a 10 year term above).

[That's why people think that
the "house price : earnings" ratio
should stay roughly the same!]

Well, yes, but normally someone would be expect to be able to move
to a bigger/better house after paying a mortgage for 10 years and having
had a 50% increase in earnings. That's what the "property ladder" is all
about. Here despite a 50% increase in salary and a 50% increase in his
mortgage, the OP will be no further up the "ladder" than he was before.

S/he's done **even better** though!

The alternative is buying a £150K house (3 x salary)
and then, 10 years later, moving to a £300K
house (4 x salary) - that's the "step up".

But instead of doing that, s/he's living in the "4 x salary"
house from the very beginning - which means that
s/he gets an extra 10 years at the next rung *up* the ladder!

[And the OP gets to live in a house that starts at
"4 x salary" when s/he can only afford "3 x salary".]

"Andy Pandy" wrote
With the associated extra costs of course (eg
council tax, insurance, heating, stamp duty etc).

Comes with the territory.

 

[Andy Pandy]

Not really - house prices and salaries do, after
all, tend to rise at similar rates over the longer
term (you suggested a 10 year term above).

I wouldn't call 10 years the "longer term". Try comparing the price/earnings
ratio 10 years ago to now!

S/he's done **even better** though!

The alternative is buying a £150K house (3 x salary)
and then, 10 years later, moving to a £300K
house (4 x salary) - that's the "step up".

But instead of doing that, s/he's living in the "4 x salary"
house from the very beginning - which means that
s/he gets an extra 10 years at the next rung *up* the ladder!

Well, yes, but if the OP's salary doesn't increase as fast as HPI (as not many
peoples' did between 1996 and now), then if forced to move he may have to move
downmarket, and still be faced with a bigger mortgage.

I agree it could be a good deal, if thought through properly, but it could be
that the house is overpriced because of this deal being offered. Eg if it's only
slightly better than another house selling at 75% of the price, it may be better
to go for the cheaper house. I guess it's a new house - IME new houses are
hideosly overpriced in general.

[And the OP gets to live in a house that starts at
"4 x salary" when s/he can only afford "3 x salary".]

"Andy Pandy" wrote
With the associated extra costs of course (eg
council tax, insurance, heating, stamp duty etc).

Comes with the territory.

Yup - not always considered though.

 

[Tim]

OK, Firstly the main lender will have to give permission
for there to be as second charge on the property ...

Is that always the case?

I understand that some *un*secured lenders are
getting charges put on borrowers' houses if they can't
pay up - so if the borrower had a "friendly" main
lender, who would agree to withold permission, then the
unsecured lender wouldn't be able to get the charge?

Or (thinks a bit more) - is it possible to get a charge
placed on a currently mortgage-free property (eg
putting the charge in your own name or in a spouses
/friends name), so that unsecured lenders could then not
go to court and get a charge on the property - because
you/spouse/friend (as 1st charge) would not allow it?

 

[Tim]

... if the OP's salary doesn't increase as fast as HPI
(as not many peoples' did between 1996 and now)...

Surely you're not suggesting that prices are set to increase in
the next 10 years as much as they did in the last 10 years? ;-)

 

[Andy Pandy]

Surely you're not suggesting that prices are set to increase in
the next 10 years as much as they did in the last 10 years? ;-)

I don't know. I was just pointing out that to rely on the price/earnings ratio
to stay relatively stable over a ten year term would be foolish. As the last 10
years proves.

 

[john boyle]

Is that always the case?

Generally yes. I have never seen a mortgage deed that does not include
that provision. There are various reasons, one, for example, is that if
the 1st mortgage is a 'continuing security' which would also cover
further advances and is being used for a flexible mortgage then the 1st
mortgagee would have to get the second mortgagee to agree that the rule
in Clayton's Case would not operate against the 1st mortgagee, i.e.
later advances by the 1st mortgagee ranking 'after' the 2nd charge.

I understand that some *un*secured lenders are
getting charges put on borrowers' houses if they can't
pay up - so if the borrower had a "friendly" main
lender, who would agree to withold permission, then the
unsecured lender wouldn't be able to get the charge?

The unsecured lenders generally obtain that charge by way of a charging
order granted by the court.

Or (thinks a bit more) - is it possible to get a charge
placed on a currently mortgage-free property (eg
putting the charge in your own name or in a spouses
/friends name),
Yes,

so that unsecured lenders could then not
go to court

Ahh, you bow mentioned court.

and get a charge on the property - because
you/spouse/friend (as 1st charge) would not allow it?

No, a court can override the requirements of the prior mortgagee.

 

[Tim]

Yes,

"john boyle" wrote
Ahh, you bow mentioned court.

"john boyle" wrote
No, a court can override the requirements of the prior mortgagee.

So, if you wanted a "2nd charge secured loan" and the main lender didn't
agree, then could you simply ask the 2nd lender to take you to court (eg for
not paying the 1st instalment on a loan initially set up as unsecured) and
get the charge that way - overriding the main lender's objection?

Eg want a secured loan at "secured rates" but main lender objects, so agree
with the (2nd) lender that you can take it unsecured initially at "unsecured
rates", but as soon as a charge is placed (by court) then the interest rate
will fall to "secured rates" (this bit being agreed in advance of the 2nd
loan being made)...

Wouldn't that work, to get around the main lender's objection?

 

[john boyle]

So, if you wanted a "2nd charge secured loan" and the main lender didn't
agree, then could you simply ask the 2nd lender to take you to court (eg for
not paying the 1st instalment on a loan initially set up as unsecured) and
get the charge that way - overriding the main lender's objection?

Eg want a secured loan at "secured rates" but main lender objects, so agree
with the (2nd) lender that you can take it unsecured initially at "unsecured
rates", but as soon as a charge is placed (by court) then the interest rate
will fall to "secured rates" (this bit being agreed in advance of the 2nd
loan being made)...

Wouldn't that work, to get around the main lender's objection?

As far as I can see, then yes! Lots of lying in court needed of course.

 

[Tim]

As far as I can see, then yes! Lots of lying in court needed of course.

What "lying in court" are you suggesting?

The arrangement would be that interest is payable at "unsecured rates" if
the
new lender doesn't have a charge on your property, and at "secured rates"
if they do have a charge on the property. Also, that the lender will
immediately take you to court if you don't make any due payments.
[Those seem reasonable Terms&Conditions, don't they?]

You (deliberately) miss all payments until the charge has been placed on the
property. As you are not making payments, the new lender takes you to
court. Seeing that you *have* missed all the payments, and you tell the
court
that you'll continue not to pay the (unsecured) loan, then they grant the
charge...

Where's the lying?!!