Buying, selling and letting - Monday, June 17, 2002

As prices in London continue to soar, more people are looking further away from the centre to try and get on to the property ladder. Karen Keeman discovers a new settlement providing over 3,000 new homes which is closer to the capital than you may think.

Just a one-hour train journey from London, work has started on a new development of some 3,300 homes. Cambourne, located nine miles west of Cambridge, is a brand new settlement that aims to provide a self-contained community with shops and services such as schools, doctor’s surgery and a library.

The idea, launched some 15 years ago, was to create a design that would emulate that of a village which has evolved organically over the centuries. This means that the developers have had to build aesthetically pleasing street scenes including traditional terraces, crescents and squares, many of which are set around play spaces and village greens.

The sheer size of the development has meant that a number of builders are involved in the site. Currently at Cambourne, Alfred McAlpine Homes, Bovis Homes, Bryant Homes, Mclean Homes and David Wilson Homes are building properties, which range from one-bedroom apartments aimed at the first-time buyer to six-bedroom family houses, as well as retirement homes and affordable social housing.

The development will be split into three villages – Great Cambourne, Lower Cambourne and Upper Cambourne – and each will be set around a traditional village green. As well as the new homes there will be a business park providing job opportunities for some 5,000 people.

The homes

Cambourne already has 600 homes occupied but with building work scheduled to continue for another 10 years, there is plenty of choice still to come. Properties currently available include: three-, four- and five-bedroom homes from Alfred McAlpine Homes priced from £154,950 to £269,950; three- and four-bedroom homes from Mclean Homes starting at £197,950; four-bedroom properties by Bryant Homes starting at £217,500; and three-, four-, five- and six-bedroom properties available through Bovis Homes and David Wilson Homes.

There are many different styles of properties available, including three-storey town houses which offer flexible accommodation for the whole family. Some homes will overlook the village green and some will have views over the country park.

Hard facts

·    Cambourne lies just off the A428, linking Cambridge and St Neots, and is also close to the A1198, stretching between Royston and Huntingdon
·    Stansted Airport is approximately 34 miles from Cambourne
·    The train from St Neots Station into Londons King’s Cross takes approximately 40 minutes
·    Cambourne has a primary school and day nursery
·    The development will become home to some 8,000 to 10,000 people
·    Cambourne has a number of walk and cycle routes through attractive wooded areas and green spaces
·    For more information call the Cambourne Concept Centre on 0800 3897525

There are thousands of mortgage deals out there: plenty of choice and oodles of competition mean there are good deals to be had. And with interest rates at a 38-year low, they are cheap. However, selecting the right deal for your needs can be a bewildering process. Paula John of Your Mortgage magazine talks us through some of the types of loan available

Just selecting the right type of mortgage is confusing. Should you choose a variable rate, discount, fixed rate, capped rate, cashback, base rate tracker or a combination? Well, right now, fixed rates and discounts are the most popular options. Currently the UK base rate is just four per cent, and mortgage variable rates range from 4.74 per cent to 5.89 per cent.

But interest rates are widely predicted to rise this year and while it is unlikely that rates will shoot up substantially by December, for example, who knows what could happen in years to come? Is it worth locking into a fixed rate in order to protect yourself against the vagaries of potentially fluctuating interest rates?

Fixed mechanics

In order to offer a fixed rate mortgage, a lender goes to the money markets and borrows a 'tranche' of money fixed at a certain rate. The lender then adds on a margin – usually around one per cent – and offers the rate to borrowers. The money markets predict what is likely to happen to interest rates in the future – a year hence, say.

So if a borrower goes for a fixed rate mortgage now, they are already paying the higher price, even though the increase may not happen. Or at least not on that scale.

Plain sailing

Ray Boulger of Charcol suggests you look at what the base rate is likely to do in future. Fixing your rate is a good option if you think the base rate will go up substantially. You will pay at least one per cent more for a fixed rate than a discount, at least in the shorter term. So, according to Boulger, you should only go for a fixed rate if you believe that base rate will go over six per cent in the next year.

