interesting point Howard - can you say what rate the rest of the world is lending to the UK at present - is it .5% or less ?


Howard said:

Paul, you are making the assumption that the UK interest rates are set here in the UK.
You are right in saying that its in the UK Governments interest to keep interest rates low for many years to come BUT that doesn't mean they can keep interest rates low even if they want to.
I see no sign that government borrowing is being brought under control. Also we have no growth in the economy, the governments tax receipts will go down and the resulting deficit will be financed by more borrowing. As soon as the credit referencing agencies realise what is going on, the UK will lose its prized AAA credit rating. When this happens the government will be forced to pay more interest on its borrowings from international lenders, and rates will have to rise.
While no one in the UK wants higher interest rates, you are forgetting that the rest of the world may not want to continue to lend money to the UK at these low rates, and we will have to raise them to attract bond investors to finance government spending

A list of Government bond rates by country is given here >>>

The UK can currently borrow money internationally and get away with paying a relatively low interest rate. This can easily change if the bond markets loose confidence in the UK's ability to deal with fiscal issues. We could quite easily see a situation where UK bond yields rise to the level of France, which would probably see a near doubling of BOE base rate.

My point is that UK base rates is not something the Government/BOE can set on its own. As long as the UK has a borrowing requirement, then the markets will dictate what rate of interest to change the UK and this will be immediately reflected in BOE base rate.

Thanks for that Howard - can you explain why it's so low in Japan ? they don't have a AAA rating and their interest rates have been really really low for years -

Howard said:

A list of Government bond rates by country is given here >>>

The UK can currently borrow money internationally and get away with paying a relatively low interest rate. This can easily change if the bond markets loose confidence in the UK's ability to deal with fiscal issues. We could quite easily see a situation where UK bond yields rise to the level of France, which would probably see a near doubling of BOE base rate.

My point is that UK base rates is not something the Government/BOE can set on its own. As long as the UK has a borrowing requirement, then the markets will dictate what rate of interest to change the UK and this will be immediately reflected in BOE base rate.

Charlie, i am no expert in this but i understand the japan situation is regarded as quite different because a large proportion of japanese government debt (ie bonds) are held by domestic investors. This is not the case with the uk.

Interesting point by Howard - seems like a vicious downward spiral.  Anyone worried?

Paul, you are making the assumption that the UK interest rates are set here in the UK. You are right in saying that its in the UK Governments interest to keep interest rates low for many years to come BUT that doesn't mean they can keep interest rates low even if they want to. I see no sign that government borrowing is being brought under control. Also we have no growth in the economy, the governments tax receipts will go down and the resulting deficit will be financed by more borrowing. As soon as the credit referencing agencies realise what is going on, the UK will lose its prized AAA credit rating. When this happens the government will be forced to pay more interest on its borrowings from international lenders, and rates will have to rise. While no one in the UK wants higher interest rates, you are forgetting that the rest of the world may not want to continue to lend money to the UK at these low rates, and we will have to raise them to attract bond investors to finance government spending

The UK can currently borrow money internationally and get away with paying a relatively low interest rate. This can easily change if the bond markets loose confidence in the UK's ability to deal with fiscal issues. We could quite easily see a situation where UK bond yields rise to the level of France, which would probably see a near doubling of BOE base rate.

My point is that UK base rates is not something the Government/BOE can set on its own. As long as the UK has a borrowing requirement, then the markets will dictate what rate of interest to change the UK and this will be immediately reflected in BOE base rate.

Hello Vanessa,

In response to your thread, i wanted to tell you about an investor I helped to exit a portfolio of 9 properties in South London. He bought them between 6 to 7 years ago and at the time did quite well converting 2 of the properties into 3 and 4 flats respectively. Once done, he had them revalued and refinanced pocketing a nice return.

5 years on and the market has seen the value of the properties drop. His rental income after taking into account management and voids (much higher than the ammeter investor allows) has given him a monthly return of £1200. A 1% mortgage rate increase would see the portfolio go into negative cash-flow.

The gearing was at 103%.

