I'm having a disagreement with a friend about mortgages. They have been
offered a house worth £200,000 for a purchase price of £150,000 (I'm not
100% sure of the exact details, something along the lines of right to buy I
believe though). They think they need to save up a large deposit for a
mortgage, I think that a mortgage company would count this situation as
needing a 75% mortgage so no additional cash deposit would be required.
Anyone got any advice about this?
Nope. The mortgage company will require you to provide a XX% deposit of
either the valuation or the actual purchase price - whichever is the
Any attempt to pretend that the valuation is the purchase price and the
difference is the deposit is "mortgage fraud" (I'm sure that you have heard
of that and I would guess that you thought it something more substantial
than this - but it isn't!)
This doesn't seem right - AIUI a deposit is basically to protect the
mortgage company in the event of having to repossess the property. Having a
bigger deposit means the company is more likely to be able to sell it at a
price to cover the remaining mortgage, making it less risky and thus giving
a lower interest rate (sometimes at least).
If a house is worth £200,000, but has been sold for £150,000 then the
mortgage company could sell the house at a 25% discount to the real value
and still break even on the mortgage remaining, making it a fairly safe
mortgage in terms of the bank not being able to retrieve their money in the
worst case scenario.
I've just had a letter from my mortgage company telling me of a change in
interest rates - despite only having paid a few thousand off my mortgage,
which I got without any deposit, I am being dealt with as if I have a 70%
mortgage - I still owe someone else the remaining funds for the house, but
that isn't the mortgage, is registered as a second charge on the property
but as far as the mortgage company are concerned the mortgage I have from
them is 70%. I've never given them a deposit, nor have I paid off more than
a small fraction of the original sum loaned to me.
The value of something is the amount someone is willing to pay for it,
in this case £150,000. There is no, set in stone, value for anything,
especially houses. In the case of the mortgage company, they, or their
valuer, will decide what they think it is worth and that is what they
will base the deposit requirement on. It's their decision, take it or
If it really was worth £200,000, in the event of a forced sale any
excess equity would go to the purchaser not the building society.
Yes, and when their valuation is £200,000 that would be the value, not the
reduced price actually paid for it.
Which gives a good chance of the mortgage company getting their full stake
easily, making it a low risk mortgage equivalent to having a substantial
, Simon Finnigan wrote
Isn't the answer likely to be how much the purchase price of the house
is above the income of the borrower rather than the difference in the
If the household income is £100k/year the lender may offer a 100%
mortgage on £150k. If the household income is £30k the lender may only
offer x3 that as a mortgage leaving the buyer to find a £60K as a
In the first 5 years of a right to buy deal some or all of the discount
will have to be paid back if the property is sold (as a result of a loan
non-payment) so for the purposes of a mortgage the property will not be
worth £200,000. The "gotcha" in any early resale of this property is
the discount to be paid back includes 25% of any increase in the value
of the property.
Short term, the house is only "worth" £150,000 for lending purposes and
the extra £50k of "value" can only be considered perhaps 3 to 5 years
down line. The lender will be interested in protecting the loan amount
in the higher risk first 3 to 5 years.
Simon Finnigan wrote
Wouldn't anyone selling the house in the early years first have to pay
back the £50k discount under the terms of right to buy? The "buffer" of
the £50k is not real for the purposes of a mortgage.
But this would be a second charge at best against the house, allowing the
mortgage company their full whack first leaving the council to chase up any
other money owing from the house owner in the event of a shortcoming.
I doubt it. The mortgagee is only interested in if they can get their
money back in the event that the buyer cannot pay the mortgage.
Even if they earn enough money they still may default on the mortgage.
For example if they lose their job.