Buying, selling and letting - Monday, May 17, 2004

With interest rates at a half-century low, more and more borrowers are considering switching their deals. If you’re one of them what should you do next? What Mortgage offers a rough guide

The popularity of switching mortgages has been staggering in the past few years as home owners have taken advantage of low interest rates. Although a surprising number are staying with their current lender, others are driving what continues to be a huge growth sector in the home loan industry.

Why remortgage?

Remortgaging is a good way to escape high variable or fixed rates and take advantage of some of the current fixed-rate or discount mortgages, which have much lower rates. It is also a way to raise funds for an expensive purchase. If you have owned your property for a few years it could be worth much more than your outstanding debt. By taking out a new, larger mortgage you can release money to spend as you choose.
Remortgaging may also appeal if you are on a variable-rate mortgage and believe interest rates are about to rise. You can move to a fixed rate deal before this happens.

The costs

Remortgaging costs money, and before applying for a new deal you should find out just how expensive it is going to be. Common expenses are:
·    Arrangement and administration fees for the new mortgage. Most fixed-rate mortgages have arrangement fees between £150 and £300
·    A mortgage valuation fee, which tends to be between £130 and £300 depending on your chosen lender and the value of your property
·    Any early redemption penalty on the existing mortgage. This can be from three to six months’ additional interest payments if you redeem the mortgage within a certain period of time after taking it out
·    The mortgage indemnity premium. If the amount you are borrowing is more than 75 per cent of the property’s value (loan to value or LTV) you may have to pay a one-off mortgage indemnity guarantee (MIG) premium on the new mortgage
·    Solicitors’ fees
·    Land Registry and local search fees
·    If you have negative equity in the property, you will have to find the additional money that you owe on your old mortgage when you take out a new one. If this is the case, don’t remortgage unless you really have to


Five-point plan

Still unsure if remortgaging is right for you? This five-point plan can help you make up your mind

1 Write to your existing lender and ask for a written redemption statement. This will indicate the exact outstanding balance of your loan and will show any penalties or fees to be charged for redeeming your mortgage

2 Calculate what the legal fees involved will be. These will vary according to the value of the property and the solicitor used

3 Look at the new mortgage offer, including the small print, and ask for a written statement of what your new repayments will be, showing any discounts and all the costs that will be incurred such as the MIG premium and arrangement fee

4 Work out how much you will save each month by subtracting the repayment for the new loan from the old repayment – don’t forget to take the standard variable rate that the new loan will revert to into consideration as well, particularly if the discounted or fixed rate applies only for a brief period

5 To judge whether or not remortgaging is worthwhile, compare the costs with the savings – but don’t forget that the costs will be payable upfront while the savings will accrue over a period of time

whatmortgageonline.co.uk

New homes market given good bill of health

The new homes market in the UK is going from strength to strength, according to figures released today by the UK’s online new homes specialist SmartNewHomes.com. The average price home buyers were willing to pay for a new property rose by 1.3 per cent to £216,115 last month, an increase of 4.8 per cent from the same time last year, indicating that buyers are still finding the means to fund more expensive homes.

Hot spots cool off

Last year’s property hot spots in the North and West Midlands were, along with London, the only regions to see new home prices fall over the last twelve months, dipping an average of three per cent from the high prices these regions commanded last summer.  

Houses rule the roost

The survey also noted a shift in the types of home sought by buyers. Last month detached and semi-detached homes regained the ground they lost to the recent trend for apartment living, accounting for over 52 per cent of new home searches compared to 40 per cent for apartments and penthouses. At their peak towards the end of last year, 47 per cent of home buyers were specifically searching for apartments, but their popularity has decreased as the number of households searching for a city dwelling declines.

Positive for 2004

David Bexon, chief executive of SmartNewHomes, commented: ‘This month’s Demand Index once again demonstrates the strength of the UK housing market in 2004. We are seeing no sign of a decline or reluctance to move, in spite of negative reports or interest rate increases, and more people are finding the resources to buy new homes.

