Buying, selling and letting - Thursday, April 18, 2002

The universal question asked by any mortgage hunter is ‘which is the best mortgage for me?’ Paula John of Your Mortgage magazine ponders this question and explains that it all depends on ... well, just about everything

You may be a first-time buyer, a home mover or a remortgagor looking to move your home loan. Whether you're a complete novice or an old hand in the world of mortgages, you want to know the same thing: what is the best mortgage to get? Unfortunately, even the greatest mortgage expert cannot tell you what the best mortgage is. That will vary according to your individual needs, beliefs, attitudes and outlook. So only you can determine which is the best deal for you.

Fortunately, in the ultra-competitive UK mortgage market, there are plenty of excellent deals of all kinds out there, to suit almost every type of borrower. So how do they differ, and who are they most likely to be suitable for?

Fixed rates

As the name suggests, with a fixed rate the rate of interest you pay is set at a particular level for a specified period of time. You can fix your rate for anything from six months to 25 years. In the rest of Europe borrowers tend to fix their rates for 10 years-plus, but in the UK the most popular are two- year and five-year fixed rates. And they really are popular. According to the Council of Mortgage Lenders, in 2001, 33 per cent of all mortgages taken out were on fixed rates.

Of course, taking a fixed rate is a gamble. It's all very well if you fix at a particular rate and then interest rates rise – in fact, you're laughing. But if interest rates were to fall dramatically, you might feel rather hard done by. That is just the risk you take when you take a fixed-rate mortgage. If you are considering a fixed rate, it is imperative that you select a deal that comes with no overhanging redemption penalties.

If the cap fits

One way to minimise any potential gamble of fixing your rate is to go for a capped rate mortgage (sometimes called a 'cap and collar'). With a capped rate, the rate you pay is 'capped' at a maximum level for a set amount of time.

So if your rate was capped at six per cent for two years, you would not pay more than six per cent during that time, even if interest rates go through the roof. On the other hand, should interest rates fall, the rate you pay on your capped mortgage tracks them downwards (sometimes to a minimum level imposed – this is the 'collar'). So a capped rate is a win-win product for the borrower. Sadly, capped rate mortgages are few and far between. So it can make sense to snap up a cap for financial security.

Out for the discount

Another popular option among mortgage borrowers is the discount mortgage. This is where you get a discount off the lender's standard variable rate (see box) for a specified amount of time. There is a huge range of discounts. For example, you might get 1.5 per cent off for one year, or 0.5 per cent off for three years. Or you might get one per cent off in year one and 0.75 per cent off in year two. Such deals are great when interest rates are low. But bear in mind that the discount you get is a discount off the variable rate, so if variable rates increase your mortgage payments will go up too. As with fixed and capped rates, make sure that any discount you choose is free of overhanging redemption penalties.

Stay on track

Another type of mortgage, that has no redemption penalties at all, is the base rate tracker. With a tracker mortgage, the rate you pay will track the Bank of England base rate.
The base rate is not set by a mortgage lender, but is decided each month by the Monetary Policy Committee of the Bank of England. At the time of writing, the Bank base rate was four per cent. So you might get a tracker mortgage charged at base rate plus one per cent, for example. Some borrowers are attracted to these deals as the rate you pay reflects the wider economic picture and cannot be autonomously changed by a mortgage lender on a whim. These mortgages are fine in an environment when base rates are falling, but of course they get more expensive when rates are rising.

Over to you

With such a selection of loan types, it is impossible to say which is the best deal for everyone. It really depends on your priorities. If you want the cheapest rate, go for a discount – but bear in mind your rate could go up. If you want security and peace of mind, opt for a fixed. If you can find one, consider a capped rate. If you want straightforward, hop on a tracker. The good news is that in all these categories there are plenty of competitively-priced mortgages available. Watch out for overhanging redemption penalties and avoid straight SVR products, and you should secure yourself a good deal.

Recent changes in property law have given many owners of leaseholds in England and Wales the right to become their own landlord. A collective of leaseholders may now purchase their landlord’s interest in the block if the landlord wishes to sell. The landlord has to give them the opportunity to buy before selling it to anyone else – this is known as the ‘right of first refusal’ – it was introduced by the Landlord and Tenant Act 1987 and strengthened by the Housing Act 1996. It is a criminal offence if the landlord fails to do what is required. Those thinking of buying leasehold property would do well to consider what their future options are regarding the freehold.

Can any leaseholder purchase their freehold?

Those who qualify include long leaseholders or regulated tenants who hold their tenancy directly from the person wishing to sell. Those excluded include: protected shorthold tenants; tenancies terminable on the cessation of employment; assured tenants; tenants under agricultural occupancies; tenants of three or more flats in the premises being sold; sub-tenants of qualifying tenants; and most business tenants.

