# length of house mortgages



## dewdrop (10 Jul 2007)

i am often amused how two seperate issues get mixed up. present  furore over 100% mortgages and 35 year loans aare a case in point. while it is obvious 100% mortgages can lead to negative equity if a person has to sell in a falling market i dont see anything wrong with a 35 year loan on the basis that the client cant afford a shorter term.  if client is on a variable rate he has the option of increasing his repayments when he can afford it thereby reducing the term


----------



## ClubMan (10 Jul 2007)

I don't really understand what point you are trying to make but...

*Any *loan to value mortgage can lead to negative equity if house prices were to fall sufficiently to leave the house worth less than the outstanding mortgage. Remember that negative equity is arguably largely irrelevant to anybody not planning to move/sell. Obviously the longer the term of the mortgage the higher the overall cumulative interest (and mortgage protection life assurance) costs.


----------



## dewdrop (10 Jul 2007)

my point is that 100%  mortgages can be dangerous whereas 35 year loans are not as you have the option to reduce your interest charges by increasing repayments or lodge lump sums


----------



## ClubMan (10 Jul 2007)

100% mortgages are not "dangerous" per se. Some people may not be able to realistically afford them in which case there are risks involved. Almost everything that we do involves some level of risk. It's ultimately up to the individual to ensure that the level of risk is appropriate for their specific circumstances both in relation to mortgages and in general.


----------



## Sherman (10 Jul 2007)

I really don't understand the media hysteria about 100% mortgages.

Negative equity is only a significant problem if you intend to sell while in negative equity. 

Ability to repay is far more important. 

Example: Person A earns €1,000,000 per year. They buy a house for €500,000, using a 100% mortgage (for whatever reason they use a 100% mortgage instead of paying cash). This mortgage, despite being 100%, is not a problem for them - €500,000 being only 0.5 times their salary. Other example: Person B earns €25,000 per year. They buy a €500,000 house using only a 50% mortgage, due to receiving the other half in an inheritance. Even though this is only a 50% mortgage, it will cripple them as interest rates rise - €250,000 being 10 times their salary.

The percentage is irrelevant in each case - the Person A can easily afford to cover a bit of negative equity if they decide to sell. Person B would need to see prices plummet by over 50% for negative equity to be an issue, and yet person B is in far more dangerous territory than person A.


----------



## demoivre (10 Jul 2007)

dewdrop said:


> my point is that 100%  mortgages can be dangerous whereas 35 year loans are not as you have the option to reduce your interest charges by increasing repayments or lodge lump sums



Can you not get a 100% mortgage over 35 years and why can't you make additional payments to a varaible rate 100% mortgage?


----------



## shanegl (10 Jul 2007)

> Negative equity is only a significant problem if you intend to sell while in negative equity.


 
So basically anyone who buys with the intention of trading up (for various reasons) in the future then?


----------



## Afuera (10 Jul 2007)

dewdrop said:


> i dont see anything wrong with a 35 year loan on the basis that the client cant afford a shorter term.  if client is on a variable rate he has the option of increasing his repayments when he can afford it thereby reducing the term


You need to reword this to "he MAY have the option of increasing his repayments IF he can afford it".  You seem to be assuming that it will be easy for people to make accelerated payments to wipe out their mortgage quicker as they progress in their career. I'm afraid that's a major assumption to make and will not apply to everyone.




Sherman said:


> I really don't understand the media hysteria about 100% mortgages.


I think the crux of the problem with 100% mortgages is that, if someone is unable to save a 10% deposit for a property, are they really financially responsible enough to make the purchase in the first place?


----------



## Sunny (10 Jul 2007)

Sherman said:


> Negative equity is only a significant problem if you intend to sell while in negative equity.