‘The index is also showing the increasing number of people hunting out a different pace of life by moving out of the city and into the countryside, with the consequence that prices in these regions are rising.’
On the recent decision by the monetary policy committee (MPC) of the Bank of England to raise interest rates by 0.25 per cent, Bexon adds, ‘Although no one really wants to pay more for their mortgage, I think that the 0.25 per cent rise could be a good thing – it will suppress house price inflation, which is starting to hit worrying levels. In addition, if new homes supply is increased, as recommended in the Barker report, then we should see a more normal market, which will help affordability at all levels. On the basis that the longer the binge, the worse the hangover, we should see this as the black coffee.’
SmartNewHomes.com

Current account mortgages (CAMs) and offset mortgages offer you flexibility across all your finances. Here’s how they work, says Your Mortgage magazine.

With a CAM, you run all of your finances through a single account – your mortgage, current account, savings and personal loans. Any unspent income you have in your current account at the end of the month is automatically taken off the mortgage debt you owe.

So say your monthly take-home pay is £2,000 and your total outgoings for the month are £1,800, the £200 left over comes straight off your mortgage, and you are immediately paying interest on a smaller amount of debt. And any savings you have are offset against any borrowings.
In addition to this you can access your savings or overpayments whenever you like without having to inform your lender. Again, a CAM has all the features of a flexible mortgage, with added convenience because all of your money automatically works harder for you. It genuinely allows the customer to take full responsibility for repaying their mortgage, and permits the more financially aware borrower to save time and money over the term of their loan.

According to research by Virgin One, eight out of ten homes in the UK with combined borrowings of £50,000 or more would be better off with a CAM than a traditional mortgage, saving interest on average of £16,713 and paying off their mortgage ten years early. The aim is that the mortgage will be repaid before the borrower retires. As long as that is on course there is nothing much wrong with a borrower increasing his or her borrowings by withdrawing from the current account. For this purpose, the lender will issue a chequebook to enable money to be withdrawn for any purpose. The only rule is that the maximum borrowing limit is not exceeded.

Other rules for setting up a current account mortgage are normally that the lender will require a borrower’s salary to be paid into the account each month. The lender will calculate interest on a daily basis. At the end of the month, any money that is left over after the usual outgoings have been deducted reduces the balance outstanding on the account. As long as this outstanding balance is regularly reduced, the process is much the same as making overpayments into an ordinary flexible mortgage, allowing you to potentially save thousands of pounds during the life of the mortgage.
In general, you will find that you pay for the flexibility of a current account mortgage through being charged a higher rate of interest than more traditional mortgages, as the lenders lose money the quicker you pay it back. However, if you learn to manage this type of mortgage well, then it could benefit both you and your lender.

Before you take out a current account mortgage it is important to make sure that you are the right person for it. A CAM requires a great amount of discipline, not just in order to enjoy the savings that are possible should you make overpayments, but also to just pay off the balance itself before you retire.

Housing market booms as agents say no to crash

House prices are up 2.7 per cent from last month and over 12.35 per cent from twelve months ago – the highest rate of annual inflation for over a year, according to the latest survey from the National Association of Estate Agents (NAEA). In the sellers’ market sale prices achieved are, on average, 97.1 per cent of the asking price, indicating that buyers are prepared to pay more to secure the home they want. Additionally, the ratio of buyers to the number of homes for sale has increased to 12:1.
Estate agents are confident of a healthy market. Two-thirds do not expect there will be a housing market crash in the foreseeable future, although one-third is expecting a slowdown by the end of 2005. Potential causes of a slowdown include further interest rate increases, the slowing down of the buy-to-let market, and the effect of the war in Iraq.
Estate agents across the country are reporting increased prices and more buyers on the market, according to the latest NAEA figures.
Melfyn Williams, president of the NAEA, comments, ‘As the weather is heating up so is the housing market, with strong annual and monthly price increases recorded across the country yet again this month.
‘With prices continuing to rise there is inevitably talk of a crash. However, it is looking unlikely that we will see dramatic falls this year, and when the market eventually slows down it will be a softer landing than the spectacular crash predicted by some doom mongers.’

FSA to regulate home reversion plans

The government has announced that home reversion plans, designed to allow home owners (and specifically older people) access to the equity in their homes, are to come under the regulation of the Financial Services Authority (FSA).
Under a mortgage-backed plan, or life-time mortgage, the home owner takes out a loan secured against their home, similar to a standard mortgage. They then receive the proceeds either as an income or as a lump sum. The individual remains the owner and when he or she dies or moves home, the loan is repaid from the sale of the property. These forms of loan will automatically come under the FSA's remit in October this year, when the watchdog takes over the regulation of the mortgage industry.
The Council of Mortgage Lenders (CML) said it welcomed the government's intention to regulate home reversion plans. ‘The Treasury has made the right decision’, said director general Michael Coogan. ‘Home reversion schemes and life-time mortgages need to operate under a comparable system of regulation as soon as possible, to safeguard consumer protection.’