Does my property qualify?

The right of first refusal applies to the disposal of any property (not just a purpose-built block) containing two or more flats held by qualifying tenants, provided that more than 50 per cent of the flats in the property being sold are held by qualifying tenants. Where a property being sold contains a mixture of flats and non-residential accommodation, such as shops or offices, the qualifying tenants (but not the others, such as business tenants) have the right of first refusal, if not more than 50 per cent of the internal floor area (not counting common parts – staircases, landings etc) is in non-residential use. Properties held by resident or exempt landlords are not subject to the right.

There are, however, circumstances where a property containing flats may change hands without triggering the first refusal procedure. Transfers within a family or trust are exempt; as are transfers in some other special circumstances, such as the exercise of certain options, compulsory purchase orders, bankruptcy, divorce etc, or a disposal to an associated company, provided that the company has been associated with the landlord for at least two years.

Where can I find out more?

Contact your solicitor or a qualified surveyor or valuer for information on how your particular circumstances may affect the right to freehold purchase. You can also get a copy of a booklet called Long leaseholders – your rights and responsibilities, published by the Department of Transport, Environment and the Regions, by writing to: DETR, HPRS Division, 2/J4, Eland House, Bressenden Place, London SW1E 5DU. Telephone 020 7944 3462.

Leasehold advisory service info

It is intended as a general guide only and is not a substitute for legal advice. It has been produced jointly by ARMA, the Association of Residential Managing Agents, and LEASE, the Leasehold Advisory Service.

What is leasehold?

Leasehold flats can be in purpose-built blocks, in converted houses or above commercial or retail premises.

Leasehold ownership of a flat is simply along tenancy, the right to occupation and use of the flat for a long period - the 'term' of the lease. This will usually be for 99 or 123 years and the flat can be bought and sold during that term. The term is fixed at the beginning and so decreases in length year by year; thus, if it were not for inflation, the value of the flat would diminish over time until the eventual expiry of the lease when the flat reverts to the landlord (although an assured tenancy would then become a possibility).

The ownership of the flat usually relates to everything within the four walls of the flat including floorboards and plaster to walls and ceiling, but does not usually include the external or structural walls. The structure of the building and the land it stands on is owned by the landlord, who is responsible for the maintenance and repair of the building.

The landlord can be a person or a company. It is also becoming quite common for the leaseholders to own the freehold of the building, through a residents' management company, effectively becoming their own landlord.

What is a lease?

A lease is a private contract between the leaseholder and the landlord. When a flat changes hands, the seller assigns all the rights and responsibilities of the lease to the purchaser, including any future service charges that have not yet been identified. It is an important document and leaseholders must ensure that they have a copy and that they understand it. The wording of leases is usually in legal language and can vary from property to property. Leaseholders who cannot understand their lease should get advice.

The lease sets out the contractual obligations of the two parties, what the leaseholder has contracted to do, and what the landlord is bound to do. The leaseholders obligations will include payment of the ground rent and contribution to the costs of maintaining and managing the building; the lease will probably also place certain conditions on the use and occupation of the flat. The landlord will usually be obligated to manage and maintain the property, to collect contributions from all the leaseholders and keep the accounts.

Leaseholders are not necessarily entirely free to do whatever they want in or with the flat - the lease comes with conditions, to protect the rights of everyone with an interest in the building.
Read the lease - understand your rights and responsibilities.

What are your rights?

First and foremost, the right of peaceable occupation of the flat for the term of the lease, usually referred to as 'quiet enjoyment'. In addition, the leaseholder has the right to expect the landlord to maintain and repair the building and manage the 'common parts' - i.e. the parts of the building or grounds not specifically granted to the leaseholder in the lease but to which there are rights of access, for example, the entrance hall and staircases.

What are your responsibilities?

Principally these will be the requirements to keep the flat in good order, to pay (on time) a share of the costs of maintaining and running the building, to behave in a neighbourly manner and not to do certain things without the landlords consent, for example, make alterations or sub-let.
The landlord has an obligation to ensure that the leaseholder complies with such responsibilities for the good of all the other leaseholders.
These rights and responsibilities will be set out in the lease.

What is ground rent?

Because leasehold is a tenancy, it is subject to the payment of a rent, usually nominal, to the landlord. Ground rent is a specific requirement of the lease and must be paid on the due date.

What are service charges?

