Libdems' plan to surtax houses worth over £1 mn

No. In many cases more expensive is harder. I agree with you only if the deposit is the sole limiting factor and size of the mortgage is not important.

Reply to
Mark
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"Ronald Raygun" wrote

I thought you were considering saving the difference between 'small mortgage payments' and 'big mortgage payments' - which will be affected by the mortgage interest rates (especially so for interest-only mortgages)...

Reply to
Tim

"Mark" wrote

Ah, but "not at all" is **even harder** ... :-((

Reply to
Tim

Ah, I see what you mean, I was just being dense, sorry.

However, although I did indeed propose saving the difference between what it costs to service a small loan and a big loan (£90k and £270k in the example), the proviso of not needing to rely on house price rises to beef up the equity did rather assume that such rises would be low. I you want to change that assumption, then there is no longer a question of needing to rely on the rises helping you on your way, since you will get the help whether you need it or not - you'll just get off your rung in double quick time.

But if you meant "...lower than house price rises *would have been*", then you're back into the realm of the hypothetical, away from the "practical terms" I mentioned.

In any case, it boils down to what you mean by "much". What sort of value did you have in mind for the ratio of annual price rise rate to annual interest rate? This value will be very roughly equal to your rung waiting time in years. Is a ratio of 3 "much"? E.g. an interest rate of 3 and a bit % against house price inflation of 10%pa, sustained for a good 3 years isn't unthinkable, nor is a 3 year waiting time unreasonable.

Reply to
Ronald Raygun

"In many parts" being the trendy massively overpriced areas. Move a few miles down the road away from the mugs and the prices are much more reasonable. I did a search on the website someone else mentioned for 4+ bed houses in London for under 500,000 and got 100 pages of them.

Reply to
Andy Pandy

That's an asking price, probably in a vastly overpriced trendy area. I did a search for 4+ bed houses in London under 500k on that site and got 100 pages of houses.

Reply to
Andy Pandy

You'd have to be pretty desperate to cash in an endowment IMHO. It's possible to have a mature endowment if you had lengthened the term or got a new mortgage.

I should think the next house would have gone up a lot in that timescale though. IIRC the average period of a mortgage is 7 days so I assume that is the average period at which people move.

Reply to
Mark

Yeah right, so what income do you need to get a 270k mortgage? Probably at least 60k. If you had an income of 60k and a mortgage of 90k, but could afford a mortgage of 270k, it would take you no time at all to save up the extra 20k deposit. So if house prices hadn't risen you could get a 20% better house for the 270k mortgage.

You really do have warped logic. It's blatently obvious that if things become more expensive, they are harder to afford.

Reply to
Andy Pandy

Mark gurgled happily, sounding much like they were saying:

That's either a typo or you're trying to _seriously_ revitalise the property market...

Reply to
Adrian

Yes, Brixton's delightfully affordable now, isn't it?

Reply to
Norman Wells

I wrote 500k not 50k.

Reply to
Andy Pandy

"Andy Pandy" gurgled happily, sounding much like they were saying:

You're so funny.

Reply to
Adrian

You need to get out more...

Reply to
Andy Pandy

Would it? What's a typical mortgage interest rate? Let's say 4%. So if you could afford 4% on an extra £180k, you could afford to save £7200 per year, so it would take you a bit over 3 years to save £20k.

That's not an unreasonable amount of time, but it can't really be described as "no time at all". If your net income went up by £7200 to whatever's left from £60k after tax, and you had aspirations to move upmarket, it's not obvious that you would have the patience to save for 3 years, you'd probably end up resigning yourself to staying put, and spending the extra money on something else.

Indeed, only you mis-spelled "200%".

You don't understand his logic, so you just call it warped. :-)

He didn't argue that rising prices would make a better house easier to afford, just that they would make it easier to move up the ladder into a house which you could in some sense *already* afford.

The problem is that affordability, in the context of mortgages, has 3 components which must all be independently satisfied:

(1) Your before-tax income must meet the lender's income-multiple formula.

(2) Your after-tax income must be enough, after considering the cost of maintaining your lifestyle, to make the mortgage payments (this becomes a problem when interest rates rise when people went for a loan they could only just afford when rates were low -- and satisfying (1) doesn't always guarantee that you will also satisfy (2)).

(3) You must have enough of a deposit.

What you've overlooked in Tim's logic is that he started from the position where you've *already* somehow managed to tick boxes (1) and (2), but have still to tick box (3). He simply pointed out that rising prices can help you overcome this final hurdle.

Specifically, you could afford a 150% better house in perhaps two years, which in effect is moving up the ladder at *faster* speed than getting a 200% better house in three years.

What's more, his two years started when prices started to rise, and if this was 2 years before your income went up, you could in fact move as soon as your income rose. But without the rising prices, your three years don't start until after your income rises.

Reply to
Ronald Raygun

Not necessarily. The endowment could be underperforming so badly that you judge its future growth rate (between now and maturity) to be less than the interest rate on your loans. In such circumstances it might not be unwise to cash it in and use the proceeds to pay down the loan.

Reply to
Ronald Raygun

Indeed. I would suspect that, in this case, the surrender value would be tiny too.

Reply to
Mark

A bit *over* 3 years?? Are you assuming negative interest rates?

Or getting an unsecured loan for the extra 20k. Actually, you'd only need

15k for the same house assuming stable prices and the same LTV (as the "300k house" would only cost 250k and you've got 10k equity). Someone on 60k would almost certainly be able to get an unsecured loan of 15k and even allowing for the much higher interest rate it'd be cheaper overall than getting a 45k larger mortgage.

I meant a 20% better house than if prices hadn't risen.

I do understand it - and it *is* warped ;-)

Which is wrong.

