Interest rates are a scam

[jon]

I lost a house in 1990 when my interest rate went up to 16% which equalled £1700/month.

[JNugent]

Ooh no... that can't have happened.

It's only properly bad for those who have been paying 2% for years and thought it was going to last for years more.

6% now is apparently *much* *worse* than 16% was in the late 80s.

Well, so the Guardian's columnists say.

[SH]

there is some truth in this....

the most peopel could borrow then in the 1980's was around 2x for single income and soemthign like 2.25 to 2.5 for Joint income.

Rool forward to today, you can now borrow up to 4x to 5x times your income.....

so 2.5 x 6% = 15%

One thing that never stops to amaze me is why the majority of BTL investors took out interest only loans?

By having a repayment mortgage deal from day one, you are nibbling away each month at the amount borrowed so two immediate benefits (a) you decrease your LTV quicker opening up cheaper deals when you remortgage and (b) when you come to remortgage that fixed deal and interest rates have gone up, its less of a financial shock so you don't beocme a distressed seller or get into mortgage debt.

Anyone remember the endowment mortgage crisis for homeowners where the planned investment did not perform as expected and this was expected to pay off the amount borrwed at end of term in full and give you some profit?

Could we be seeing some parallels for BTL investors albeit self-inflicted?

[The Natural Philosopher]

The lower interest rates are, the more people will buy more expensive houses.

In the 1970s a typical terrace or small semi was about £16000, today it will fetch ten times that

[SH]

Yes, but up to the limit the bank is prepared to lend plus your deposit or equity from house sale... The bank will typically lend up to some maximum multiple of your single or joint income.

my mothers house bought in 1977 for £9,600. Now worth £200,000. SO try

20 times!

[The Natural Philosopher]

Yes, I haven't been keeping up

[SH]

and (c) you reduce the amount of negative equity should house prices fall below the mortgage amount you borrowed to purchase said house....

[Theo]

Also you got MIRAS so you could pay interest out of pre-tax income, which was a nice bonus of up to 60%.

I think this is BTL's buying a 'portfolio'. If your properties are on interest only, you don't need to worry about paying off the capital, you can buy more properties. Eventually you end up with dozens, with a lot of rent coming in. When you sell them you assume that the property value will go up and so that will pay back the principal.

I'm not sure that interest is a primary concern since that's a business expense and you can offset that against tax. If the numbers don't work out, just raise the rent.

Being a BTL landlord is basically all about leveraging up, and so if the leverage goes bad it all rapidly rolls up (but maybe that's ok if you put it all in a limited company).

However since 'house prices only go up' it hasn't actually worked out as risky as it seems on paper.

(it is even worse in Australia where the previous government put in a lot of effort to keep up house prices, resulting in crazy housing inflation)

Theo

[alan_m]

Those were the "low cost" endowments rather than the traditional type of endowment sold previously. They were pushed hard for the sales commission :)

I had a straight repayment mortgage and took the pain when the interest rates went high but when they fell a bit I kept up the higher payments to reduce the capital amount.

[Bob Eager]

That's what we did.

The insurance we did separately, with a reducing amount insured as time went on. This pissed off the salesman who wanted a nice juicy 'flat' cover. He was already upset because we didn't want an endowment...

[alan_m]

I purchased my house in the mid 1980s and (including the amount of money I initially spent on renovations) is valued at close to x10 more today.

However in the intervening years quite a lot has been spent of new roof, windows, /ch system etc. which i couldn't afford when i first purchased the house.

[Adrian]

In message <u6p01j$20osn$ [e-mail], SH [e-mail] writes

That reminds me of a conversation I had with the mortgage advisor at my local branch of the Bradford & Bingley Building Soc (and look what happened to them). He was advising me to take out an endowment to cover the loan. I asked him what would happen if the endowment failed to make the money it was predicted to. His reply was something along the lines of "the economy will be in such a mess, that will be the least of your worries". Hmm.

Adrian

[Eusebius]

If I needed a new home these days I'd just buy the land and put up a prefabricated self-build.

And one with plenty of solar panels.

[Peter Johnson]

I got a year of Miras when I bought my first house in the 1980s.

I thought the George Osborne had stopped BTL investors from ofsetting loan interest against tax.

[JNugent]

We had three times my income and 1 x my wife's weekend hospital job.

I don't know whether they (mostly) did or not.

But appreciation of property prices (subject to CGT of course) could reasonably be expected to produce a profit in the distant future.

But BTL buyers aren't operating on the same model as a homebuyer.

I certainly do. We worked hard to pay off the mortgage after the youngest child graduated. When the several endowment policies matured, it was savings. Same as the lump sums on retirement.

Don't worry about them. Most of them know what they're doing, I reckon.

[JNugent]

Yes. But it has only reached that price because buyers are willing to take out loans to help them bid up the prices. There is no central committee of evil estate agents, lenders and developers setting house prices!

[JNugent]

My first house, in Lancashire in 1977, was £7,000.

I sold at £15,750 five years later to move south. The cheapest in the same road ATM is £140,000. But that is regarded as cheap. A 95% mortgage at 6% would cost about £690 a month in interest.

[JNugent]

A landlord cannot offset mortgage interest against profit. In a sane world, it would be allowed (it's allowed for any other business). But Osborne stopped it in order to appear sympathetic (to whom wasn't explained).

[Joe]

It's not quite as bad as it looks, general inflation from 1985 to 2022 has been about 3.6 times i.e. the Pound is now worth about 27% of its value then.

House price inflation has averaged about 2.8% above all-items inflation over that time i.e. about 2.8% p/a rise in real terms. Not a bad return on investment, but not stupidly high, particularly if you have spent a bit on it after purchase.

People notice house price inflation because they can usually remember how much they paid in which year, but they don't consider, say, how much a pint of Guinness cost in 1972 (18p) and how much now (no, I don't know, I haven't drunk any for at least forty years).

[Rod Speed]

Bullshit.

That is due to the very much higher immigration rate and lots of weathy asians buying propertys for their kids to live in while getting a decent education and the fact that the release of new housing blocks is much lower than the need for new houses.