Service charges are the payment by the leaseholder to the landlord for all the services the landlord provides. These will include general maintenance and repairs, insurance of the building and, in some cases, provision of central heating, lifts, porterage, lighting and cleaning of common areas etc. Usually the charges will also include the costs of management either by the landlord or by a professional managing agent.
Service charges can vary from year to year; they can go up or down without any limit other than that they are reasonable,
Details of what can (and cannot) be charged by the landlord and the proportion of the charge to be paid by the individual leaseholder will all be set out in the lease.
The landlord arranges provision of the services. The leaseholder pays for them.
All costs are down to the leaseholders; the landlord will generally make no financial contribution. Most modern leases, however, allow for the landlord to collect service charges in advance, repaying any surplus or collecting any deficits at the end of the year.
The landlord can only recover those costs which are reasonable. Leaseholders have powerful rights to challenge service charges they feel are unreasonable at the Leasehold Valuation Tribunal (LVT).
When considering the purchase of a leasehold flat, it is important to find out, for personal budgetary purposes, what the current and future service charges are likely to be.

What are reserve funds?

Many leases provide for the landlord to collect sums in advance to create a reserve or 'sinking' fund to ensure that sufficient money is available for future scheduled major works, such as external decorations or lift replacement. The lease will set out the sums involved and when regular, cyclical, maintenance works are due.
Contributions to the reserve fund are not repayable when the flat is sold.

How is the building insured?

The lease will normally require the landlord to take out adequate insurance for the building and the common parts, and will give him or her the right to recover the cost of the premium through the service charges. This policy will not normally cover the possessions of individual leaseholders.

What happens if the leaseholder doesn't pay?

It is the leaseholders obligation to pay the charges promptly under the terms of the lease. As long as the landlord is able to show that the charges are reasonable, then he will be able to take forfeiture proceedings. If approved by a court, this can lead to the landlord repossessing the flat.

What is a managing agent?

A managing agent is appointed by the landlord and manages and maintains the building on behalf of the landlord, in accordance with the conditions of the lease, and current relevant legislation and Codes of Practice. The agent takes instruction from the landlord, not the leaseholders, but should constantly be aware of the leaseholders' wishes and requirements. The agent will receive a fee which will usually be paid by leaseholders as part of the service charges. This may be based on a specified percentage of the day-to-day service charges, but good and common practice is for it to be a fixed fee per annum. Where major works are involved, the agent may charge an additional fee, which would normally be a percentage of the total cost of such works.

What other rights does the leaseholder have?

Probably more than you think. There is wide range of rights set out in legislation and advice is readily available; however, where a dispute arises, the first step should be to ask the managing agent for full details and/or an explanation.

·    Information - the landlord must provide his name and a contact address within the UK which must be stated on every demand for service charges. Leaseholders can demand summaries of the service charges, details of the insurance cover and have the right to inspect accounts and other documents.
·    Consultation on major works - the landlord cannot carry out major works to the building without first consulting the leaseholders in the proper fashion; if he fails to do this, he may not be able to recover all the costs.
·    Challenging service charges - leaseholders can apply to the LVT to seek a determination of the reasonableness of the charges.
·    Appointing a manager - if the landlords management is deficient, then leaseholders can apply to the LVT for the appointment of a new manager.
·    Extending a lease - an individual leaseholder who satisfies certain conditions can demand a new lease from the landlord, with the price to be agreed between the parties or, if this is not possible, set by the LVT.
·    Buying the freehold - groups of leaseholders who satisfy certain conditions can get together and enforce the purchase of the freehold, again with the price being agreed between the parties or, if this is not possible, set by the LVT.
·    Right of first refusal - where the landlord proposes to sell his interest in the building, he must offer it to the leaseholders first or he can be prosecuted.
All these rights are covered in various publications. Click on the underlined text to access the relevant information.

A final question

Should I buy a leasehold flat?

If you want to buy a flat, rather than a house, then you have little choice. Present property law in England and Wales effectively requires that flats be leasehold. However, this should not be a concern as long as you know and appreciate your rights and obligations. With a well-written lease and a properly managed building, a leasehold fiat should provide a perfectly good home and a secure investment.
(c) 2001 LEASE and the Association of Residential Managing Agents

The traditional pension scheme is no longer looked upon as the safe bet it once was. These days property is considered by many to be a much more sound investment. Steve Mansfield, partner at Mortgage Talk Direct, looks at why people are looking to bricks and mortar to ensure a comfortable old age

Pensions have been getting something of a bad press recently. Many organisations, some of them household names, have been revising their pension scheme estimates – often dramatically downwards. Most have now closed their final salary schemes to new employees and some have even suggested to existing staff that they might like to shop around elsewhere. Suddenly the retirement picture is starting to look a little less than rosy.

