Desperate measures for desperate times?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
As house prices in the UK continue to slip-slide downwards, compounding fears that the multi-year housing boom has run out of gas, the country’s largest mortgage lender, Lloyds Bank, has unveiled a new mortgage scheme called “Lend a Hand” to help first-time buyers with little or no personal savings inject fresh blood into the souring market. It is an adjustable-rate mortgage with no down-payment and with a teaser-interest rate for the first three years of just 2.99%. It allows buyers in England and Wales to borrow the entire amount of the purchase price of up to £500,000 ($653,000).
These types of mortgages are high-risk instruments that helped fuel madcap property booms and busts, including bank collapses, in countries like Spain and the UK.
But this one comes with a parental twist. For customers to qualify, they must have a family member (or members) willing and able to place 10% of the loan in a Lloyds savings account for three years as security, where it will accrue 2.5% interest.
“Although times have changed, children still have a similar ambition to their parents – to own their own home,” said the group’s director Vim Maru. “Lend a Hand helps parents to invest in their children’s future and get the best return on their cash.”
And what happens after the first three years are up?
“We’ll also contact you with details of the mortgage options available,” Lloyds says. So on that day, fasten your seat belt. Because the 2.99% was just a teaser rate. The bank cites this “representative example”:
A mortgage of £130,000 payable over 25 years, initially on a fixed rate for 3 years at 2.99% and then on our variable rate of 4.24% for the remaining 22 years, would require 36 monthly payments of £614.32 followed by 264 monthly payments of £692.03.
So after year three, the mortgage payments in this example jump by nearly 14%. To take this example to a place in London, purchased for £500,000, the monthly payment would jump by £296 ($386) a month.
While the scheme clearly has its attractions, including the parental savings account rate of 2.5% in today’s low-interest rate environment, it’s yet to be seen whether it will be enough to lure first-time buyers and their familial sponsors into a highly uncertain housing market. Under-paid and over-indebted, many young people simply cannot afford to put down even a modest 5% deposit on houses whose prices, after they’re adjusted for inflation, have almost doubled in the last 20 years.
Even after multiple quarters of falling prices the average deposit for first-time buyers in London is a staggering £110,182. It’s for this reason that Lloyds Bank is trying to tap the wealth of the baby boomer generation, but even the so-called “Bank of Mom and Dad” is beginning to run out of funds.
All the while, UK house prices continue to trend downward as rampant unaffordability, Brexit-related uncertainty, stamp duty changes (property transaction taxes), and adjustments to mortgage tax relief continue to take their toll. During the final quarter of 2018, values across the prime regional housing markets slipped by 0.9% from where they were at the start of the year, according to London-based property agent, Savills.
In London, the prices of prime property fell by 3% in 2018. During the same period the number of property transactions in the capital’s upmarket “prime” districts slumped 14% to their lowest point since 2008, according to data compiled by LonRes. Property investors are feeling the pain. London Central Portfolio Property Fund, a closed-end fund focused on small apartments worth less than £1 million in Prime Central London, informed its investors that it had to write down the value of its properties by 9.6% over the six-month period ending September 30, 2018.
London may be at the epicenter of the UK’s property downturn, but its reverberations have begun to ripple outwards into the commuter belt and are now affecting nationwide figures. Prices in the suburban and commuter markets around the capital fell by 2.6% and 1.6% in 2018 respectively, according to Savills. Values of other prime properties in the wider south slipped by an average of 1.3%. It was only in Scotland and the Midlands & North that prices rose over the past year, albeit modestly.
It is against this backdrop that Lloyds has decided to launch its “Lend a Hand” mortgage. The scheme is part of a commitment by the bank to lend up to £30 billion to first-time buyers by 2020. The goal is not to stoke a new property boom but rather to keep the current one alive.
While Lloyds is not the first UK lender to dust off the 100% mortgage — Barclays Bank, Yorkshire Building Society, Bank of Ireland and the recently privatized Post Office have all unveiled similar deals in the last 12 months — it is the biggest. More worrisome still, last November, the Building Societies Association (BSA) encouraged lenders to “revisit the case for lending up to 100% loan-to-value ratio mortgages”, arguing that technology could make it easier to determine how risky a borrower is.
