125% mortgages?

[DanielCarrera]

Just read an article on BBC, about banks moving away from 100%-125% mortgages:

http://news.bbc.co.uk/1/hi/business/7254426.stm

I wonder, who would get a 125% mortgage in the first place? Why? Why would anybody borrow $125 to buy something that costs $100? What's the idea?

I can't wait to hear the reason for this one. I bet that some people think that the other 25% is profit and they can spend it on beer.

[junglistic]

Well, if they carry loans of another type (line of credit, car loan, etc), which typically are prime + 1-5%, they can take advantage of the low(er) interest rate of a mortgage.

[ynot]

Just read an article on BBC, about banks moving away from 100%-125% mortgages:

http://news.bbc.co.uk/1/hi/business/7254426.stm

I wonder, who would get a 125% mortgage in the first place? Why? Why would anybody borrow $125 to buy something that costs $100? What's the idea?

I can't wait to hear the reason for this one. I bet that some people think that the other 25% is profit and they can spend it on beer.

I believe this was a part of the sub-prime mortgage problem in the US.

[elty]

Just read an article on BBC, about banks moving away from 100%-125% mortgages:

http://news.bbc.co.uk/1/hi/business/7254426.stm

I wonder, who would get a 125% mortgage in the first place? Why? Why would anybody borrow $125 to buy something that costs $100? What's the idea?

I can't wait to hear the reason for this one. I bet that some people think that the other 25% is profit and they can spend it on beer.

House renovation? Cheap car loan? Credit card consolidation? Invest back to the stock market?

Bank lends to people with no collateral (e.g. credit card) all the time. In this case they are essentially having a "80% secured LOC".

The $25 extra could be very useful if used wisely. Unfortunately most people aren't and there you have the sub prime mess.

[CSK'sMom]

I think that it needs to be kept in perspective that this is a UK article about their mortgage offerings. They have all kinds of what we would consider really odd and weird mortgage offerings, things like interest only and endowment mortgages.

[gei]

Yep.... it's not uncommon in places like that where real estate prices are beyond unaffordable to pass your mortgage down to your children. We have it comparatively well over here in Canada.

[brunes]

Just read an article on BBC, about banks moving away from 100%-125% mortgages:

http://news.bbc.co.uk/1/hi/business/7254426.stm

I wonder, who would get a 125% mortgage in the first place? Why? Why would anybody borrow $125 to buy something that costs $100? What's the idea?

I can't wait to hear the reason for this one. I bet that some people think that the other 25% is profit and they can spend it on beer.

It's quite simple.

You are looking at a fixer house that costs $200K, you know if you put $30K of repair sand upgrades into it you could sell it for $300K without an issue in the current market. You get a 125% mortgage, do repairs, sell house, all as quickly as possible. You've made $70K in a couple of months with little work involved (assuming you hire-out the labor).

People do this for a living all the time, don't you watch HGTV? :P

[heymike]

Just read an article on BBC, about banks moving away from 100%-125% mortgages:

http://news.bbc.co.uk/1/hi/business/7254426.stm

I wonder, who would get a 125% mortgage in the first place? Why? Why would anybody borrow $125 to buy something that costs $100? What's the idea?

I can't wait to hear the reason for this one. I bet that some people think that the other 25% is profit and they can spend it on beer.

I thought the negtive amortization loans were a lot stranger than the 125% loans. Can you imagine walking into the bank after 2/3/5 years of payments to ask how much more money you owe on your house.

Or signing the neg-am and referring to yourself as a "home owner".

Interest onlys or 125%'s have there reasons, but they should be few and far between and not very popular with the average buyer.

[elty]

Interest only mortgage works if your income is not very stable (say, you are buying a house and getting married, so in the first year you cannot afford anything other than interest) or if your income is seasonable or unstable.

Negative amortization probably works for "investor". It is just highly leverage.

[heymike]

Interest only mortgage works if your income is not very stable (say, you are buying a house and getting married, so in the first year you cannot afford anything other than interest) or if your income is seasonable or unstable.

Negative amortization probably works for "investor". It is just highly leverage.

Interest only is great for builders; as interest is deductible right off the bat and they have no intention of ever owning it. Helps with cash flow as you don't need cash to service the principal.

But I was under the impression you could not go interest only if your income or the affordability was in question, particularly if you are buying with the intention of someday owning. Can someone confirm if you can get them with a low down payment/low income w/o lying on the app?

[DanielCarrera]

I thought the negtive amortization loans were a lot stranger than the 125% loans.

Negative amortization? What's that?

Interest onlys or 125%'s have there reasons, but they should be few and far between and not very popular with the average buyer.

I really don't get interest only mortgages. Why not just admit it and pay rent?

[DanielCarrera]

It's quite simple.