All this doom and gloom is made worse by the fact that, especially since 11 September, the world’s stock markets have been at best volatile, and at worst seriously underperforming. In bald terms, all this translates to the fact that your pension (if indeed you have one) is probably worth less than you believed. Moreover, the long-term implications are that – assuming that global growth stays within the bands that are being forecast – by the time the current generation of thirtysomethings approaches retirement, their pension provisions will be severely eroded.

Of course, basic human instinct, coupled with the need for financial security, is driving us all to seek alternatives as our pension provisions take a nosedive. This means that, short of stuffing fivers under the mattress and hoping they will magically start to earn interest, we need to re-examine the best ways to capitalise on our earnings potential. If we stop for a moment to think about it, we should all be looking at something that represents a relatively low risk. After all, playing a high-risk strategy with your potential retirement fund is a surefire recipe for disaster – not to mention poverty in later life.

So, what’s the answer? As I mentioned earlier, with the investment markets in the doldrums any form of savings vehicle is going to provide you with a limited rate of return. And with interest rates set to remain at reasonable levels for the foreseeable future, the returns on bonds, unit trusts and even ISAs are hardly going to pay for an annual Caribbean cruise, let alone finance that two-seater sports car that you promised yourself.

No, nowadays the alternative – and increasingly the smart – choice is for wise investors to look at enhancing their property portfolio. The scenario goes something like this: homeowners who have been on the property ladder for a few years will, thanks to steadily rising prices, have built up a reasonable amount of equity in their house or flat. As such, especially where incomes have steadily risen, these fortunate individuals will have seen their mortgage payments plummet to a very affordable level.

Many of these householders, particularly in the South East, will be looking to buy an additional property instead of merely using the equity already accrued in their existing home to fund their next move. Now, this actually makes sense on a couple of levels especially as, despite the occasional peak and trough, UK property prices have shown, and will continue to show, a strong upward trend for the indefinite future.

Firstly, provided that you are sensible about the type of property you choose and the area that it’s in, the rental income available from the property will generally exceed the cost of any mortgage. Certainly on an annual basis the range of discounted rate mortgages currently on offer make it even more attractive to buy a property for the purpose of renting it out. And don’t forget that even if the net rental income only just covers the mortgage cost, you’ll still be quids in after a few years when you take into account the likely rise in property values over this period.

Secondly, if you buy an additional property, particularly as an investment, you can make your own decision as to whether you’d rather live in your existing home or the new one. In fact, mortgage schemes now exist that will enable you to acquire a second property without too much difficulty. And, all things considered, these new entrants help you realise the dream of funding your future through your own property-based empire.

For home owners looking to rent out their existing properties while purchasing a new home, most lenders used to deduct the amount that you had already borrowed from the amount available on the new property. The implication was that you could never exceed a standard ceiling for your mortgage borrowings, no matter how many properties you had. But, more recently, as mortgagees have sought to jump on the buy-to-let bandwagon, this line of thinking has gone by the wayside.  

Nowadays many banks and building societies will take a pragmatic view of your mortgage borrowings, simply by looking at the cost of your existing borrowings over twelve months and treating them as equivalent to a credit agreement. In other words the total cost of the mortgage on your initial property is viewed in exactly the same way as your credit card repayments or bank loan. All that’s needed is confirmation from an ARLA-accredited lettings agent of the value of the likely rental income available from the property. The lender should be happy to accept the mortgage application on the new home concurrent with the existing mortgage. Even more appealing is the fact that many lenders don’t even need proof that the property is actually being let out.

There is another big advantage to this new flexible attitude toward buy-to-lets. In many situations, especially where the property being purchased is a new build, there is a lot of pressure on the buyer to exchange contracts and complete at very short notice. Quite apart from the strain that this places on the conveyancing process, such a tight deadline often means that buyers will find it difficult, if not impossible, to find a purchaser for their own property. Of course it helps in these situations to know that many brokers and lenders can turn around a mortgage application – and issue a formal offer – in twelve days or less. But this still doesn’t help the borrower to find a buyer for his or her existing home.

Thankfully, the buy-to-let scenario is equally applicable to this sort of situation. As such, it allows the buyer to complete their purchase of the new build property while waiting to sell their existing home. And, what’s more, the scheme even allows you to take a theoretical 95 per cent loan up to £150,000 and only requires a 10 per cent deposit above that figure.

But is there still a market for buy-to-let properties? Certainly within affluent urban areas, and especially inside the M25 zone, there are large numbers of young professional people who have a good income but minimal savings. These people are generally at a disadvantage in their quest for property ownership, as they will often struggle to afford a deposit on a reasonable property. However, this doesn’t deter such people from wanting to live in a nice location. So there is a strong demand for good quality rented accommodation.

