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 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

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