Discussion
Has anyone here ever bought debt? I've got an opportunity to buy some debt off a local home builder/developer (who has entered administration) but it's all quite new to me. It was one of those deals where home purchasers got loaned (mortgage) deposits by home builders. My lawyers looking at the legal aspect of it, but I'm wondering about the financial aspect of it.
Example:
- Purchase Price 2010: £200,000
- Developer Loan to home purchaser: £50,000 - to be paid in full in 2020. Secured on a 2nd charge against the respective property (1st charge being with the mortgage provider/bank)
- Current "Value" of the property: £160,000
Without knowing about the individual home owners and mortgages; they are probably in negative equity. However, if you assume they took out a 25 year long repayment mortgage at an interest rate of 5% - By 2020 (when the £50k is owed in a lump sum) the capital owed to the bank by the home owner would be £110k. Hence as long as the property is worth just as much it is now; I could still get the full £50k back. Of course; the prices could fall even further, the home purchasers could default before or they might be on interest only mortgages (?unlikely.)
How much would you pay today for this £50k of debt which *should* be paid back in 7 years?
Example:
- Purchase Price 2010: £200,000
- Developer Loan to home purchaser: £50,000 - to be paid in full in 2020. Secured on a 2nd charge against the respective property (1st charge being with the mortgage provider/bank)
- Current "Value" of the property: £160,000
Without knowing about the individual home owners and mortgages; they are probably in negative equity. However, if you assume they took out a 25 year long repayment mortgage at an interest rate of 5% - By 2020 (when the £50k is owed in a lump sum) the capital owed to the bank by the home owner would be £110k. Hence as long as the property is worth just as much it is now; I could still get the full £50k back. Of course; the prices could fall even further, the home purchasers could default before or they might be on interest only mortgages (?unlikely.)
How much would you pay today for this £50k of debt which *should* be paid back in 7 years?
Edited by zuby84 on Tuesday 10th September 17:33
Yeah, these are the cohort of home owners who are inherently higher risk for being repossessed. There's a portfolio for sale; so risk will be spread somewhat rather than relying on a solitary property/home owner. They wouldn't have been able to remortgage it without the permission of the 2nd charge on the standard security (bankrupt home builder); of course we'll need to check if this has been done or not (but I doubt it.)
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