According to recent polling by YouGov, many consumers will welcome the return of the high-risk financial instrument with open arms: 48% of respondents said they thought this category of mortgage to be a good idea, compared to 32% who said that it was a bad idea.
Lloyds — and other banks — will be happy to oblige, despite the obvious risks attached. Mortgages for 100% of the purchase price not only help fuel dangerous housing bubbles, they also make them a lot riskier when home prices fall, leaving more and more borrowers with negative equity – where the home is worth less than its mortgage.
At this point, homeowners cannot sell the home unless they put more of their own cash into the deal, which is precisely what most of these homeowners cannot do. That, in turn, sharply increases the likelihood of borrowers defaulting on their loans. And when they default, losses start to cascade through the financial system. And that’s why these 100% mortgages are so risky for banks — and even more so for the taxpayers that end up having to bail them out. By Don Quijones.
Prime Central London housing market is “probably now enduring its most protracted period of price suppression since records began.” Read… What an Investment Fund, Forced to Take a Big Loss, Said about the Housing Bust in Prime Central London
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According to the Institute for Fiscal Studies, house prices in England have risen by 173% over two decades. But average pay for 25-34 year-olds has grown by just 19% over the same period.
They may be in for a lifetime of renting. Rents keep outpacing wages as well.
Britain either needs rent control and/or a crash in home prices and/or a substantial hike in wages.
Not something the aristocracy in Westminster and Canary Wharf would tolerate.
I understand why Lloyds is doing this .They have a ton
of mortgages that will soon be underwater if they don’t find
a way to prop up the real estate market. Hence the new deal.
Securitize and offload the mortgages onto a bunch of knife catchers? It is my understanding that here in the US we have GSEs that insure the vast majority of mortgages and that the mortgage risk doesn’t stay with the banks long. Do you know how this works in the UK? Maybe Lloyds has no mortages on its books either.
This sure looks like Lloyds is running a casting call for “greater fools”. And they even have a nifty way of allowing mom & dad to help them audition.
Good grief – what’s next? Offering mortgages in-utero?
Thanks, Don. Very interesting!!
A few observations: 1) few will probably be able to thread this needle as they need parents who have a “spare” 10% of the purchase price laying around, and they have to be first-time buyers, 2) this is patently unfair to those who do not have parents with money like that, 3) this is effectively an “option” on the purchase: If the property devalues within the 3-year period, the buyer and their parents can walk (unless the loans have recourse clauses to make the debt inextinguishable). And the buyer is paying a low “rent” if they end up walking, only 3% of the value of he property annually. And the upside is, in the unlikely event that the property appreciates, that option is in-the-money, and they can make a tidy profit from this creative but very bizarre loan arrangement. Sounds like there’s blood in the water.
…an option that requires a 3 year hold, that is.
The whole point of setting the 10% figure aside is to get the parents to essentially put in the down payment without thinking of themselves as doing so.
If the loan is paid, the down payment is irrelevant – it would just lower the loan amount anyway. The bank charges more than that 2.5% rate on the loan, so they make more money than they’re giving back here.
If the loan defaults, the 10% is forfeit, acting just like a lost 10% down payment.
In the UK the borrower can’t ‘walk away’ from the mortgage. The borrower is obligated to pay the whole mortage back to the bank
Same thing in 38 US states that are full recourse states, where borrowers cannot walk away from their mortgages either. This includes Florida. Only 12 states are “non-recourse” states where borrowers can walk away. But the mortgage crisis happened in all states, regardless.
From the Lloyd’s site –
“No borrower deposit required – Instead, a family member can put down %10 of the purchase price of your home into a 3 year fixed term savings account.”
Not exactly “zero down” Mr. Quijones… More like other people’s money down.
Parents are rubes though and since they can’t seem to raise their kids with any sort of financial prudence these days I imagine it to be wildly popular.
Reads more like “Find a cheap place and get your kids out of your house for %10!”
A “deposit” in a savings account is NOT a “down payment.” It serves as a guarantee if the kid misses payments. That’s all it does. But it is NOT equity in the house, unlike a down payment which creates instant equity that grows as payments are made, and it makes the mortgage less risky. But there is zero equtiy in this deal
Everybody who can afford a house has one. Everybody else can’t save for a down payment and can barely come up with rent, but at least they’re not paying mortgage interest. Buying will make them debt peons locked into generating cash flow out of the mortgage interest. Lloyd’s needs to get positioned for the bailouts and the bailins ahead of the Brexit meltdown and the defaults start rolling in.