Long-term outlook

Other experts believe that it is important to take a longer-term view. While the most popular fixed rates at the moment are two-year deals with no tie-ins, they argue that a five-year fixed rate can bring more value and security.

‘If you want to keep your mortgage for five years, you cannot go wrong with a fixed rate mortgage,’ advises mortgage expert John Wriglesworth. ‘The only downside to having a fixed rate mortgage could possibly be if you thought you might leave the country and travel the world, for instance, or that you were to come into an inheritance in a couple of years and would use the money to pay off your mortgage. In that case you would want a flexible mortgage.’

Watertight

But at what point could fixed rates get too expensive? If a fixed rate is substantially higher than a discount, then surely people should be going for the discount? ‘Absolutely not,’ says Wriglesworth. ‘The rate at which fixed deals are charged is based on forward markets. If fixed rates start getting higher, that is because the markets anticipate a rise in base rates.

In your bones

Sadly, even the greatest expert cannot accurately predict what is going to happen to interest rates. Analysts and the market do get it wrong. So the choice of whether to go for a long or short-term fixed rate or a discount really rests on your attitude to risk and your own feeling about what will happen to rates in the future. The most important things to remember once you have decided are to shop around for the best rate and to ensure that the deal does not tie you in at the end of the term.

What does a mortgage lender do when low interest rates and a competitive market combine to cut profit margins?

Many have been busy developing ‘niche’ products that offer something different to the average home loan. And, says Paula John of Your Mortgage magazine, these can be worth a look

If you are struggling to get your foot on the property ladder, have a penchant for foreign currencies or a passion for the environment, it could be worth looking further than your nearest bank for the ideal mortgage. Innovative new products are vying for your attention.

Guaranteed rise?

Newcastle Building Society recently launched the Guarantor mortgage, designed for first-time buyers facing sky-high property prices. It allows customers to borrow 100 per cent of the value of a property -- providing a parent or close relative stands as guarantor for the 'proportion of the loan which cannot be adequately covered by the borrower's earnings'.

Robert Hollinshead, chief executive at Newcastle Building Society, says the mortgage is designed for young professionals -- such as trainee doctors and lawyers -- whose income will increase rapidly during their career.

You will need a minimum income of £15,000 and the maximum loan is £250,000. The rate is fixed at 5.99 per cent until March 2007 and you can repay up to 10 per cent of the outstanding loan every year, without incurring any penalties. But -- and it's a big but -- anyone offering to stand guarantor should be aware that if the borrower taking out the mortgage defaults on any payments they will be responsible not only for the shortfall, but for the entire mortgage debt.

Room with a view

You can earn up to £4,250 a year tax-free by renting out a room in your home -- a definite help with bills. But until recently lenders have refused to include this income when calculating how much you can borrow.

The Rent-a-Room mortgage from Bradford & Bingley's MarketPlace will allow you to borrow up to 3.25 times your combined salary and predicted rental income, which could increase the chance of being able to afford a property, especially among first-time buyers. You will need a deposit of at least five per cent. Cheltenham & Gloucester is another lender that takes the income generated by a rented room seriously -- they will take up to 50 per cent of the estimated rental income into account when calculating how much you could borrow.

Bank on it

With euro mortgages the loan is provided in euros and the interest rate is based on the European Central Bank (ECB) interest rate rather than the Bank of England base rate. Your monthly mortgage payments must be made in euros. Abbey National and Barclays are the only mainstream lenders to offer euro-denominated mortgages, and they only offer variable rate products.

Euro-currency mortgages may seem to offer the perfect opportunity to take advantage of the lower European base rate -- but there is a major drawback. If you are paid in sterling you will need to change money from sterling to euros every time you make the monthly payment, exposing yourself to currency swings which could cost you money.
Going stateside
Skipton Building Society's Stateside mortgage could offer lower rates, but without the currency risk. It tracks the US dollar’s three-month LIBOR (USDL) -- the rate at which UK banks lend dollars to each other -- for the first five years, but your mortgage is paid in sterling. Historically, the USDL has been lower than the sterling three-month LIBOR. The interest rate on Stateside is reviewed every three months in line with USDL, so if this rate falls then so will your mortgage payments. However, if it rises then so do your monthly costs.