You are looking at a fixer house that costs $200K, you know if you put $30K of repair sand upgrades into it you could sell it for $300K without an issue in the current market. You get a 125% mortgage, do repairs, sell house, all as quickly as possible. You've made $70K in a couple of months with little work involved (assuming you hire-out the labor).

Ok, so the only people who should get this sort of mortgage are professional flippers. Yes?

[pitz]

Negative amortization? What's that?


Negative amortization loans are loans whereby the lender is willing to, under a long-term contract, lend additional money on the presumption of appreciation.

For instance, if houses were to appreciate at the rate of 10%/year (yes -- crazy -- but lots of Americanos actually believe this), why ever bother making mortgage payments when one can just keep borrowing against increasing equity?

[DanielCarrera]

Interest only mortgage works if your income is not very stable (say, you are buying a house and getting married, so in the first year you cannot afford anything other than interest) or if your income is seasonable or unstable.

I disagree completely. Interest-only mortgages have the same drawbacks of renting without the benefits (with renting you at least remove the risk of unexpected large repairs, and other maintenance-related issues). So I think that interest-only mortgage is all risk and no reward. If you are considering that kind of mortgage, I think you should be renting instead.

[pitz]

danielcarrera, that's exactly why those products exist -- to concentrate the risk onto the hands of the user of the product.

In the past few years, taking risk in the housing market has paid off handsomely.

Going forward, it may not. Many people will wish that they had no risk exposure to the housing market.

It just depends on what you're looking at doing, I guess.

[heymike]

I disagree completely. Interest-only mortgages have the same drawbacks of renting without the benefits (with renting you at least remove the risk of unexpected large repairs, and other maintenance-related issues). So I think that interest-only mortgage is all risk and no reward. If you are considering that kind of mortgage, I think you should be renting instead.


I was under the impression interest only loans were developed primaily for larger builders who have no intention of owning the homes. With interest only they do not have to service the principal, so it frees up cash flow; and they can write 100% the interest annual on their T2's. No need to capitalize anything or increase your debt level, etc through the project.

I was also under the impression, you can not get these loans with marginal/questionable income, you would have to lie you ass off to get one if you ever planned on getting one when you intend to own the house and only reported employment income.


Negative amortization? What's that?

When you buy your house with a mortgage rate of say, 6.0% but you are only required to pay 2.0%. The 4.0% difference is tacked onto your principal every year. Typically, in the US, these were 1/2/3/5 year terms. So you sign a mortgage and your principal is $500k. 3 years later when you renew it after making 60 interest-lite payments, they give you a refinanced mortgage with $550 principal or something.

Crazy stuff.

[movieman]

I was also under the impression, you can not get these loans with marginal/questionable income, you would have to lie you ass off to get one if you ever planned on getting one when you intend to own the house and only reported employment income.

In Canada, quite possibly. In the UK, lying about your income in order to qualify for an interest-only mortgage at the limits of what you can afford to pay seems to have become endemic in the last few years.

Which was fine when prices were rising 20% a year, but is a big problem when prices start dropping.

Also, on the 125% mortgage front, I suspect more people spent that extra 25% on a fancy car or expensive holidays than used it to turn a 'fixer-upper' into a place to live. Again, it's not a problem for the bank when prices are rising 20% a year, because in 18 months the house will be worth more than the mortgage.

[elty]

I disagree completely. Interest-only mortgages have the same drawbacks of renting without the benefits (with renting you at least remove the risk of unexpected large repairs, and other maintenance-related issues). So I think that interest-only mortgage is all risk and no reward. If you are considering that kind of mortgage, I think you should be renting instead.

An interest only mortgage doesn't necessarily mean you can only pay the interest and nothing more. You should have the option to overpay, just like regular mortgage. Such mortgage already exists here, pay your mortgage then withdraw the equity from your HELOC = a 80% interest only mortgage.

If you rent, you can't just offer double payment to your landlord and the unit magically become yours.

[Sandokan]

interest-only mortgages = renting money from the bank.

[pitz]

When you buy your house with a mortgage rate of say, 6.0% but you are only required to pay 2.0%. The 4.0% difference is tacked onto your principal every year. Typically, in the US, these were 1/2/3/5 year terms. So you sign a mortgage and your principal is $500k. 3 years later when you renew it after making 60 interest-lite payments, they give you a refinanced mortgage with $550 principal or something.


Not only that, but the users of the neg-am loans were getting tax refunds on the entire mortgage rate of 6%.

So they were making 2% payments, and receiving roughly 2% back on their taxes, essentially making their housing expenses equal to $0/month. In some cases, the numbers were such that, on a monthly basis, they were actually money ahead (after taxes) by using these loans.

As you pointed out, the extra money wasn't used to invest, or do anything like that with -- it was used for weekly trips to Olive Garden, plasma TVs, pedicures for the dog, and other miscellaneous waste.

Wealth is only created through innovation and production, not through speculating on consumer items such as housing.