Question for any Mortgage people

In message , MacFan writes

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.

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)

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

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.

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.

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).

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.

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

"Andy Pandy" wrote

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).

"Andy Pandy" wrote

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

"Andy Pandy" wrote

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".]

A big assumption! Nevertheless....

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.

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

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.

In message , Ronald Raygun writes

I think you have insufficient information to deduce that RR. It could just be an interest free loan.

"Andy Pandy" wrote

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!]

"Andy Pandy" wrote

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!

"Andy Pandy" wrote

Comes with the territory.

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

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.

Yup - not always considered though.

"john boyle" wrote

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?

"Andy Pandy" wrote

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.

In message , Tim writes

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.

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

Yes,

Ahh, you bow mentioned court.

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

"john boyle" wrote

"john boyle" wrote

"john boyle" wrote

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?

In message , Tim writes

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