The Mortgage Works – You need to know about this risk if prices fall !

by Readers Question

13:23 PM, 4th August 2015
About 3 years ago

The Mortgage Works – You need to know about this risk if prices fall !

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The Mortgage Works – You need to know about this risk if prices fall !

I am just about to buy a property and I had my mortgage in place through TMW (The Mortgage Works). While reading through the Standard BTL Mortgage Conditions:2012 booklet they sent me I noticed right at the back a tiny little clause which I think could have serious consequences for me (and anyone else with a mortgage from TMW ) so much so that I’m now pulling out of the mortgage ! Just want to share the clause here and then some background on what I found out by making feverish calls to my broker and TMW.the mortgage works

The scary clause is, and I quote:

“32.3 If at any time the LTV is greater than the original LTV, we can require you (i) to reduce the debt such as to ensure that the LTV is equal to or less than the original LTV or (ii) to provide us with alternative or additional security acceptable to us (at our discretion) which would, when aggregated with the value of the property, ensure the LTV is equal to or less than the original LTV, or any combination of (i) and (ii). When we make such a request you will comply with it and make such payments and/or deliver such acceptable alternative security as applicable in 30 days o request.”

In simple terms, say you have a 75% LTV and you take out a loan and the property drops in value for any reason then you need to find extra money to make up the difference so that the lender maintains the 75% LTV. Think about that, the property market goes down – you’re happily paying your mortgage and meeting your commitments but they can send a valuer round (at your expense, according to clause 32.2 !!) who may conclude the property is worth a bit less than you originally paid for it so now you need to make up the difference by finding extra money or providing extra security.

A worked example shows how scary the numbers can be:-

£300k purchase price. 75% loan = £225k, Say the price drops 20% so the property is now worth £240k it means the LTV is now 93% so that’s not going to fly for TMW ! They’ll be looking for you to bring that LTV back down to 75% which means that the maximum debt they will accept outstanding is 75% of the new lower price (£240k) i.e. £180k. That basically means you’ll need to pay the mortgage down from £225k way down to £180k …i.e you need to find £45k of extra money or security for them to hold at a really bad time in the property market in 30 days !!!! yikes ! If like me you like to hold money on the sides to pick up bargains when the market is in trouble or to see you through troubled times, you’ll find you’ll be having pay down the debt on your existing property(ies). It doesn’t stop there….if the price continues to fall further they can send a valuer again, and again, and again !!!!

Anyway, I called TMW – couldn’t get any sense from anyone as nobody even had the terms in front of them to read. They then said to ask my solicitor to contact their legal team. Spoke to my broker who spoke to his business manager who confirmed that yes the clause is there but that he’s never heard of it being used before (but then these terms were printed in 2012 so would they really have needed to given the strength of the market?)

The other thing to note is that if you are fixing for say 5 years, presumably like me you are worried about rates rising, which in most cases will mean a cooling off of prices especially if you’ve bought just recently. So on the one hand you’re playing it safe locking the rate in but at the other end of the equation you may be asked for money / security that you don’t have !!

Be interesting to hear others members comments on this…

Beware all – it’s fine if you know the risks going in but even my broker didn’t appreciate how financially painful this could be!

Joel



Comments

Howard Reuben CeMap CeRER

16:02 PM, 4th August 2015
About 3 years ago

"(ii) to provide us with alternative or additional security acceptable to us (at our discretion) which would, when aggregated with the value of the property, ensure the LTV is equal to or less than the original LTV"

What none of us truly know at this time is how they would be able to enforce that?

For any lender to take a charge on another property against your will, would it not have to be via a legal action and unless you had defaulted on your payments, would a court actually allow this anyway?

Things are however always changing in our marketplace and will change again next year when some BTL’s will be deemed as regulated.

Would be interested to know how many people actually fully read the conditions booklet……not many I would guess.

Dr Monty Drawbridge

16:11 PM, 4th August 2015
About 3 years ago

Commercial loans (especially shorter term development) often include these clauses. During the recession NAB Clydesdale threatened to enforce a similar clause to encourage me to agree to a higher interest rate mid term. My latest lender included a similar term but I refused to sign unless they built in a cushion, which they eventually agreed to. Ironically, I think they liked the fact that I was being cautious.

Shakeel Ahmad

19:24 PM, 4th August 2015
About 3 years ago

They may have never used it. The fact is. it is there & they can use it, should concern every prudent borrower.

Placing a charge over another property would be construed as a second charge. The majority of the lenders do not allow this as it diminishes their security unless of course there is substantial equity in the property.

Forum users will know of West Brom using a reason which was not even in the terms & conditions.

There is always the grounds of unfair/restrictive clauses.

Joel Hearne

21:30 PM, 5th August 2015
About 3 years ago

Reply to the comment left by "Howard Reuben" at "04/08/2015 - 16:02":

Hi Reuben,

Can you say that hand on haert to every Mortgage your firm has done with TMW you have pointed out that very clause I have raised here in the terms and condition handbook? Most brokers I talk to say that they dont read the smaller terms and conditions.