 
It doesn't mean it is not a problem. People have taken out 100% mortgages to buy one and two bed apartments in the middle of nowhere assuming property can only go up in price. They will probably be looking to start families, trade up etc and won't be able to. Also, you talk about affordability and you are correct when you say it is  more important. But, if interest rates keep rising, it is more likely that the people who will be the most impacted will be the people who pushed themselves to the limit to buy somewhere. Suddenly, they are struggling to meet repayments and selling the property isn't an option because it won't get enough to pay off the loan.


----------



## robd (10 Jul 2007)

Sherman said:


> I really don't understand the media hysteria about 100% mortgages.
> 
> Negative equity is only a significant problem if you intend to sell while in negative equity.
> 
> ...



The argument and thus histeria from the media relates to the fact that a person with a low equity to loan ratio can get themeselves out of financial trouble by simply selling the property.

A person with 100% mortgage in a stagnent or dropping property market (take your pick as to which we have at the moment) does not not have this luxery.  100% mortgages work well in a fast growing market.  They introduce serious risk for lenders and purchasers in the current environment.

Incidently, very few pay all cash for property.  It would be very financially niave to do so.  Markets (both property and equity) work by the cost of finance being less than the return on investment (through growth or yield).  Far better uses for your money to all in one house (either in equities or leveraged into multiple houses). Your second example is also not normal.  Someone earning 25k could not ordinarily borrow 250k, as the repayments would be outside of their affordablity.

Most people who bought in the last few years bought to get on the fabelled ladder or for investment.  If the bought to get on the fabelled ladder then the intend to sell in the near future to get a better place.  Negative equity seriously affects them.  Investors/Speculators bought based on equity release from current home or other investment property and an Interest Only Mortgage.  This types of mortage are a lot more sensitive to interest rate increases compared to a 20-30 year repayment mortgage.  As yields have been so low over the last few years these type of investors are in danger of getting into serious cashflow problems.  They have a home and investment or multiple investment mortages to pay and their is a significant shortfall in rent versus finance costs of any properties bought over the few years.  These are forced to sell the investment properties and thus any shortfall must come out of the equity in their home.  Not a good position to be in.


----------



## BlueSpud (10 Jul 2007)

negative equity is a banking problem.  they find themselves in a position where if an owner defaults, they cant get their money back.


----------



## Afuera (10 Jul 2007)

BlueSpud said:


> negative equity is a banking problem.  they find themselves in a position where if an owner defaults, they cant get their money back.


The banks have been quite clever in spreading the risk though. The popularity of mortgage backed securities means that a pension or insurance company is just as likely to get hit badly if their are a large amount of defaults.

Also, there would clearly be reprocusions for other sectors of the economy should there be a heavy amount of defaults. Banks would have to tighten up their standards, which could possibly lead to a credit crunch,  and would make it hard to fund all forms of business, leading to lower economic activity, and so on...


----------



## Sherman (10 Jul 2007)

The media should realise that 100% mortgages form only a small percentage of mortgages in this country - 30% of new mortgages in 2005 (the year 100% mortgages became widely available) dropping to 24% in 2006. I would wager that 100% mortgages account for less than 5% of all outstanding mortgages in this country. This is not the massive problem the media have been making out.


----------



## Maine (10 Jul 2007)

Sherman said:


> The media should realise that 100% mortgages form only a small percentage of mortgages in this country - 30% of new mortgages in 2005 (the year 100% mortgages became widely available) dropping to 24% in 2006. I would wager that 100% mortgages account for less than 5% of all outstanding mortgages in this country. This is not the massive problem the media have been making out.


 
Residential mortgage lending at the beginning of 2003 was roughly €50b which at ECB rate of 2% plus 1% margin cost €1.5B in interest

By the the end of 2007 , 5 years later, residential lending will be close to €140B which at a probable ECB rate of 4.5% plus 1% margin will be costing €7.7B in interest

ie the cost of servicing mortgages interest will be 5 times higher - all in the space of 5 years.

This may not be a problem but we have increased the bets on the table significantly.


----------