No happy ending here. Just an inadequate upwards wealth transfer.
The example given by Lloyd’s assumes 4.24% (variable) interest for the remaining amortization of 22 years which should be interpreted as covertly deceptive. The gullible (i.e. the sort of borrower that the loan targets) might optimistically consider this as the interest rate for the balance of the loan whereas historically it would be wise to budget for the possibility of double-digit rates.
Maybe Mom and Pop could educate them on this, but then, what do they know, especially when kids want something and the only way to get rid of them is to give it. The upside for the parents (or whomever) is to have the hope that the kids won’t default and eat a big hunk of the 10% deposit. I would also assume that if the mortgage did fall into default, the contract would require that the whole 3-year term, £22,115 be honored in full.
Then there’s the possibility of being underwater at the end of the 3 year term … would the mortgagors consider renewing if they were down say, £50K, only 10%? Maybe if they didn’t renew and if they had to sell, Lloyd’s could give them a loan to finance the loss if they sold.
So many questions, at least for the skeptical mind.
The only way rates could go double digit is if consumer price inflation goes double digit as well. While not particularly pleasant, with two earners who are young and healthy they can probably keep up with that treadmill. If they survive to the end, then the principle value of their mortgage will have been destroyed by inflation and they’ll still have the house, so not the end of the world by any means.
Compare this with someone who is prudently saving for a better deposit, or waiting for the ‘crash’ instead. They won’t even be able to take their savings out at the end and burn it to heat their dilapidated rental property, as the notes are made from plastic now.
This is the new normal.
Wikipedia indicates ALL UK mortgage loans are full recourse (ie: you can’t hand over the keys and walk away).
“0% down with family depositing 10%” is pure dynamite for three parties:
o First-time buyers (who really can’t afford a house)
o Family depositing 10% (apparently they can’t/don’t want to “give” 10% to the kids)
o Bank shareholders (including taxpayer-backed safety net)
These things should be strictly illegal, especially in a depreciating market. This is management malpractice & regulatory stupidity.
If the mortgages are full recourse, that’s an additional bonus. Lloyds can apply the 10% security deposit immediately as part of funding for the mortgage, on which it collects the 0.5% difference. If the mortgage defaults, the security deposit can cover the loss without going to court.
Lloyds is making a smart and callous calculation that the central banks with backstop their creation, the debt bubble (or everything bubble).
The deposit is only there for the first three years. What if the market falls for three years and than doesn’t move for a decade? Obvious totally unlikely with China in recession, oil price up, retail collapse and Brexit
And even if, in a theoretical 25 year scenario, where interest rates average 4.24%, how long could a finAncially stretched buyer continue to make pAyments if rates rose/spiked to 8%?
The buyer doesn’t know what rates are going to do when they hit 8%. Most likely he’ll fear they keep rising. So there is a very good chance he defaults / stops paying, and the bank gets the house back and has earned all the interest along the way. And the “home owner” as they curiously call him, gets nothing or likely worse, finAncial penalties, bad Credit rating, etc etc
“Do you own your home or do you rent?”
As if there were only those those states of being.
Looks like USA in 2007…
Oh man, if we can only get the banks in the US to copy the Brits.
Then we can keep the housing bubble inflated for a while longer.
At least the financial institutions of the UK knows how to Make England Great Again. (MEGA) And that’s even a real word. Wish we had those here instead of the boring old American banks with the evil Fed watching over them. Although I think Lloyds should not hold the parents hostage.
Hi Don, interesting article. Not all UK banks are following the lead such as Lloyd’s above. RBS-Natwest have become ultra risk averse in the last year for whatever reason.
Is “rent to buy” a thing in the U.K?
The single most important factor causing an economy to be experiencing good times or bad times is the rate at which bank loans are being created versus the rate that they are being paid off. Most academic economists ignore debt as an explanation of anything. I have to thank a few rebels like Steve Keen and Richard Werner for filling me in on this basic, and one would think obvious, fact.
The average UK household income ratio to property price is a staggering 9.7 ie twice the long term average. House prices have been falling for the past 2 years and rents are com8ng down as well. First time buyers weren’t buying then. Why would they buy now that the expectations are for lower prices down the road. With Brexit and a global recession on its way, there will be bargains soon.