What I find annoying is that this should be put in bold in the main paperwork offer where they tell you what the monthly payment will be? Obviously maybe bad for business! Leaves a bad taste to tell the truth....

If a landlord takes out a few TMW loans and the market turns on them, a clause like this if enforceable which I dont see why not can ruin a landlord.

One of the fundamental basis that Mark A talks about in growing a buy to let business is that when property prices go down , you take the lenders money down also and then you use your assets/cash to buy more, this clause is not allowing you to do that and is hurting the borrower....

Michael Barnes

11:55 AM, 6th August 2015
About 3 years ago

Sounds to me like you want to take the benefits if prices rise, but have the mortgage company take the pain if prices fall and you can no longer pay the mortgage.

I would suggest, as Dr Monty has indicated above, that you negotiate on these clauses.
E.g.
a) Aim for having the clause come into effect only when LTV reaches 85%
b) Aim for having it changed to a specific LTV, which may be higher than the initial LTV, say 75%.
c) Ensure that you can pay off some of the mortgage each year without penalty, so if it looks like you are getting toward the 85% (in this example) then you can pay some off without having to bring it all the way down to 75%
d) Negotiate on the valuation clause so that it is based on an online price-change calculator, not a new survey.

Essentially, aim for making it fairer for you whilst maintaining security for the lender.

And whilst you are at it, negotiate on any other problematic clauses, e.g.
- In the wake of West Brom, ensure that any clause to call in the mortgage before the end of the term can only be invoked if you are more than 1.5 month's payments in arrears and have been for at least 2 weeks,
- Ensure that the priority of conditions in multiple documents is stated and acceptable.
- Ensure that there are no woolly worded reasons for them to hike the rate, or do other things.
BUT beware, that if you have negotiated on terms, then you will have less legal protection for unfair terms in the contract (even if you did not negotiate on those).

Monty Bodkin

12:15 PM, 6th August 2015
About 3 years ago

Reply to the comment left by "Michael Barnes" at "06/08/2015 - 11:55":

I don't think TMW will negotiate individual terms and conditions.

I have recently taken a loan out with TMW and I did read all the T&C's, including the term Joel highlights but went ahead as they were the best lender for me at that time with that property. All lenders have some howlers hidden away, it is a case of knowing them and assessing the risk.

I also think Joel may be preaching to the converted here on 118, anyone knowing about the weaseling of BofI, West Brom will surely be checking the smallest of print.

Joel Hearne

12:58 PM, 6th August 2015
About 3 years ago

Reply to the comment left by "Michael Barnes" at "06/08/2015 - 11:55":

Hi, not sure you have fully thought about your comment, if prices fall I will have sufficient cash/assets to buy more property at reduced prices so of course I will be able to pay the mortgage. What I do not want to do at that point is to be forced to reduce the mortgage debt which I am easily able to pay. It's a no brainer and obvious buy to let strategy if you have cash/assets left on the sidelines. I dont want to be using that cash to reduce my current mortgage debt while great yield are available....

Michael Barnes

13:15 PM, 6th August 2015
About 3 years ago

Reply to the comment left by "Joel Hearne" at "06/08/2015 - 12:58":

I know what you want to achieve, but I also understand that the lender does not want to be out of pocket if prices do drop and for some reason you cannot keep up repayments (e.g. you die). The only way they can do that is to ensure that there is sufficient equity in the property to cover the loan and their cost of recovery.

Overall it sounds like you want all the rewards with none of the risk.

Howard Reuben CeMap CeRER

13:23 PM, 6th August 2015
About 3 years ago

Reply to the comment left by "Joel Hearne" at "05/08/2015 - 21:30":

Hi Joel

Reuben is my surname, Howard is my first name.

You raised two interesting points;

1) does a Broker read out the mortgage conditions to every borrower and
2) " .....when property prices go down , you take the lenders money down also and then you use your assets/cash to buy more"

My replies;

1) We are all individually responsible - as borrowers and party to the contract (i.e. the mortgage Offer and T's and C's) - to read the contract terms that we enter in to with the bank.

We all know that the bank will always refer to their contract that the borrowers sign in acceptance, when they want to update, change, amend or instigate terms.

So, it's not a case of whether the Broker reads out the full contract terms and it's not a blame game either, it's basic sense that we all read what we're signing up to. Whether we all do or not is up fro debate.

2) Not sure that works if you're already on a high LTV and if values come down how can extra equity be released if you're already LTV max'd out? If you are choosing to use your own funds / assets to buy more then that is another matter, but if you follow Mark's leveraging advice then you seem to be contradicting these strategies?

I agree with Monty "I have recently taken a loan out with TMW and I did read all the T&C’s, including the term Joel highlights but went ahead as they were the best lender for me at that time with that property. All lenders have some howlers hidden away, it is a case of knowing them and assessing the risk."

Michael Barnes

13:48 PM, 6th August 2015
About 3 years ago

Reply to the comment left by "Monty Bodkin" at "06/08/2015 - 12:15":

I was replying in general, for readers who have not considered negotiating over onerous terms.

If a lender will not negotiate, then you have not lost anything and you can choose to walk away or not.

On the other hand, if you don't ask, then yo won't get.

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