However much you borrow you will have to repay the loan by the end of your chosen term, together with the interest it has accrued, says What Mortgage magazine.

There are two ways to pay off your mortgage: you can either make monthly repayments towards the capital and interest or opt to pay off just the interest each month.

Repayment mortgages

Each month you pay back some of the capital you borrowed to buy your home plus some of the interest. In the early years the majority of your monthly repayments go towards paying off the interest but in later years they reduce the capital you owe. By the end of your chosen mortgage term you will have cleared the loan.

Interest-only mortgage

This is a mortgage where only the interest is repaid each month. At the end of the term you have to find cash to repay the capital you borrowed. You could do this by selling your property; with an inheritance or with the proceeds of an investment vehicle. Most borrowers will choose one of the following investment vehicles:

Endowments

There are several different kinds of endowment policy but all pool your money with that of other investors and invest at least some of the fund in equities.
If you choose an endowment-backed mortgage you are taking a risk – the investment may not perform as well as expected and you could end up with a gap between the value of your endowment and the amount you have to repay.
If you are concerned that your policy won't make enough to pay off your mortgage, you can increase your payments or pay off some of your mortgage with a lump sum or through regular payments; start up another investment such as an ISA; or do a combination of these.
Unlike other investments, endowments include life insurance. This will cover your debt should you die before the end of the mortgage term.

ISAs

Individual Savings Accounts (ISAs) offer you the chance to earn money on your investment without paying income tax or facing a capital gains tax bill when you withdraw your cash. To earn enough to repay your mortgage you will probably need to invest in some sort of equity ISA, which means having exposure to the stock market. There are no guarantees that your investment will grow enough to cover the capital you need to repay.

Pensions

You can back an interest-only loan with a personal pension. At the end of your mortgage term you withdraw a tax-free lump sum from your pension pot to pay off your mortgage debt. You must be aged 50 or over at this time and you can only take out up to a quarter of the fund.
Like other investments, the pension may not grow enough to enable you to pay off the capital you owe.

Rates up again

But what effect will this have?

The 6 May decision of the monetary policy committee (MPC) of the Bank of England to raise interest rates by a quarter of a point to 4.25 per cent  was predicted by many market experts, from economists to brokers. But what will this rate rise do for the housing market? The general feeling seems to be that this move will yield positive results.

Andrew Frankish, operations director of leading mortgage broker Mortgage Talk, is of the opinion that the rise could be a stabilising force. ‘The Bank is acting to try and dampen the runaway house inflation that we have seen throughout the UK’s property market over the last three years,’ he says. ‘Only last year, experts were arguing that house price inflation would slow down to a crawl, and that we might even start to experience the first signs of a housing crash. This has manifestly not happened, and the MPC needs to take steps to bring to housing sector back in line.’

Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA) sees the decision as neither unexpected nor damaging. ‘Whenever the Bank of England puts up rates inevitably a sense of uncertainty is created,’ he comments. ‘However, we have been saying from the start of the year that rates were likely to climb to around 4.75 per cent by the end of 2004. That in itself will not damage the housing market because we know affordability is healthy in historic terms. The last quarter-point hike did not affect the market one jot and we don't believe this rise will have any material effect except perhaps on first time buyers who will be further overstretched.’

House prices continue to rise

The Hometrack April survey of the housing market has reported a 0.7 per cent increase in house prices across the country, following the previous month’s equivalent rise of 0.7 per cent and February’s rise of 0.9 per cent. This year’s monthly rises continue to remain significantly above typical month changes recorded last year and confirm a buoyant start to the year. With demand still outstripping supply, the housing market remains on an upward curve.
Once again price rises were spread across the country; no regions recorded falling values and all the country’s major cities saw rising prices this month.
The overall average price of a house has now increased to £150,800 (last month £149,800), breaking the £150,000 barrier for the first time. The average house price is now over five times the typical household income.

