IMPORTANT: How will the ‘credit crunch’ affect your off plan mortgage?
Hey guys,
I just wanted to raise a couple of issues that may affect you if you have bought an off plan and it completes throughout 2008 or early 2009.
We are in the midst the credit crunch and although initially it only affected the US it has now spread across all financial markets. The problem has been that banks are not prepared to lend to each other, the trust has gone. This has lead to a drying up of funds in the world economy and for you and I our mortgage interest rates have increased about 1% - 1.5% this stage and pretty much all buy to let mortgages now have hefty arrangement fees attached.
The result of this increase in rates has meant that the rental calculations do not work at 85% or 90% anymore but are more likely to work at 75% or 80%.
Now the potential problem that I am presenting is this:
Most probably when you were sold the property off plan, the property investment company gave you a wonderful glowing cash flow summary which had a great mortgage deal allowing you to get an 85% or 90% mortgage, the rents they quoted would have been from the RICS valuation and if it was like most cash flow summary’s I see it was wrongly quoted as positive each month. Like thousands of investors you probably thought, great I only need this much money when I complete.
Well the credit crunch has now changed all that. Now before I give you the implications and some of the solutions to the problem, it’s really important that you understand some of the dangers of off plan investing. Of course most property investment companies will never tell you these because all they know is that you exchange and wait and as you wait it supposedly goes up in value. Well, ummm not quite.
Ok so here we go. Off plan investing when the market is shooting up is great because you secure the property through exchanging on it and because the overall market is galloping upwards by the time you come to complete it is worth significantly more than when you exchanged. This is the mis-sold certainty that most property investment companies would have you believe.
The reality is that the market doesn’t gallop upwards all of the time. It gallops upwards then sits stagnant (or what you might call inflationary growth) and the gallops up again.
So if you did buy an off plan property over the past 2-3 years then you bought in a phase of the market which I consider to be stagnant and therefore you may not have seen a huge amount of growth in your off plan property. It’s one of the reasons that YPC has done so little off plan, in fact only 3 developments over the past 18 months.
Now let’s add the effects of the credit crunch. Your property hasn’t gone up in value massively and now the mortgage lending criteria has dropped considerably. This criteria is likely to remain for at least the next 6 to 12 months (and who knows it could become the norm, although I think this is less likely to happen once the fear goes and the competition of a free market comes back)
So assuming you were sold an 85% mortgage and now you can only achieve a 80% mortgage and you bought a £200,000 property, this means that you will need to find an extra £10,000 for the deposit. Now if you were expecting a 90% mortgage and only end up getting a 75% mortgage well that’s an extra £30,000 that will be required.
Now ask yourself, “Can you afford the extra deposit?” If you can’t afford it then you need to start planning now.
Each situation will be different and each person’s circumstances will also need a different response.
So what can you do to overcome this?
Save the extra – If you have enough time and enough extra cash flow you could save the extra deposit.
Borrow the extra – If you can borrow the extra through a personal loan, credit card or perhaps family. Remember you would have been borrowing it anyway so you will only be paying the extra percentage is interest by borrowing.
Remortgage another property – If you have an existing property with equity it might be worth remortgaging this property and using this to fund the difference in your deposit.
On sell (or flip) the property – I don’t really believe this to be a viable proposition for most people in this situation but if you have had some growth you may be able to find another buyer.
Hand the property back now and take a loss – This is an extreme thing to do but it may save you the hassle right at the end and it also gives the developer time to resell the property.
Hold out and hope – The credit crunch may end, the markets may return to the old way, mortgage finance may free up. So you could hold tight and see what happens. I actually think that this is probably a better choice than just handing the property back.
The most important thing is to act early and stay on top of things, its better to know the implications upfront than to wait and not have enough time to get things done. If you feel that this may affect you, I suggest you do two things. Call the property investment company that sold you the property and ask them what they are doing about it and secondly call my team on 0207 812 1255 so they can help you plan efectively.
Live with passion,
Brett Wood
PS. For the most part there is no one to blame for this current crisis except human nature itself. Our thirst to take now, pay later. Our thirst for greater and greater credit, backed with less and less education has lead to financial responsibility being thrown out the door for a lot of people.
PPS. Don’t think this I a predicting doom and gloom by this blog, it is only a small number of investors it will affect and especially those that have bought through many property clubs out there that are more focussed on selling the property than have it complete. If you are concerned give the team a call.
