Re: House prices & Banks

Aug 05, 2003 21 Replies

You're right to query this, it may well not be. But these days aren't typical. :-)

A 25 year repayment at 4% would cost about 6.4% of the original size of the loan, not of the value of the house. OK, so the balance is redressed slightly if you take account of loss of credit interest on the deposit.

But arguably a repayment mortgage is not a fair comparison because that way you are building up capital which when renting you are not. So it makes more sense to compare with an interest-only loan.

Also 1% for I&M is an unrealistically high estimate IMO (especially when houses are overvalued).

So I'd put the cost of ownership at nearer 4.5%.

Well, it does depend where you are, and of course if houses are overvalued you'd expect yields to be depressed if you measure them against the inflated values. So much so that 5% or less would not be unusual. So it's pretty close just now.

I gather a long term average yield in "normal times" should be in the 7-10% range. It needs to be comfortably above borrowing rates, otherwise all landlords would want to sell up.

Mortgage lenders don't care much when the house prices start to fall. They are only interested in the borrowers ability to pay.

If they would allow less, their business would dry up. Their business is to own houses without equity risk and collect rent (interest payments).

Actually the houses have been moved to the possession of the mortgage lenders (modern landlords) and the borrowers are just modern tenants. But note that the equity risk is transferred to tenants.

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