Mortgage Gambling Fuse Lit in 2008 – Will It Explode in 2018? No Slow Fuse, It's a Mortgage Express!
I start with the Last considerations on most investor's list – the ability to extend or swap a mortgage or mortgage product with the same lender. Boring! Not if you are one of the victims described below! Our focus zooms in on any number of apparently more important considerations when considering a mortgage for Buy to Let – BTL. The loan to value ratio, loan-to-rent ratio, interest rate, arrangement fees; all are important and relevant to this topic as you will see:
- High interest rates mean some struggle to pay mortgages.
- Affordability fluctuates with interest rates.
- Affordability today might actually CAUSE bankruptcy tomorrow.
- What is this unseen hazard looming in the distant misty horizon.
- 100 years ago the Titanic sunk; is there a present parallel? Oh yes!
- The seven fat and thin cows is another pertinent analogy.
- Interest rates are at an all time low, this may last some time if economic pessimistic predictions come true.
- But for some the time bomb fuse has already been lit – and from what I can see – few even know! Presently enjoying good fortune they remain blissfully unaware of the Cassandra crisis creeping up on them.
- A routine call to Mortgage Express (MX) in 2012 revealed the extent of the crisis already being encountered by some investors. Had I not pre-empted and enquired then there is no evidence I would have been fore-warned. Unlike those unaware and thus unprepared, I am one of the fortunates who now have time to phone the lifeboat. Compassion compels me to throw this lifebuoy to fellow investors ultimately facing the same crisis. To remain silent would be a speedy way to sink the competition.
In 2018, I will see some mortgage terms come to an end. These were set up in the good times when no one thought the bubble would ever burst. It was already normal to regularly mortgage-hop saving a fortune on interest rates even after any arrangement fees. So the likelihood of remaining with the same lender more than a few years was almost zero. There were invariably other lenders offering more competitive rates making a future mortgage-swap not only likely, but also very prudent.
- No I am not an Oracle, nor a pessimist, merely cognisant of some fatalistic facts:
- Many borrowers who took mortgages with eg Mortgage Express MX prior to 2008 will have a loan term of x years before repayment.
- This might not now suit some then short sighted borrowers who planned to swap loan products or lenders or extend the loan term.
- MX has stated that it will demand full repayment upon expiration of the term! No extensions! No exceptions!
- This is because following the economic crash in 2008 the government bailed out this lender and taxpayers want their money back – so no sympathy for landlords who in the main have done very will out of MX.
- This is a ticking time-bomb awaiting many landlords who were expecting to be able to transfer but now cannot, during a time of poor funding and quadrupled fee increases. Any such transfers will be very costly. But the complexities continue as the implications unravel.
- The other side of this bittersweet coin is that borrowers will want to keep these low interest mortgages for as long as possible. Provided at a time when lenders were unprepared for the '7 thin cows' these bygone bargains can neither be retained nor repeated. We desperately wish we could hold onto them until the last possible moment when we have to get rid of them frantically seeking alternatives before bankruptcy beckons.
- The big dilemma is timing the optimum point at which to jump ship and escape drowning? Too soon and we suffer the premature loss of a very favourably low interest rate potentially jeopardizing any dependent cashflow. Likely to continue for the duration of the recession (which shows no sign of ending) low rates currently rescue highly geared borrowers. Hold onto this hot potato too long and borrowers may get their fingers burned. If they are too late there may not be a rescue ship passing when their's is sinking!
- AND the EU if successful in amending mortgage lending rules, could further stymie any future BTL mortgages.
- This means that for some landlords, even if there is a ship passing, they may not be permitted to jump under more stringent lending rules.
- Some will have no option but to sink with their ship. Glug!
- And it gets worse! Gulp, glug and gargle! Recent 'leaks' from George Osborne the Conservative chancellor might mean mortgage interest tax allowances could face cuts or caps.
- This would send a liner load of landlords into the depths of the deepest ocean.
- One can only imagine that such an own goal is unthinkable, but … didn't they say something very similar about the Titanic …?