Killer Arguments Against LVT, Not (488)

Although they have lost their deposit it doesn’t matter because they are paying down the mortgage by £5k each year and also continue to save £10k per year. So after 5 years they have built up equity of £75k. The house they want to buy is now worth say £450k (rather than £600k).

“The only people that might lose out significantly are those who bought within a year or two of the LVT coming in”

Some points to note:

1. Trading up will still be cheaper and overall mortgage payments will be lower.
2. If LVT just replaces existing taxes on land and buildings (council tax, SDLT, inheritance tax) then their tax bill – and house prices – won’t change much. They pay a bit more in LVT than they did Council Tax but save as much again in SDLT when trading up.
3. IF LVT goes further and replaces the really damaging taxes like VAT and National insurance, then they will be better off every year, so they can save up, pay off the mortgage, enjoy life a bit more, whatever.
4. If LVT goes further… then there’s no reason to assume that house prices will fall much. The extra net disposable income (VAT and NIC take about one-third of your earnings) will largely go into rent and house prices, so it cancels out.
5. Even assuming house prices fall and some people are in nequity, don’t forget that the principal mortgage amount is just a number.
Let’s say you have a £100,000 mortgage @ 3% interest, 15 years left to pay.
That means annual payments £8,400 = total payments £126,000 over 15 years.
That’s what the bank cares about – the £126,000.
So the bank just replaces the £100,000 @ 3% mortgage with (say) a £75,000 mortgage @ 7.4%. Or a £60,000 mortgage @ 11%.
All those mortgages have the same annual payments of £8,400 for 15 years.
Your payments don’t change, you are unaffected (and have more disposable income) and there is no nequity any more.