May 08: 75% mortgages and other Buy to Let Ramblings…
Hey guys,
Isn’t it amazing the difference 5 months make in the property cycle. Consider January 2008 through to May 2008.
85% becomes 80% becomes 75%…
Well it looks like that mortgages are at 75% for the time being. We dropped from 85% to 80% mortgages in early March and then the end of April saw that drop again from 80% to 75% and now it appears that all lenders have settled at 75%.
Lenders margins from 1.5% margin up to 2.5% margin…
Taking an honest look at the market, what has actually happened is that throughout last year the banks margins were generally about 1.5% over base rate. So using 5% as base rate you would have been paying around 6%-7% interest on your property depending on the arrangement fee.
Jumping forward to May 2008 and the margins are at about 2.5% to 3% above base rate. The base rate has come down but the pay rates and arrangement fees have gone up.
Are they just profiteering? Maybe, but not because of this. Here’s the real sting in the tail. This is where I believe the banks have been profiteering from investors…
Loan to values have dropped from 85% to 75% so not only are the banks making more money through the raise in rates but they have also dropped their risk considerably by only allowing only 75% loan to value. So you and I have to put in an extra 10% deposit. Effectively they are making the same money on less mortgages with a lot less risk.
The Buy To Let Witch Hunt.
Now before you go off on a witch hunt to burn them at the stake consider that the banks have been writing all manner of mortgages for the past 10 years to just about everyone that asked. All this free credit has bred a culture of greed and gluttony. The developers have happily raised prices as the insatiable demand went unchecked, the valuers may have actually believed this could go on forever and let the values raise unchecked, the property investment company’s believed that the market (and them) were invinicible and you and I as investors looked on in amazement and disbelief as it all went up and up so we jumped on the bandwagon to certain riches.
So in effect we are all to blame for our own little part in where the market is at… So I am apologising upfront for the part I played. :)
Anyway the bottom line is that reality has set into the market. With that you need some really blunt and solid education and support (whether or not you own properties).
The real point of this blog is this… Reality is here. You can choose to fear it or you can choose to take advantage of it. The most money in property is always made in the times when everyone is selling.
Warren Buffet says “You should be fearful when people are greedy, and greedy when people are fearful!!!” Awesome statement, I say “When everyone Zigs, You Zag”.
We are smack bang in the middle of the best time to buy now… Why do I say this????
Everyone is desperate to sell… Put simply demand is down and supply is up and the people who are making the money are the ones in the market making the ridiculous offer…
Make no mistake prices are not spiralling upwards, they may even go downwards. If you take away all the smoke and mirrors of the credit crunch and the mortgage meltdown in the papers and media, you’ll realise that our economy is still extremely strong, demand is still relatively high, employment is at record levels and most of all there is still not enough houses to meet the demand.
Ohhh and let me remind you, in order to build more houses you need developers that will build them, and they must have someone to sell them too. In this market things have slowed to the point where developers simply aren’t starting new sites. This is further adding to the already massive shortage. Throw in the fact that lenders don’t like lending on new builds and all of a sudden the problem is getting far worse than expected. Smell an opportunity anyone!!!
Those that own property will make an absolute killing, those that don’t have property ARE becoming the lower middle class and before long the upper poor class, forever sentenced to renting.
I think we all agree that this is a short term, normal market cycle and that if you invest for the long term you will see your investment grow.
So are you going to be the one that says ‘I wish I had of …………‘ or will you be the ‘I am so glad I did ………..’
Now is the only time to buy…
Live with passion,
Brett Wood
PS. Never forget my 2 Year Cash Flow Rule - Whatever the market is doing you need to cash flow your portfolio for a full two years…