Foreign climes

ECU Group offers a multi-currency mortgage where the loan is spread across a number of different foreign currencies. The debt is actively managed by the ECU Group, which aims to take advantage of currency fluctuations to reduce your mortgage. However, be prepared to pay the price.

The typical interest rate is 1.25 per cent to two per cent above the inter-bank rate of the relevant currencies. There is an annual charge of between 0.25 per cent and one per cent on the loan depending on the size -- the more you borrow, the lower the charge. A 15 per cent 'performance' payment is payable to the ECU Group on any savings it makes compared to a standard sterling mortgage.

This is not a mortgage for the average home buyer. Unless you are earning more than £75,000 (the minimum salary level), have a keen interest in the currency markets and are happy to accept a high level of risk, then steer well clear.

Shades of green

Norwich & Peterborough Building Society offers a 'carbon-neutral' mortgage, for people with an environmental conscience.

The Green mortgage encourages borrowers to increase the energy efficiency of their home, and N&P promises to plant eight trees a year, for the first five years of every new Green mortgage taken out with it. The trees will absorb carbon dioxide emissions equivalent to the amount your home will normally produce -- hence the term 'carbon-neutral'.
There is a discount of 1.25 per cent off the standard variable rate (SVR) for four years, for people buying a brand-new home. A free standard valuation is also included. If you are buying an existing property there is a one per cent discount from the SVR for four years, and a free standard valuation.

Something for everyone
So, what next? When it comes to mortgages it seems the possibilities are endless. In a competitive mortgage market the ball seems to be firmly in the buyers' court.

With traditional pension schemes underperforming, more are turning to bricks and mortar to ensure a comfortable old age. Steve Mansfield, partner at Mortgage Talk Direct, looks at the buy-to-let ‘pension’

These days, the retirement picture is starting to look a little less than rosy, due to a combination of a relatively weak global stock market and a massive pension re-think by employers. Many are now putting their hopes in property, which is seen as a relatively good place to put money long-term.

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. 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. 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.

We’ve become more sophisticated consumers in recent years, increasingly used to choice and willing to look for the best deals. This applies to home loan products as well, with more of us becoming ‘switchers’. Mortgage Talk partner Steve Mansfield considers the benefits of moving your mortgage

Yes, it’s official – people’s expectations have grown up. In every walk of life, we’re becoming more and more sophisticated. And all the while, what we demand from our products and services is increasing. These days the levels of service and quality that we rightly expect from our goods and products has spiralled way beyond what our parents and grandparents could ever have imagined.

What this means is that, as a society, we have moved on from a mere acceptance of the minimal standards that manufacturers and service providers were willing to give us – and told us we should be grateful for. In fact, the whole principle of consumerism has turned this mustn’t-grumble premise on its head. What now prevails is the attitude that the consumer is king and, with it, the concept of product and service mobility.

What I actually mean by ‘mobility’ in the context of mortgages is the idea that the consumer is free to compare and contrast various product offerings from numerous different providers. And that as a result, the borrower can switch mortgages to save money. In other words, a mortgage is no longer for life – in fact in many cases, it needn’t be for more than a couple of years.

From the above, you might well conclude that any inertia to the principle of switching mortgages has well and truly worked its way through the housing market. Well, not so. There’s still a tremendous reluctance among householders to consider alternative schemes and lenders – especially where many borrowers have been with their lender for most of their house-owning careers.

In fact, this is exactly what many lenders strive hard to achieve. Millions are spent on attracting new borrowers, using advertising campaigns targeted at encouraging you to take out a mortgage with them. Then, once you’ve signed up, the lender does its best to discourage you from going elsewhere, often by making you feel that you’re part of a club. Admittedly, this sense of belonging frequently extends to little more than the occasional piece of promotional literature, but it’s still intended to keep you in the corporate fold.