Because lenders are now happy to look at rental income rather than just salary, the buy-to-let market is starting to move away from the sort of properties that were traditionally occupied by those with a lower income. In fact, the market dynamic has shifted almost completely towards professionals on short-term contracts, typically a six-month shorthold agreement.

Even more exciting than the prospect of becoming your own property mogul is the fact that being a landlord nowadays can also mean a virtually trouble-free existence. Plenty of management companies will look after rent collection – and even maintenance and repairs – for an eight per cent to 15 per cent management fee. For the higher figure, many will even offer a guaranteed rental income between tenancies through re-insurance schemes. And if the property bug bites you even harder, remember that lenders nowadays will lend up to £1 million, provided that your rental income will cover the repayments on this.

So whether you are looking at a second property as a temporary bridging vehicle, or even if you fancy becoming the next Duke of Westminster, there really is something for everyone in the buy-to-let market. And that has got to be the best news in a long time for beleaguered pension holders.

The traditional pension scheme is no longer looked upon as the safe bet it once was. These days property is considered by many to be a much more sound investment. Steve Mansfield, partner at Mortgage Talk Direct, looks at why people are looking to bricks and mortar to ensure a comfortable old age

Pensions have been getting something of a bad press recently. Many organisations, some of them household names, have been revising their pension scheme estimates – often dramatically downwards. Most have now closed their final salary schemes to new employees and some have even suggested to existing staff that they might like to shop around elsewhere. Suddenly the retirement picture is starting to look a little less than rosy.

All this doom and gloom is made worse by the fact that, especially since 11 September, the world’s stock markets have been at best volatile, and at worst seriously underperforming. In bald terms, all this translates to the fact that your pension (if indeed you have one) is probably worth less than you believed. Moreover, the long-term implications are that – assuming that global growth stays within the bands that are being forecast – by the time the current generation of thirtysomethings approaches retirement, their pension provisions will be severely eroded.

Of course, basic human instinct, coupled with the need for financial security, is driving us all to seek alternatives as our pension provisions take a nosedive. This means that, short of stuffing fivers under the mattress and hoping they will magically start to earn interest, we need to re-examine the best ways to capitalise on our earnings potential. If we stop for a moment to think about it, we should all be looking at something that represents a relatively low risk. After all, playing a high-risk strategy with your potential retirement fund is a surefire recipe for disaster – not to mention poverty in later life.

So, what’s the answer? As I mentioned earlier, with the investment markets in the doldrums any form of savings vehicle is going to provide you with a limited rate of return. And with interest rates set to remain at reasonable levels for the foreseeable future, the returns on bonds, unit trusts and even ISAs are hardly going to pay for an annual Caribbean cruise, let alone finance that two-seater sports car that you promised yourself.

No, nowadays the alternative – and increasingly the smart – choice is for wise investors to look at enhancing their property portfolio. The scenario goes something like this: homeowners who have been on the property ladder for a few years will, thanks to steadily rising prices, have built up a reasonable amount of equity in their house or flat. As such, especially where incomes have steadily risen, these fortunate individuals will have seen their mortgage payments plummet to a very affordable level.

Many of these householders, particularly in the South East, will be looking to buy an additional property instead of merely using the equity already accrued in their existing home to fund their next move. Now, this actually makes sense on a couple of levels especially as, despite the occasional peak and trough, UK property prices have shown, and will continue to show, a strong upward trend for the indefinite future.

Firstly, provided that you are sensible about the type of property you choose and the area that it’s in, the rental income available from the property will generally exceed the cost of any mortgage. Certainly on an annual basis the range of discounted rate mortgages currently on offer make it even more attractive to buy a property for the purpose of renting it out. And don’t forget that even if the net rental income only just covers the mortgage cost, you’ll still be quids in after a few years when you take into account the likely rise in property values over this period.

Secondly, if you buy an additional property, particularly as an investment, you can make your own decision as to whether you’d rather live in your existing home or the new one. In fact, mortgage schemes now exist that will enable you to acquire a second property without too much difficulty. And, all things considered, these new entrants help you realise the dream of funding your future through your own property-based empire.

For home owners looking to rent out their existing properties while purchasing a new home, most lenders used to deduct the amount that you had already borrowed from the amount available on the new property. The implication was that you could never exceed a standard ceiling for your mortgage borrowings, no matter how many properties you had. But, more recently, as mortgagees have sought to jump on the buy-to-let bandwagon, this line of thinking has gone by the wayside.  

Nowadays many banks and building societies will take a pragmatic view of your mortgage borrowings, simply by looking at the cost of your existing borrowings over twelve months and treating them as equivalent to a credit agreement. In other words the total cost of the mortgage on your initial property is viewed in exactly the same way as your credit card repayments or bank loan. All that’s needed is confirmation from an ARLA-accredited lettings agent of the value of the likely rental income available from the property. The lender should be happy to accept the mortgage application on the new home concurrent with the existing mortgage. Even more appealing is the fact that many lenders don’t even need proof that the property is actually being let out.