Hi , thank You Don for a great article again,
There is absolutely ( emphasis on absolutely)
Nothing that will wash the bloated Economies
Of the English speaking world and get them to rejuvenate and climb out the pit that ( their leaders) have put them in! Except to swallow the Poison Pill that the level headed (unsponsored) Economists prescribe ( that is to let a clean recession to wash over these embattled Economies.
No amount of prop ups, shonky, inventive remedies will save their carcasses , You can’t blow life into a dead animal, and you don’t reinvent the wheels either.
Question is, how would the current crop of politicos survive such Revolution?! and what obligation do these countries have to their long suffering citizens to make such an upheaval less unpleasant than it would?
another question by the by would be , are our jails large enough to accommodate those scoundrels that brought us to this point ?
Thank You Don . Wolf you’re a lucky man to have those great contributors to this fantastic joint! :)
This is the bank that we taxpayers bailed out and here we are going into the teeth of another downturn and it offers mortgages that leave it completely exposed to said downturn. I guess that iron clad governance deserves a round of bonuses?
I lived in in England until July 2008, and got out deliberately just before the Crisis, which was not in the least unexpected by anyone who paid attention to what real people were doing.
The thing that matters is not the mortgage conditions, but the lending standards. In practice, loan salesmen for the mortgage issuers were telling people from 2006 onwards to write any number in the income column of the application column, and it would not be checked. They and their bosses, tacitly approved of by the higher-ups, were ignoring all checks for the purpose of sales (and their own bonuses). And if anything the pressures on those sales people are now worse, and their understanding of their clientele lower. That is no different in North America, with the exception of the rural lenders there, but they don’t have the volume or the value to affect things.
Another debt-based crash is inevitable because the banks remain, in practice, unregulated. One look at Wells Fargo’s antics tells you that.
I live in a UK ‘property hot-spot’ (and bio, hi-tech, etc, ‘growth hub’).
Property has gone up by some 400%, since 2000,in my charming (but not ‘picture postcard’) village, very well located and with an excellent state school for under-11’s.
Quite insane: but every house that sold last year at this inflated valuation is being gutted, refurbished, and hugely extended, and as I write hew houses (4-5 beds) are going up where people can squeeze them in. The gardens are very big for the UK and some plots were smallholdings in the 19th century. I could build another house on mine, but I prefer a small orchard rather than pouring concrete, I leave that to the next barbarian.
Why can’t people get a deposit together?
What was the rent on a 3-bed house (and you could then sub-let a bedroom or two) in 2000, is now the rent on just a bedroom in a shared house (a sensible move if you wanted to save for a deposit, or it used to be….)
As for the parents, there are many people in Britain who, even if they started out with not much, find themselves retired with decent pensions and share -holdings, a few hundred thousand in the bank, earning nothing, and this seems sensible to them. They also find the thought of their children paying huge rents very painful indeed.
The Spring property market is about to open here, and I shall be fascinated to see what happens. But more interested in my apple trees.
Some of the comments here are with respect missing the point. There are plenty of potential ‘first time buyers’ in UK that are renting but cannot afford to buy because after paying the rent there is not enough left over to save much if any for a deposit. Lloyds deal enables such renters to stop funding the landlord’s lifesyle and start owning a home they can call their own.
The svr after 3 years is only a guide. Presumably there would be nothing to stop the borrower from switching to another fixed rate mortgage.
As for the bank of mum and dad, 10% guarantee is nothing. All the family member has to do if they don’t have the cash is mortgage some equity in their own home.
House price slumps are nothing new. If push comes to shove, the guarantor can let the property or allow the default.
First thanks DQ & Wolf for your coverage of Europe on this excellent blog.
One anecdotal observation on UK first time buyers and their calculations from a friend about to buy the first property in a so-called shared ownership, a scam in its own right. My friend was distressed as the bank had twice within days increased the deposit requirement from 10% to 15% and then again to 20% on what was supposed to be a done deal. When asked why the bank would do that, the first guess was: Brexit, second guess: the non-British nationality. My friend now sees the higher deposit (which the family will pay) as positive for making the place more “affordable” as the mortgage amount is lower.