Of course, it doesn’t have to be this way. What we should all do is to tackle the mortgage market with the same degree of consumer savvy with which we have already embraced many high street products. Currently, UK consumers swap their cars on average every two years. Now, although I’m not suggesting anything more than a tenuous link between cars and mortgages, the principle remains the same. When we swap our cars, most of us make a considered appraisal of the market. We assess what our needs are, then look at the models and manufacturers that are available. Then we make a decision, based on our individual requirements.

And this is exactly what we should be doing with our mortgages. While there’s nothing wrong in principle with brand loyalty – after all, many people buy the same model of car time after time – there’s every advantage to be gained in shopping around. And with such intense competition between lenders, many mortgage companies’ product portfolios change every few months anyway. So there’s even less of a reason to stay with the same bank or building society.

But while this all sounds like music to the ears of bargain hunters everywhere, savvy consumers will realise that there are sometimes pitfalls involved with the process of saving money. First up, there’s the paperwork. Certainly in the past we’ve heard of numerous situations where the application forms seem to be designed to put you off changing lenders. Thankfully, that’s no longer the case. In fact, today’s forms are intended to make the process as swift and seamless as possible.

An application to remortgage can often take as little as two weeks to complete. Many lenders have specific application forms that cut down on the number of questions that are asked, as they don’t need the same depth of information as with a house purchase. Moreover, several lenders also have specific procedures in place that help streamline the valuation and legal processes.

Even if you’re considering moving home, there are plenty of attractive deals available that would make it folly not to shop around. Most mortgagees are offering substantial discounts on their standard variable rate (SVR), as well as on a number of fixed rate products. However, given the current economic climate, as well as the undoubted strength of the housing market, the discounted rates are grabbing all the headlines.

One thing to remember with some of the appealing discounts currently on offer is: what happens when the discount period ends? Some lenders will charge a penalty for you to redeem the mortgage and move to another preferential scheme, as a way of recouping the loss of profit from your taking advantage of the offer. This redemption penalty can be up to several months’ interest charges, which can sometimes negate the advantage of moving in the first place.

Therefore, it’s important when choosing your mortgage to select the product on the basis of swapping again once the incentive period ends. Indeed, many lenders realise that you’ll probably be doing this and, while they don’t charge redemption penalties once the discount is over, they will raise their SVR to compensate for those borrowers who will swap after their incentive is over. Think of it this way: if you stay with the same lender after the deal finishes, you’ll be paying for all those other borrowers who have migrated elsewhere for another better rate.

However, don’t forget that if your personal circumstances have changed, there may be barriers to choosing another mortgage with a different lender. For example, if you’ve very recently changed jobs or become self-employed it might be hard to get one of the better deals. The difficulty here is in proving continuity of income sufficient to satisfy the lender that you will be able to carry on affording the mortgage in the future. Because of this, most lenders will insist on seeing at least one year’s accounts, and even then might not give you access to their best rates.

If this all sounds too daunting for you to consider, there is one easy solution. An independent mortgage broker will have access to thousands of products, from hundreds of different lenders. Any adviser that’s worth his salt will assist you in choosing a mortgagee and product that’s ideal for your particular circumstances and pocket. What’s more, they should have a customer support department that will automatically contact you when you’re nearing the end of the incentivised term, with a fresh set of products to choose from.

That way, you’ll always be certain to get the best value from your mortgage, without the hassle of making endless phone calls, or wandering along the high street comparing rates and schemes. And – without a doubt – that’s one of the real benefits of being a modern consumer.

Deciding to buy a brand new home is an exciting time. But as with any home purchase, there is a lot to think about. Here at Hot Property we get to meet a variety of experts who can offer a wealth of advice on a range of topics concerning your new home.

How to furnish your home

Helen Bygraves and Jenny Weiss of Hill House Interiors.