There is another big advantage to this new flexible attitude toward buy-to-lets. In many situations, especially where the property being purchased is a new build, there is a lot of pressure on the buyer to exchange contracts and complete at very short notice. Quite apart from the strain that this places on the conveyancing process, such a tight deadline often means that buyers will find it difficult, if not impossible, to find a purchaser for their own property. Of course it helps in these situations to know that many brokers and lenders can turn around a mortgage application – and issue a formal offer – in twelve days or less. But this still doesn’t help the borrower to find a buyer for his or her existing home.

Thankfully, the buy-to-let scenario is equally applicable to this sort of situation. As such, it allows the buyer to complete their purchase of the new build property while waiting to sell their existing home. And, what’s more, the scheme even allows you to take a theoretical 95 per cent loan up to £150,000 and only requires a 10 per cent deposit above that figure.

But is there still a market for buy-to-let properties? Certainly within affluent urban areas, and especially inside the M25 zone, there are large numbers of young professional people who have a good income but minimal savings. These people are generally at a disadvantage in their quest for property ownership, as they will often struggle to afford a deposit on a reasonable property. However, this doesn’t deter such people from wanting to live in a nice location. So there is a strong demand for good quality rented accommodation.

Because lenders are now happy to look at rental income rather than just salary, the buy-to-let market is starting to move away from the sort of properties that were traditionally occupied by those with a lower income. In fact, the market dynamic has shifted almost completely towards professionals on short-term contracts, typically a six-month shorthold agreement.

Even more exciting than the prospect of becoming your own property mogul is the fact that being a landlord nowadays can also mean a virtually trouble-free existence. Plenty of management companies will look after rent collection – and even maintenance and repairs – for an eight per cent to 15 per cent management fee. For the higher figure, many will even offer a guaranteed rental income between tenancies through re-insurance schemes. And if the property bug bites you even harder, remember that lenders nowadays will lend up to £1 million, provided that your rental income will cover the repayments on this.

So whether you are looking at a second property as a temporary bridging vehicle, or even if you fancy becoming the next Duke of Westminster, there really is something for everyone in the buy-to-let market. And that has got to be the best news in a long time for beleaguered pension holders.

The old adage ‘money makes money’ is never truer than in the case of house builders Octagon, as Karen Keeman discovers after meeting the company’s marketing manager.

Those lucky enough to be already on the property ladder will know that bricks and mortar are a great investment. In buoyant areas such as London and the South East, property is providing the answer to the lack of confidence in stocks and shares.

Over the last few years, the capital growth rate has been phenomenal, with the top end of the market enjoying the biggest price hikes. House builder Octagon is renowned for building prestigious detached houses and apartments in prime town and country locations so it is no surprise that prices for their homes have increased dramatically. At the company’s Ellerton House development in Bryanston Square W1, an apartment sold in late 1999 for £720,000. Just 12 months later, estate agents Kay and Co sold the property for £908,000. In Oxshott in Surrey, a house built by Octagon four years ago selling for £1.25 million was recently re-valued by Knight Frank to the tune of £3 million.
 
‘We charge about 15 per cent more than other house builders because we are offering a home with all the added extras. We provide you with more square feet of living space than you actually need,‘ says David Smith, Octagon’s group marketing and PR manager. ‘The top end of the market is still performing well – in fact, this is our seventh year of profit and good markets in general.’

David Smith on the Octagon X-factor 

Security and privacy are important issues. We install electronically controlled gates and various other safety fixtures as standard.

Location – we reject lots of land before we buy it because we know that the right location will pay dividends for us, and our future residents.
Kitchens – very large and linked to a living area with an adjoining family room as well as an additional playroom/office.
Bonus rooms – a flexible room, which can be used for any number of purposes.
Triple garages – a popular one with dads who don’t want to compromise on space when the children learn to drive.
Big hallways – although this space could be used for a more functional purpose, we believe in creating the right impression from the moment you walk in the home.
Fitted studies – the ideal home office wired up for all the latest hi-tech communication systems.
Bathrooms – luxurious and relaxing with marble floors, Jacuzzi and double size showers.
Dressing rooms – plenty of storage space with these walk-in dressing rooms.  

Where to buy

Shepperton, Surrey

Churchfield Place comprises 11 houses, each with four-bedrooms. Prices range from £545,000 to £650,000. Call 01932 230033.

Walton-on-Thames, Surrey

Manorcroft House comprises four two-bedroom apartments and one three-bedroom penthouse with private parking. Prices range from £375,000 to £650,000. Call 01932 35306.