Hometrack’s National Demand Index™ shows that both the number of properties for sale and the number of buyers registered have risen this month. The number of new buyers registered continues to outstrip the number of properties listed, indicating that demand continues to outweigh supply. This excess demand supports the argument that house prices will continue to rise in the coming months. Sales agreed grew by seven per cent, another major increase following last month’s rise of ten per cent. Seasonality could explain some of the increase, but levels of transactions are rising much more than at this time last year (five per cent in April 2003).
Average sales price achieved as a percentage of asking price continued to rise to 96.4 per cent, over two per cent up from the low of 94.2 per cent recorded in last year’s June survey. This is the highest percentage recorded since November 2002 and again provides evidence that demand is strengthening in relation to supply.

The average length of time taken to sell a property has fallen to 4.2 weeks (4.3 weeks in March’s survey). There is currently an average of 10.2 viewings before a sale is achieved. John Wriglesworth, Hometrack’s Housing Economist, comments: ‘House prices continue to rise strongly with no signs of a slowdown. Demand continues to outpace supply, sellers are getting ever closer to their asking prices and transactions are rising strongly. Meanwhile, mortgage lenders are bending over backwards to offer exceptionally attractive mortgage deals at historically low interest rates. Prospective house buyers are also increasingly able to borrow higher multiples of their income to allow them to afford their desired home.

‘The only economic factors that could seriously hinder future rises in house prices over the next year are a doubling of interest rates, stamp duty or unemployment. No economist in the world is expecting any of these for the UK, even those at the IMF. We continue to confidently forecast house price inflation of eight per cent for this year.’

Whether looking to buy a new family home or a buy-to-let investment property, buyers can still make great returns by predicting the next ‘up-and-coming’ area, reports The County Homesearch Company. There is a cliché that the arrival of a premium coffee chain heralds gentrification, but by the time the first cappuccinos are being sipped the canny investors will have already moved in.
The County Homesearch Company has identified ten reliable signs that a district is on the up:

·   Look for skips in front gardens and on the roadsides.

·  Check if the council has plans to impose parking restrictions – residents-only parking is very desirable and can attract buyers to an area

·  Estate agents are often the first to sniff out an opportunity, so look for new upmarket estate agencies opening on the high street

·   Investigate the stock at the local garden centre. Patio furniture and high-style, low-maintenance garden accessories show the presence of time-poor affluent professionals

·    See if the local sandwich bars are re-styling as delis; when Parma ham and Sicilian olives take over from egg and cress, it could be time to call the estate agents

·    Working parents are desperate for good childcare provision. Private daycare nurseries are often very quick to spot new areas of opportunity, so look out for any new openings

·    If the local pub has developed its exterior and installed outdoor gas heating, it is a sign that the ‘al fresco’ crowd is moving in

·   The large supermarket chains have to spot trends well in advance, so keep an eye on any new upmarket stores such as Waitrose

·   When an area acquires a new name, such as Brackenbury Village or Between the Commons, it is a sign that the estate agents are gearing up for a push

·  Curtain, sofa and other interior design shops will start to spring up very rapidly as new owners overhaul their properties

Jonathan Haward, founder and managing director of The County Homesearch Company, comments: ‘As the housing market is still growing year on year, the trend for affluent buyers to move into traditionally down-at-heel areas continues. If buyers want to take advantage of this, they have to spot the signs as early as possible to make the maximum gains.’

Planning permission ensures that buildings go up in the right place and with minimum disruption to the community. Anna Bowden explains

The planning system helps to balance the developments the country needs (for example new homes, factories, offices and schools) with our duty to protect and improve the environment. This balance is essential to ensure that development and growth are environmentally sustainable; that is meeting the needs of the present without affecting the ability of future generations to meet their own needs. It does not control how a building is constructed – that is the function of Building Regulations – and there are also separate systems governing, for example, developments affecting listed buildings or the demolition of unlisted buildings in conservation areas.

Each council must prepare and adopt policies for development in its area, and when you apply to your council for planning permission the application will be decided in line with these policies, unless there are very good reasons not to do so.

Do you need to apply for planning permission?

You do not always need planning permission. It is not required, generally speaking, for changes to the inside of buildings or for small alterations to the outside, such as the installation of telephone connections or alarm boxes. Other small changes, for example putting up walls and fences below a certain height, have a general planning permission for which a specific application is not required. If you are unsure whether you need it or not, check informally with the council. For a fee, you can also apply for a formal decision. This is known as a lawful development certificate. If your council refuses a certificate, you can either apply for planning permission or appeal to the Secretary of State.

