From The Evening Standard:
In spring Chancellor George Osborne announced the £500 million rescue package giving buyers a loan to cover 20 per cent of their property.
The buyers - who must have a joint household income of no more than £72,000 - then have to find a minimum four per cent deposit, and can fund the remaining 76 per cent of the cost with a conventional mortgage. Deposit loans are interest free for five years and can be repaid when the property is sold.
Lucian Cook, director of research at Savills, said that lenders are punishing First Steps buyers with interest rates of about five per cent because of the initial loan they are taking out to help pay their deposits. A typical rate at the moment is 3.75 per cent but most lenders will have regard to the fact that there is some sort of equity loan in place and ask for a higher rate," he explained.
Well duh.
With all this economics stuff, you have to know what the starting figure is for a calculation. In the case of housing, The Maypole around which prices dance is rental values (which are very stable in the short or medium term), and we know from observation that there is an equilibrium between rents and monthly mortgage repayments (if one is much cheaper than the other, people will choose the cheaper option, and so the two will come back into line).
Therefore, initial monthly mortgage repayments can also be assumed to be very stable in the short term; if the rent for a home is £1,000 a month, then the initial mortgage repayments will also be in the region of £1,000 a month; but what happens if the lender knows that the purchaser is not paying interest on 21% of the loan (20/96)?
On the face of it, the purchaser's mortgage repayments for that flat would drop to £790 a month. Two things can happen: the vendor hikes the selling price to soak up the £210 x 12 months x 5 years interest saving; or the lender hikes the interest rate on the non-interest free part of the loan, which is what is being observed here. In other words, the buyer is indifferent between
a) a £96,000 mortgage @ 3.75% = £3,600 interest every year (there's no way they'd get such a low interest rate on such a high LTV mortgage, of course, they'd more likely be paying 5% or 6%)) and
b) a combination of £20,000 interest free and a £76,000 mortgage @ 4.74% = £3,600 interest every year.
Just sayin', is all.
I Don't Know Why They Call Them 'Thinktanks'...
2 hours ago
8 comments:
Yup. But for those who don't get the numbers bit, there's an even simpler explanation:
If they can't save a full deposit, they're more likely to run into trouble paying the mortgage.
If their only skin in the game is the 4%, they're more likely to find it easy to walk away.
If they default, it costs the lender an arm and a leg.
Ergo, the rate's higher to cover the greater risk.
And of course, it won't have escaped the lender's attention that if they're borrowing 20% less, the borrower can more easily afford a higher interest rate, so it gets charged.
Simples.........
FT: "the rate's higher to cover the greater risk."
Well no, because unless I am very much mistaken, the 76% normal mortgage ranks in priority to the 20% taxpayer-funded 'deposit', so there is practically no risk at all.
No, the greater risk of incurring costs running in to £000's on clawing back a default. The government takes 20% of the sale value, come what may.
FT, I stand corrected, from the First Steps London website: "if your FirstBuy equity loan was originally for 20% of the full market value of your home... you would repay 20% of the full market value when it came to selling.", but hey.
We also have to factor in the interest saving on the 20% loan once the 5 years expire (which is only 1.75%) and the fact that the interest rate on a 96% mortgage would be very high indeed.
Is the rental cost comparison not with the interest part of a monthly re payment rather than the interest plus principle, as the value of the principle part is retained in the bicks'n'mortar
Den, everybody can make up their own mind which one 'should' be higher. Sometimes people are happy to pay more in rent than in mortgage repayments and at other times it's vice versa. They are not always the same figure but they move up and down in tandem around the same mid-figure for any particular home.
D, yes, the interest payments are rent paid for the money to buy the house in the first place. Sharia mortgages make this more explicit. With them, you buy the house in instalments (the repayment of principal element) and pay the bank rent on the bit you don't own.
Wankers. That's all I have to say about this lalest home-owner-ist wheeze from Planet Tory.
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