Hampstead, London

Manor Heights comprises 16 large town houses close to the Heath. The four-bedroom, three-bathroom homes start at £1.25 million. Apartments will be launched next year. Call 020 8458 7311.

Hadley Wood, Hertfordshire

Only two large detached houses remain at Camlet Way, each with five bedrooms. Prices start at £1.75 million. Call 020 8449 3383.

Soaring house prices has meant that it is harder than ever for young people to get on the property ladder. However, when they do, their demands are greater and expectations higher.

According to the Halifax, the UK’s biggest mortgage lender, the average age at which Britons buy their first property has risen dramatically in the last three decades. With annual house price inflation at 16.9 per cent, fewer young people are able to get a foot on the property ladder. The problem is particularly pronounced in London and the South East with the average house price in Greater London now five times the average wage.

As a result, the average age for first-time buyer is now 34, a rise of seven years since 1995. House builder Rialto Homes believe that although the age is increasing, these typically young professionals with good jobs and sophisticated tastes are pushing up the expectations from the starter homes market. Labelled as ‘virties’ (virtually 30) these buyers are demanding contemporary design, good finishes and fashionable kitchens and bathrooms.

With the young professional single or couple in mind, Rialto has launched Grafton Gate in Bedford. The development of 95 one- and two-bedroom apartments, two-bedroom houses and three-bedroom town houses is conveniently located close to the town, which offers a host of attractions for young people including pubs, restaurants and high street shops.

Designed with a range of internal layouts, many of the homes feature flexible accommodation and open-plan living – something that busy virties demand. The development is also suited for commuters to London with nearby St John’s railway station providing a 50-minute service to Kings Cross. Prices at Grafton Gate start at just £65,750. Call 01234 327373.

After 15 years of living with her grandparents, actress Jane Horn decided that she really needed her own space. Having appeared in various West End shows including Les Miserables and Starlight Express, it was important to Jane to be within commuting distance of the capital.

Just a few minutes walk from the Docklands Light Railway, Jane’s new apartment at Barratt’s Central House development in Stratford, east London, provides an affordable home within easy reach of work. Typical of the virties profile, Jane also wanted an elegant home with some added extras. ‘I loved the style of the building and the fact that there will be a gym and sauna in the basement.’

All one-bedroom apartments are sold but two-bedroom apartments start at £199,995. Call 020 8522 1008.

Where to buy

Chelmsford, Essex

Telford Homes is launching their latest development at Wharf Road. Little Docklands comprises 18 one- and two-bedroom apartments featuring state-of-the-art kitchens, stylish bathrooms and unusually shaped balconies. To register your interest call 0870 872 0987.

Woolwich, London

With property prices up to 50 per cent cheaper than in the City, Woolwich has been identified as a new London hot spot. Fairview New Homes has launched Galleons Lock, a development of 55 houses and 667 apartments built in a contemporary style. Prices start at £149,000. Call 020 8511 7895.

Tunbridge Wells, Kent

At the Richard Beau Nash apartments, purchasers have the chance to own a period-style home with contemporary interiors. The Georgian-style building has features such as deep bay windows, tall sash-style casements and wrought iron gates. Inside the 26 new apartments, open-plan living areas and fitted kitchens give a contemporary feel. Prices start at £150,000. Call Copthorn Homes on 01892 530161.

In the world of home loans, it pays to stay informed. Steve Mansfield, Co-Director of Mortgage Talk Direct looks at some of the most commonly asked mortgage questions

Will interest rates increase in the short term?

An interesting one, this, as there has been much speculation in the press recently about interest rates in general, and consumer spending in particular. Because at the moment we have a two-tier economy, property prices are still forging ahead while manufacturing is struggling. This means that any increase in interest rates will have a negative effect on the strength of the economy as a whole. It also results in British exports being more expensive abroad, because of the strength of the pound.

However, many pundits agree that consumer debt will continue to spiral unless interest rates are increased in the short term. It’s always dangerous to speculate, but my view is that rates may well rise a little during this year but flatten out in the medium term. After all, Gordon Brown has to keep one eye on the convergence criteria for the euro.

Is it better to fix or discount at the moment?

Less than twelve months ago, fixed rates were all the rage. But with speculation rife on interest rate changes, many lenders have withdrawn the most attractive fixed rate deals and replaced them with shorter term discounted offers.

Because the market has now swung in favour of discounted mortgages, if you shop around you can get a two- or even three-year discount at a much more attractive level than the fixed rates currently on offer. Even if interest rates rise by, say, one per cent, provided that you choose your discounted scheme wisely, the rate that you will be paying will still be lower than the fixed rates that are available.