Which obviously means the cheaper houses are, the more house you get for your maximum mortgage.

Same as above.

Which doesn't necessarily have to come from current equity, as above.

So after 3 years who is further up the ladder? What about 5, or 10? With rising prices you'll soon hit the salary multiple limit.

If you take a very short term view and totally ignore obvious solutions to the "lack of equity" problem, then he might have a point. But that's why his logic is "warped", it's not real-world, it's theoretical bullshit based on assumptions that aren't valid, or are very rarely valid.

Reply to
Andy Pandy

Er, just testing. :-) But actually interest rates aren't far off negative, are they?

Not really. That would reduce the size of the mortgage advance you'd get, unless you lied on the application form and kept quiet about the fact that your "deposit" actually came from a loan shark.

True, but remember that we've also conveniently forgotten about all the incidental costs, legal fees, stamp duty, etc.

See above. Not really an option.

I take it that's a typo and you meant getting a £15k larger mortgage, at

100% instead of 90%, thus applying a higher interest rate to the whole loan instead of just to 90% of it. OK, but if you want to be practical you must recognise that 100% loans have all but disappeared from the market and are unlikely to return any time soon.

OK, fair enough.

*He* may be warped, but there's nothing wrong with his logic. :-)

No it isn't. He demonstrated that *if* you could afford the 20% higher payments to go with a 20% higher 90% loan because the £250k house now cost £300k, but didn't have a £30k deposit (nor even a £25k deposit), price inflation could magic one up out of your original £10k deposit.

Yes, but that's not the issue. It was assumed that your income had gone up by enough to let you afford payments on a 150% to 200% bigger loan, both on criterion (1) and on criterion (2).

Yes, but again that's not the issue.

Well, to be realistic, yes it does. If you're borrowing at the limit of your salary multiple and your budget, then it's a bad idea to borrow a deposit. If you admit it on the mortgage application, you'll either be refused or it wil be taken into account reducing your loan or increasing your interest rate. If you don't, it would be fraud.

Indeed you will. So what? His argument was limited to that small subset of all the likely real-life scenarios in which people have not yet hit that limit. That doesn't invalidate the argument or the logic, it simply limits its applicability.

It was also predicated on a low equity ratio, because the less equity you have, the more it grows for any given price increase. In his example a 20% price increase boosts the initial 10% equity by 200% to 25% (the arithmetic looks a little warped here, but the equity grew from £10k to £30k) and therefore to move upmarket while staying with a 90% loan, it means you could afford a 200% better house (in figure terms, 150% better in real terms), by criterion (3), provided you'd already met criteria (1) and (2).

But of course if you had had a "safer" equity stake of 20%, a 20% rise would "only" double your stake instead of tripling it.

Yet if you'd had a 95% loan, your £5k equity would have quintupled to £25k, and if a 95% loan were available (and affordable), you could then go for a half million pound house (which is almost where we came in).

There's nothing wrong with the *logic* of the argument, and that isn't changed simply by it only being applicable to a minority of situations. The only thing that's warped is if someone thinks the pre-requirements stated or implied in the argument are unimportant and that the conclusions apply universally.

That's not the fault of the logic of the argument, just of the person trying to applying the argument in inappropriate circumstances. It's a bit like blaming the gun dealer for the murder, rather than the person who pulled the trigger.

But just look at the recent past. It's very much a real-world effect that house prices have boomed unsustainably. This boom was facilitated by a number of factors, including salary inflation, probably at a higher rate than the general cost of living, allowing people to pour a higher proportion of their income into housing; and with lower interest rates they could afford to borrow even more, and so prices rose even more. But the rising prices also fuelled equity boosts which contributed the higher deposits which people needed.

You can't deny that in the real world part of what made prices rise was the price rises themselves. But of course nobody would claim this to be the only contributing factor.

Reply to
Ronald Raygun

Not even that. He'll probably have a few credit cards with the total credit limit over 15k. Apply for the mortgage, with no debts, then use the CC's for all spending and cash withdrawals, building up a debt of 15k between the application and completion. In the meantime save all his salary. In a the few months between the application and completion plough all salary and CC cash withdrawals into his deposit pot.

Completely crackers, but I'm trying to use Tim logic ;-)

Good point - the costs will be a hell of a lot more if house prices had gone up. Stamp duty on a 300k house is 9000, on a 250k house it's 2500. So that's an extra cost of 6500 if house prices go up 20%. Also other fees are likely to be higher.

So in the original example, the person moving to the 300k house and using

*his full equity* as deposit, must have saved enough to pay the moving fees, otherwise he wouldn't be able to use the full equity as deposit on the new house.

So he must have saved - stamp duty at 9000, estate agent fee, say 1% -

1200, solicitors/survey/removals etc 1800, total 12000

In the "stable prices" case - stamp duty at 2500, estate agent fee, say

1% - 1000, solicitors/survey/removals etc 1800, total 5300.

So if prices hadn't gone up he's got an extra 6700. Take that off the extra

15k he needs, he's only 8300 short. Less than the cash limits alone I have on my 3 credit cards.

I meant 15k unsecured and 45k less in mortgage.

Yes, that's why it's "warped". You can dream up virtually any situation where the logical outcome is reversed, SFW? It keeps him amused I guess.

Here's one - if I'm looking to buy a particular telly and find that Curry's have put the price of that telly up by 20%, that can be good news! It might put me off buying it, and I might find a better telly for 10% less. So the fact that the price went up actually benefitted me!!

OK fair point - it's the "use of logic" that is warped rather the logic itself.

Not by much though - about 1-2% over inflation.

Yes, but that's not the point. The point was whether it is easier to move "up the ladder" with rising prices.

Reply to
Andy Pandy

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