What do banks want when you apply for a mortgage?

Sometimes I ask the folks in the office about the questions they are asked by clients they are dealing with at the time, often it will result in comments like ‘the usual’… ‘How much can I borrow? What’s the best rate etc.’ and while that is true, another question often asked is one that is implied but not directly a question.

‘What do banks want from me when I am making a mortgage application?’

The answer, in the sense of principles, is that that they are looking for a way of determining your ability to repay a debt, some mathematics is used, some gut instinct often plays a part too, qualitative is mixed with quantitative.

Banks use different general mortgage calculators and these use your financial information to give different brackets of lending outcomes. In looking at your p60 they try to establish a year on year figure for your earnings, if you got a raise in the interim (if you did recently you are a rarity!) then …

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Current account interest rates are set to drop

Banks have a pool of money called ‘zero rated funds’, this is the money that they hold for which they are paying no interest. Lots of current accounts fall under this category, and banks can figure out with time, the block that is there on a regular basis when you remove the marginal volatility in the funds held at any time.

Imagine you own a money shop and you buy in money and sell it too, in the till you know that no matter what  happens you always seem to have at least €60 in the till, that would be the equivalent of your zero rated funds (hope that makes sense!).

When banks lend they take these zero rated funds and mix them with money bought on the market to come up with ‘blended rates’. So while some money is costing 0% other money might cost 1.269% (that’s today’s 3 month Euribor ), you then get an average of these and depending on what the ‘blend’ or ‘mix’ is your …

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Rent to buy: The pitfalls in practice

Rent to buy is not a ‘new idea’, one of my mentors is a man who built over 10,000 homes in Dublin (he retired in the 70’s having started his business in the late 40’s), but in talking to him he spoke of almost exclusively selling houses in staged payments and renting them out to prospective buyers as a way of paying for the property.

The resurfacing of rent to buy is not evidence of the wheel being reinvented but purely of the prevailing economic environment, however, unlike the way it operated over thirty years ago, today renting to buy is having obligations stitched into the contract that may not be possible to meet in the future and therefore it leaves the renter/purchaser in some slight uncertainty.

One of the primary issues is that of ‘loan offers secured’. When you rent to buy you are essentially (in most cases) saying you will buy the property at a point in the future for the market value at the time of completion of …

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Bank of Scotland cut back on LTV’s

Bank of Scotland recently announced that no longer will support an applicant seeking to borrow 90% for a newly constructed, or second hand property.

In view of the new homes gathering market clearing pace, I feel Bank of Scotland have been a little short sighted here. This profile of the property market accounts for a huge amount of business, especially with builders seeking to offload newly built properties at knock down prices. I don’t think I am being short sighted when I predict fervent activity over the coming months with many first time buyers eyeing dropping prices as an economical godsend, match that with a low rate environment and it gives mobility, choice, and all of this at a price that won’t break the bank.

Paying € 1,100 / € 1,200 for a 2 bed city centre apartment makes sense for people who don’t wish to live with their parents. If we move this on a step further, it makes even more sense to buy. With very low lending rates, you …

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Bank of Scotland cut back on LTV's

Bank of Scotland recently announced that no longer will support an applicant seeking to borrow 90% for a newly constructed, or second hand property.

In view of the new homes gathering market clearing pace, I feel Bank of Scotland have been a little short sighted here. This profile of the property market accounts for a huge amount of business, especially with builders seeking to offload newly built properties at knock down prices. I don’t think I am being short sighted when I predict fervent activity over the coming months with many first time buyers eyeing dropping prices as an economical godsend, match that with a low rate environment and it gives mobility, choice, and all of this at a price that won’t break the bank.

Paying € 1,100 / € 1,200 for a 2 bed city centre apartment makes sense for people who don’t wish to live with their parents. If we move this on a step further, it makes even more sense to buy. With very low lending rates, you …

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Drop in Fixed Mortgage Rates likely

In watching the movements of the Euribor Yield Curve we saw that margins were likely to increase on fixed rates, however, over the month of April we are seeing the yield curve drop below levels seen at the start of the month and that will likely result in a repricing of debt.

What we are seeing is the increasingly bearing outlook feeding through to interbank rates with the expectation of the May cut showing a strong likelyhood of going too 1%, that is why the 1 month money has actually dropped below that mark when earlier in the month it was slightly above it.

The yield curve is generally feeding the market information about inflation and it would appear that after the May rate decrease that the medium term outlook is depressed. The lines hold a tight margin until the two year mark at which point the earlier curve trends higher and today’s keeps that c.20bip difference. Fixed rates don’t always change with rate drops because they are priced off of …

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The banking 'Whitewash'

Meredith Whitney talks about the ‘banking whitewash’, saying that the recent gains in many banks (they have been beating expectations by and large in Q1) are not all down to ‘recovery’ but instead due to other factors.

She says that the factors that lead to these gains are not replicable and that the underlying assets are still deteriorating. This makes for some interesting observation because the great deleveraging of both companies and individuals is still in full swing so there is little reason to doubt the observations Meredith Whitney makes, rather it will be how these factors play into the real economy that concern me.

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The banking ‘Whitewash’

Meredith Whitney talks about the ‘banking whitewash’, saying that the recent gains in many banks (they have been beating expectations by and large in Q1) are not all down to ‘recovery’ but instead due to other factors.

She says that the factors that lead to these gains are not replicable and that the underlying assets are still deteriorating. This makes for some interesting observation because the great deleveraging of both companies and individuals is still in full swing so there is little reason to doubt the observations Meredith Whitney makes, rather it will be how these factors play into the real economy that concern me.

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The Criteria Crunch

We have just been informed that one the lenders we deal with are only getting through applications received by the 4th of March, that is a near 20 day delay on new applications they are considering. Why the backlog? Has the market suddenly recovered? Are they being flooded?

No, rather it is a case that in banks nearly everybody has been enlisted to work in ‘collections’ and the staff were taken from every other department, in particular the ‘new business’ section. The bank we are talking about today merged their direct channel with brokerage so even going via a branch makes no difference, the whole company has only four working underwriters.

So inasmuch as the credit explosion saw too many resources being thrown at lending and the expansion of same, the crunch is doing the exact opposite by overshooting the mark in the reduction of resources. For a publicly quoted bank to be 20 days behind means that the market is facing yet another hurdle in reaching its rational level. Lending hasn’t frozen, people are …

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Preventing Inflation

We’ve had some problems with the embedding code, if the video doesn’t play for you click here

The common view (my own included!) is that there will be some serious inflation coming down the line, the valid point raised here is that all of the liquidity is currently trapped in many mechanisms from deleveraging to recapitalising financial institutions. The hard hand to play will be that of timing with taking the right moves, which frankly doesn’t inspire me hence my belief that we will not get it right and the inflation will come one way or the other! Having said that, it is vital to accept and consider all counterpoints and this is an easily understood one.

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