General industry sentiment at present is to buy a mortgage product for the short term and, if interest rates or circumstances change in a couple of years, shop around for what’s on offer at the time. That way you’ll be guaranteed to get the best of both worlds. But remember, be careful of lenders that offer good rates but charge swingeing penalties to redeem after the incentive period has ended.

Can I overpay on my mortgage?

The days have long since passed when a mortgage was for a fixed twenty-five year term, and borrowers stayed with their building society for life. Nowadays, thanks to intense competition in the marketplace, mortgages are more flexible than ever before.

Many borrowers like to have some payment flexibility built into their mortgage. This means that should they receive a bonus or unexpected windfall – or even if they are feeling flush that month – they can pay an additional amount to their lender, and hence reduce not only their mortgage debt but the amount of interest they are paying on the debt.

Many lenders will allow their borrowers to pay up to 10 per cent of their outstanding balance as an overpayment in any one year. Some lenders will go even further. Again, however, remember that if you redeem your mortgage before a fixed rate or discount incentive period has finished you are likely to be penalised.

Will my mortgage by portable?

Because personal circumstances can unexpectedly change, many homeowners find themselves having to move house or flat, even though they may only recently have taken out their mortgage. Under normal circumstances this would require them to redeem their existing mortgage and take out a totally new scheme on their new property. From a lender’s perspective, the bank or building society would then run the risk of losing the borrower as a client.

To counteract this situation, lenders have devised a scheme whereby the individual mortgage product can be transferred to another property. Obviously, the original loan against the first property must be paid off in full, with fresh security provided by the new property.

How is the interest calculated on my mortgage?

Historically, mortgage interest was calculated on an annual basis. In the case of repayment mortgages, where both the interest and capital are gradually being paid by the borrower’s monthly repayments, this meant that the capital amount owing was only reduced once a year. In a sense, this resulted in borrowers being charged interest on capital amounts that they had already repaid.

Over the last decade or so, lenders have introduced a daily interest calculation so that borrowers are no longer penalised in this way. The method of calculation used by a particular lender is usually shown in their product information sheet.

What happens if I change jobs?

Thankfully, if you change jobs during the term of your mortgage, this will make no difference to your lender. The key factor to consider is to make sure that you can afford to make repayments on the loan, as it is secured on your property.

If you have changed jobs just before you make a mortgage application – or even during the period while your application is progressing – the lender will, not surprisingly, want to make sure that you have continuity of employment. Because of this you will need to discuss, either directly or through your broker, the individual lender’s attitude to situations such as probationary periods.

If you're interested in investing in property you'll need to study the form first. Paula John, Editor of Your Mortgage magazine, gives some tips on how to become a successful landlord

Returns on buy-to-let property can be very attractive. But there is a lot more to being a landlord than sitting back and waiting for the cheques to roll in every month. In fact if you don't do your homework, investing in property could end up costing you money rather than earning it. So before you undertake this type of investment there are number of things that you need to consider.

Choose carefully

Make sure the property you buy is in an area that is well suited to letting. Your property will be easier to rent out if it is near a large city and is close to local amenities with good transport links. Consult local estate agents and letting agents to determine the supply and demand of rental properties in the area. Advertisements in local newspapers will also give you an idea of how much rent you can expect to receive.

Do your sums

Never underestimate the initial cost of investing in property. Most lenders will only allow you to borrow 80 per cent of the value of the property you want so you'll need to fund a substantial deposit as well as solicitors' fees and other home buying expenses. Most lenders will require your expected rental income to equal at least 125 per cent of the monthly mortgage payment so it's vital that you do your sums first. It is also your responsibility to pay for the maintenance of the property. Furthermore, most lenders recommend that you put some money aside in case something unexpected happens. If there is ever a period where you are between tenants, stop receiving rental income, lose your job or the tenants from hell have set fire to your house, you'll be glad you did.

A landlord's life for you?

Investing in property may not be a stroll in the park – but the more preparation you do before you start out the more likely it will be that your investment will yield financial rewards later. However, remember that any profit you make when you sell the property will be subject to Capital Gains Tax (CGT), which is charged at the highest rate of income tax. (To reduce your costs UCB Home Loans recommends putting the property in joint names to make the most of two personal tax allowances.) You also pay tax on your rental income although mortgage payments are tax deductible. Of course, property prices can go down as well as up but John Crossley, head of mortgages and lettings at Bradford & Bingley, believes that potential landlords shouldn't be too concerned about any short-term slowdown in the housing market. He says: ‘Buy-to-let is a long-term investment and over a period of 10-15 years you would expect the property you had bought to rise considerably in value. If prices do slip a little, now could actually be a good time to enter the buy-to-let market.’