To sell the portfolio as whole would have seen him being forced to look at offers at 70% of the market value and leaving him with a debt of £660,000 plus selling fees.

I have taken the portfolio off his hands with an exchange totalling the value of the debt i.e. at 3% over the market value. He doesn't have any management or maintenance worries, in fact, he made £40,000 as a front end payment from me. I found buyers on a delayed completion basis. They cover the mortgage and all maintenance on the property. He doesn't have the worries of interest rate rises to deal with until i complete. I have negotiated the completion based on a future value for the properties which gives me and my Tenant Buyer, a share of the value uplift. The Lender(s) are aware that i have underwritten the payments and they are in a better position. If they had tried to seek a reduction of debt to equity, given the situation, the investor was prepared to walk away from the portfolio - with the help of a debt reconstruction (mitigation) specialist.

In summary, I have helped the investor who couldn't see a way out, I've strengthened the position for the bank(s) and I've helped 9 motivated buyers into their own homes without needing a mortgage.

Ian made some valid points regarding Rent to Buy - though my role as the "Agent" is much stronger and I have a vested role to play in the Buyers long term success. It is important the Buyer understands that mortgage rates will inevitably increase and as "homeowners" they are the ones responsible to meet these rate increases. 

Thanks for commenting Mike.I am just concerned how the TB would afford the mortgage payments if interest rates rose, how you can "underwrite" the payments and why you would want to take such a risk,  and also that you mention "capital uplift" and, to my mind, there is no guarantee of any, and is unlikely to be in the forseeable future.How and why would you pay £40K upfront?    Who paid these fees and what were they for?  Are they protected, and would they get them back if it all went pear-shaped?How did you do due diligence on the TB'ers to ensure they could meet the payments and all associated costs of owning these properties?Thanks in advance for your help in understanding this. 

Hi Vanessa

All good questions.

Firstly interest rate rises will affect us all not just Tenant Buyers. We ensure they understand it is a market driven process.

A lot of Tenant Buyers can't get a mortgage for reasons outside their control. It does not mean that they would be ineffective at paying a mortgage. We have a method for doing the underwriting and the risk is analysed as part of our due diligence. We have arranged our exit based on the property achieving a predetermined value. It may take some time for this to occur. But our model is based on understanding the growth factors of the area we invest in. We only support certain regions within the UK with this strategy. Yes we are reliant on the property market continuing to gain value - if for no other reason than matching inflation. My Post code has risen by over 5% annually since 2007. 

The £40k payment was based on the way we structured the terms with the Seller and understanding their needs.

I hope this helps.

I interviewed a very high profile LPA last week about a property matter unrelated to his day job.

It was interesting as he said the huge landlords were falling like dominoes and going into receivership.

He mentioned a plumber who earned £23K per year but had acquired £18 million pounds worth of property in the good ol; days of NMD.

This plumber's portfolio is now being managed by LPA.

He also mentioned an interesting case about a taxi driver who acquired £27K of credit card debt and then hung himself because he couldn't cope with the stress.

When the credit card company tried to sue the taxi driver's estate, the judge ruled that they should have never lent that line of credit to the poor fellow in the first place.

This LPA was of the opinion that there were some huge fall outs to come, but the lenders would not be looking to sell portfolios due to negative equity. Their current thoughts are to hold on to stock managed by LPA and "hope that the market improves".

(29-07-2012 06:59 PM)vanessa warwick Wrote:  This LPA was of the opinion that there were some huge fall outs to come, but the lenders would not be looking to sell portfolios due to negative equity. Their current thoughts are to hold on to stock managed by LPA and "hope that the market improves".

This is one of the biggest differences between the USA and the UK. Until last year, USA lenders could not hold property while waiting for the market to recover. They were forced to sell everything they had taken back no matter what the price is. This has the benefit of forcing the market to find a bottom.

That said, the USA Fed has now said that a bank can rent the properties while they continue to market them. More or less acknowledging that in some markets, there is no price at which the inventory can be easily sold. Too much inventory more or less.

The fact that the UK starts from the point of view that a lender can place a bet on the direction of prices by holding back repossessed properties causes confusion in the market.