Don’t skimp on the curtain lining. It is worth spending that bit extra for quality lining.
Think of imaginative ways to add extra storage. For example, cubed boxed seats look great – but get them made or buy them so the lid opens up. Glass effect in the bathroom looks stunning but use sparingly because it is very expensive. Carry a folder of all the colours and material samples you have used. That way when you are out shopping you can perfectly match the different tones. If you have small or unusually shaped windows, it’s better to use shutters or Roman blinds rather than curtains. Never use long sweeping curtains in the hall – they will get trodden on and end up looking very messy. Use mirrors to make a room look bigger; with the lights out and candles lit, it will also give the room a lovely soft glow. If you reserve your new home at an early stage, work out where you think you will want your plug sockets and tell your builder. This will save on having to have wires on display.

What’s hot in interior design?

Carol Gearing, managing director of Inside Design Company.

There are a number of key trends to look out for in 2002, inspired by many diverse influences.  We will see a more directional approach to urban living with sleek, graphic interiors juxtaposed against a growing interest in organic natural materials.  As modern architecture becomes more environmentally aware and building practices continue to focus on green issues, so too continues a general interest in contemporary crafts.  Think texture not colour when it comes to fabrics. For example raw linen, patchwork, hessian, felt, mohair and suede, all with soft fluid lines in calming neutral colours.  Prominent tones will be dusky pinks, duck egg blue and silver grey. A strong sense of fashion will be felt as we move towards sophisticated couture fabrics and men’s suiting, (think the smart City-tailored looks of Terence Conran) in subtle pastels, olive green and taupe – forget black, we did that last year. The hard-edge of retro futurism will also make a welcome return featuring monochrome palettes, Latino reds and tangerine orange.  Materials such as chrome, vinyl and plastic will also feature strongly.

How to create your perfect garden

Dave Clarke of Dave Clarke Landscapes prepares the gardens for Bellway Homes.

The most common mistake people make is rushing things. Before you lift a spade, decide on some important factors. Firstly, how much time do you want to spend looking after it? What do you want to use your garden for – eating out, a children’s play area or growing plants? And what is your overall design theme – traditional or modern? Having answered some of these questions, you will then have some idea where to start. If you wish to have a place to eat, you may want a patio. This is perhaps the most expensive item you will put into your garden, so position it carefully to catch the sun and make the most of the privacy available. I would advise putting down a patio with a concrete base as this gives it a solid surface and prevents shifting and lessens the chance of weeds creeping through. As an alternative to a lawn, you might want to consider a low-maintenance garden such as decking, gravel or stone chips. If you already have a lawn laid, look after it and avoid walking on it until it has rooted – which at some times of year could be up to six weeks. The lawn should be watered well when it is new – in the early morning or evening is best as watering in hot sun can damage the leaves. When designing a flowerbed, go for curves rather than straight lines and don’t get too fussy in a small space. Always plant tall plants at the back and smaller at the front. Read the labels closely and remember: just because a plant is small when you buy it, it doesn’t mean it will stay that way. All gardens should have a feature to act as a focal point: a specimen tree, a bench, birdbath, pond, pergola or something similar. Don’t make the mistake of having too many features because this will make the garden appear cluttered.

How to buy off-plan

Chris Crook, managing director of Countryside Residential North Thames.

You have to be very persistent with agents and developers and let them know exactly what you are looking for. Developers want to be assured that once you have found your home, you are in a position to proceed very quickly so have some evidence of this. As soon as you can, ask the developers for plans and drawings of the development and decide what plots you want to go for. But don’t let your heart rule your head and make sure you can definitely afford it – otherwise you will be wasting everyone’s time. Before you proceed, make sure that the information meets all your requirements. Think about what is important to you and don’t be afraid to ask questions. For example, if you have a car, where will you park it, and is it secure? Are the common parts privately managed and is the home north or south facing? Remember, when you buy off-plan you may have to live with building work. So if you have bought plot one of a 2000-unit site, make sure you find out about the developer’s safety record because building sites are potentially dangerous. This may seem like a lot to take on, but there are many advantages of buying off-plan. In a time of rapidly rising prices it’s a way of ‘freezing’ the asking price – the cost of a home tends to increase during the life of a development. Also you often get some degree of choice in the fixtures and fittings and some developers also offer a bespoke service.  

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.