Things that you might need planning permission for include working from home, extending existing premises, building flats over shops or building new premises. Working from home is an interesting issue - the key test here is whether or not the overall character of the property will change as a result of the business i.e. is it still a home or is it now business premises? For example, will your business result in a marked rise in traffic or people calling; will it involve activities unusual in a residential area; will it disturb your neighbours at unreasonable hours or create other forms of nuisance such as noise or smells?
The construction of new premises nearly always needs an application for planning permission. The development plan in force in your area will give you some indication of whether or not your proposal is likely to be acceptable, so it is worth talking to your council before submitting an application. If there are difficulties, officers may be able to suggest ways to make your proposal more acceptable.

How to make an application?

It is not necessary to make the application yourself – if you wish you can appoint an agent (for example an architect, a solicitor, or a builder) to make it for you. In most cases a decision will be made within eight weeks, although large or complex applications may take longer. Your council should be able to give you an idea about the likely timetable. There will also almost certainly be a fee involved, the amount of which will vary according to the type of development proposed. The revenue from fees contributes towards the cost to the council of handling applications and the fee is not refundable unless the application is invalid.
Once your application has been accepted, a copy will be placed in the planning register to be available to anyone who wants to see it. The council will also notify neighbours by letter or will fix a notice on or near the site, and may also advertise your application in a local newspaper to give the public the opportunity to express views. Anyone can comment on your proposals. Your local council will assess the relevance of comments and, in the light of them, may suggest minor changes to the application to overcome any difficulties. A report will then be sent to the planning committee or the planning officer making the decision.

The council grants planning permission by sending you a letter notifying you of its decision. Generally, unless your permission says otherwise, you can begin the development at any time within five years of the granting of planning permission.
If you have not started work by then, you will probably need to reapply. If the permission is subject to conditions, for example, requiring you to submit for approval details of a specified aspect of the development which was not fully described in the application, these must be dealt with before the development can begin.
As an alternative to outright refusal, the council may grant permission subject to conditions – for example, restricting what you can do on the premises or requiring you to get specific approval for aspects of the development, such as the materials to be used, before you can proceed. Again, the council has to give reasons for the conditions. If you are not prepared to accept the conditions, you can discuss the position with the planning officer, who may be able to suggest ways of overcoming the council’s objections.

Timeshare meets buy-to-let

The buy-to-let boom has mutated into a new strain – an investment scheme offering people the chance to make money by buying a hotel room and letting it out to guests. Currently being run by company GuestInvest, under the deal investors buy a hotel room for up to 52 nights a year and can earn an annual return of up to seven per cent by letting members of the public pay to stay in it.
GuestInvest estimates that an investor should see returns of between five and seven per cent a year on the room, depending on how often they use it themselves. Revenue from letting the room is shared equally between the hotel and the room owner, and investors have to pay £500 a year towards maintenance and room renovation costs.
The venture is aimed at the type of person who might otherwise have to choose between paying for expensive hotels on a regular basis or buying a city-based home that they wouldn’t use that often.

Ministers step up home loan scheme

The government is to expand its scheme for housing aid for key public sector workers in the south-east. Deputy prime minister John Prescott and health secretary John Reid will extend the £230 million starter homes initiative fund launched three years ago. Loans from the scheme help key public sector workers get on to the housing ladder but will no longer be limited to first-time buyers. The loans only have to be repaid if the workers leave their job or sell their house.
The four schemes on offer are:
·    Homebuy, providing an equity loan of at least 25 per cent of the property value up to a limit of £50,000
·    London Challenge Key Teacher Homebuy, providing a higher loan value limit for which only a small targeted group of teachers will be eligible
·    Intermediate renting, offering a rent somewhere between social and open market rates
·    Shared ownership on new-build schemes, where the purchaser buys at least 25 per cent of the equity and pays rent on the balance
The recent Barker review on housing supply, published alongside the budget, confirmed that the number of newly-built social houses for rent has fallen from 42,700 in 1994–95 to about 21,000 in 2002–03. The current scheme gives priority assistance for teachers, police, nurses and other essential health workers, but these groups are likely to be extended.