The Hidden Sub-prime Buy-to-let Mortgage Crisis
For several years Britain has been denying that it is facing the credit crunch that has gripped the financial markets of the United States. While financial institutions collapsed and entire neighbourhoods were abandoned to become ghost towns throughout the USA, Britain appeared to dodge the silver bullet and emerge unscathed from the loose lending criteria of the early 2000s.
Bankers rejoiced and Government ministers breathed a sign of relief as the UKs financial institutions remained unharmed and the national repossession rate remained below historically high levels. With no financial disasters to answer for the major players in the UK financial markets were content to repeat to the press their belief that the credit crunch of the US fuelled by sub-prime mortgages and loans was simply not applicable across the pond.
However the repossession rate was rising and slowly but surely more and more home owners and property investors were being pushed towards financial disaster. Many are now falling over the edge into financial oblivion but unlike in the United States many of the UKs financially distressed property owners are buy-to-let investors.
Several years ago the UK was rife with seminars teaching people to invest in almost any type of property they could get their hands on in order to fund their retirements. Working in tandem with the seminar companies were developers offloading record numbers of apartments, sometimes off-plan, as well as surveyors and estate agents heavily exaggerating expected rental income levels. Amateur investors were lead to believe that without a property portfolio they would be living poor in their retirement years and as a consequence they sought to buy as many properties – any properties – they could get their hands on.
The situation was exacerbated by the loose lending criteria of buy-to-let mortgages and the almost criminal concept of a gifted deposit. The same amateur investors, many of whom did not even own their own homes, could forgo saving for a deposit to purchase their investment properties as the buy-to-let mortgage products would fund them by way of a gifted, or fake, deposit.
In order for the gifted deposit to work the property on which the buy-to-let mortgage was to be secured would need to be valued at a price higher than its true market value. For example, if a buy-to-let mortgage product allowed a borrower a 15% gifted deposit, there would be no need for a cash deposit if a property on the market for £85,000 was surveyed at £100,000. The £15,000 difference in the surveyed price and the selling price would act as an artificial deposit that the lender would approve of. In the end the investor would not need to contribute any cash for the deposit.
This situation was, of course, too tempting for thousands of wannabe investors to resist. Unfortunately for them the real value of the property above is closer to the selling price of £85,000 meaning that the property is effectively financed at a loan to value ratio of 100%. Therefore the property has no equity and the buy-to-let mortgage is secured against an overvalued asset. Because there are many thousands of properties with buy-to-let mortgages secured against them in this manner in the UK, a hidden sub-prime mortgage crisis exists that is starting to rear its ugly head as amateur investors can no longer keep up repayments on their over-financed buy-to-let properties.
Bankers rejoiced and Government ministers breathed a sign of relief as the UKs financial institutions remained unharmed and the national repossession rate remained below historically high levels. With no financial disasters to answer for the major players in the UK financial markets were content to repeat to the press their belief that the credit crunch of the US fuelled by sub-prime mortgages and loans was simply not applicable across the pond.
However the repossession rate was rising and slowly but surely more and more home owners and property investors were being pushed towards financial disaster. Many are now falling over the edge into financial oblivion but unlike in the United States many of the UKs financially distressed property owners are buy-to-let investors.
Several years ago the UK was rife with seminars teaching people to invest in almost any type of property they could get their hands on in order to fund their retirements. Working in tandem with the seminar companies were developers offloading record numbers of apartments, sometimes off-plan, as well as surveyors and estate agents heavily exaggerating expected rental income levels. Amateur investors were lead to believe that without a property portfolio they would be living poor in their retirement years and as a consequence they sought to buy as many properties – any properties – they could get their hands on.
The situation was exacerbated by the loose lending criteria of buy-to-let mortgages and the almost criminal concept of a gifted deposit. The same amateur investors, many of whom did not even own their own homes, could forgo saving for a deposit to purchase their investment properties as the buy-to-let mortgage products would fund them by way of a gifted, or fake, deposit.
In order for the gifted deposit to work the property on which the buy-to-let mortgage was to be secured would need to be valued at a price higher than its true market value. For example, if a buy-to-let mortgage product allowed a borrower a 15% gifted deposit, there would be no need for a cash deposit if a property on the market for £85,000 was surveyed at £100,000. The £15,000 difference in the surveyed price and the selling price would act as an artificial deposit that the lender would approve of. In the end the investor would not need to contribute any cash for the deposit.
This situation was, of course, too tempting for thousands of wannabe investors to resist. Unfortunately for them the real value of the property above is closer to the selling price of £85,000 meaning that the property is effectively financed at a loan to value ratio of 100%. Therefore the property has no equity and the buy-to-let mortgage is secured against an overvalued asset. Because there are many thousands of properties with buy-to-let mortgages secured against them in this manner in the UK, a hidden sub-prime mortgage crisis exists that is starting to rear its ugly head as amateur investors can no longer keep up repayments on their over-financed buy-to-let properties.
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