Buying, selling and letting - Tuesday, May 25, 2004

The number of mortgage types on offer today is almost infinite, with capped, cash back, flexible, CAM and offset among the options. However, discounted and fixed rate are still the most popular. Your Mortgage magazine clears up some confusion.

A cut below

If you are a dedicated bargain hunter then a discounted rate mortgage could be the deal for you. This type of mortgage, as the name suggests, gives you a discount off the lender's standard variable rate (SVR) for a set period of time – usually between two and five years. Every lender has an SVR, which tends to go up and down in line with the Bank of England base rate.
With the base rate currently at a low 4.25 per cent, most lenders' SVRs are also low. So discounts off these low SVRs are currently more attractive than they have ever been and there are real bargains to be had. A key advantage of discount deals is that you can get the benefit of a low mortgage rate when you most need it, leaving you with more money for the other expenses associated with buying a home, such as solicitor's fees, stamp duty and furnishings.
There is, however, a risk attached to discounted rate mortgages. If your lender's SVR should go up during the period of your deal, then so will the rate you are paying. And although mortgage rates are still very low they are on the up, taking lenders’ SVRs with them and pushing more mortgage borrowers towards fixed rates.

Fixed up

So are fixed-rate mortgages a safer bet? The main advantage of fixed-rate mortgages is that you know exactly what your payments will be for a set period of time. Whatever happens to the base rate you have the peace of mind of knowing your mortgage payments will not change. The most popular fixed-rate mortgages run in duration from two to five years (and are often charged at a similar rate to the initial pay rate on a discounted rate over the same term), but there are also deals fixing from six months through to 25 years.
However, lenders protect themselves against unexpected interest rate increases, and long-term fixed rate mortgages may be priced higher than their current SVR. Opting for a fixed-rate mortgage also means you will miss out on any falls in the base rate or the SVR, and you could be left paying an uncompetitive rate.
However, if you take out a fixed-rate repayment mortgage you should bear in mind that you will have to arrange separate life insurance. You also have to begin a new mortgage term each time you move house, whereas you can continue your existing term with an interest-only deal.

Two sides

So should you fix or is a discount more your style? Andy Homer, spokesperson for Alliance & Leicester, believes that whether customers should opt for a fixed- or discount-rate mortgage depends largely on their view of the economy, attitude to risk and personal circumstances.
‘There are some very good deals on both sides,’ he says. ‘Borrowers who are more risk-averse should consider a fixed rate, as there are some very competitive deals out there. However, if you believe that the economy is stable and you want to take advantage of possible interest rate cuts, then a discount could be more suitable, although borrowers should remember that with discounts there is the risk that rates could go up,’ he adds.

The right one

There is no right or wrong when it comes to choosing the best mortgage. What may be the perfect deal for your neighbour may not suit you. If you are uncertain it may be worth choosing a short-term deal, say a two-year fixed or a one-year discount rate mortgage, remortgaging to a different loan at a later date if necessary.
Homer says, ‘We are seeing a growing number of people going for short-term deals, reflecting widespread confusion and uncertainty about the state of the economy.’
Whichever mortgage deal you opt for, just make sure that you have first considered your needs and the market carefully.

You no longer have to choose a fully flexible mortgage to get the benefits of many of the features associated with them. What Mortgage magazine helps you find the sort of flexibility you really need.

The word ‘flexible’ is one that seems to have only positive connotations, so it’s little wonder that many of us are attracted to flexible mortgages. We’re told we can make overpayments to clear the debt early, take payment holidays or make underpayments when financial pressures come to bear, and even borrow extra cash if we need to make a substantial purchase further down the line. But not everyone will use all the features, so – as it’s no longer necessary to restrict yourself to a fully flexible deal to get some of the benefits – it’s worth considering what you want from your mortgage and then shopping around to find it at the best price

Overpayments

What are they? A lender will tell you how much you need to pay monthly in order to clear your mortgage by the end of your chosen term. Where an overpayment facility is available, you can make larger payments each month and pay off lump sums from time to time.

Why would I want to? ‘By making overpayments you are killing two birds with one stone,’ says Alan Dring, head of sales at Standard Life Bank. ‘You’re potentially reducing the period of your mortgage and you’re saving money.’ The sums don’t have to be big to have an impact on the overall cost of your loan. According to Skipton Building Society, on a repayment mortgage with a rate of 5.50 per cent, originally arranged over 25 years, increasing your monthly payment by just £50 to £665 would cut the cost of your mortgage by £13,960, thus reducing the repayment term by three years and eight months. Rather than overpaying to clear your mortgage early, if you choose a deal with underpayment and drawdown facilities you can overpay and buy yourself breathing space when money is tight.

Where can I find them? ‘The majority of lenders now allow overpayments to a certain extent on many of their products,’ says Rob Clifford, managing director of broker Mortgageforce. Nationwide Building Society, for example, allows borrowers to overpay by up to £500 a month on its fixed-rate and discount deals and offers unlimited payments on its fully flexible loan. Meanwhile, HSBC allows all borrowers to make overpayments of up to 20 per cent of their regular repayments.

How do I use them? Your lender may help you arrange overpayments at the outset. This is the case at Yorkshire Bank, says marketing manager Martin Allton. ‘At the initial interview the adviser will discuss what you are comfortable with overpaying each month,’ he says. This is reviewed each year but, in common with most lenders, the bank will let you increase your overpayments any time you want. Lump-sum payments can be made at any time: by post, in a branch or sometimes even online. Some lenders add the extra payments to your mortgage account, while some hold them in a separate account. Standard Life calls this your Prepayment Reserve, while Bristol & West directs the money to an offset account. Dominic Toller, spokesman of Bristol & West, explains: ‘Overpayments are put in your offset account and labelled differently so you can see how much you can borrow back.’

Underpayments and holidays

What is it? Flexibility means being able to reduce the amount you pay each month or to take a break from monthly repayments. This is where the terms and conditions applied by lenders tend to differ.
Why would I want them? Perhaps you foresee a period when you will have less money. ‘If people indicate that they are planning a baby-break or may experience regular income interruptions – for example they’re contract workers or freelancers – the adviser would look at these features,’ says Rob Clifford. The features could also be useful on a buy-to-let mortgage where borrowers might experience void periods.

Where can I find them? These facilities are less common than overpayment facilities and may only be offered on a lender’s flagged-up flexible mortgage. Even on a fully flexible loan they may be restricted.
How do I use them? You will have to give your lender notice that you intend to take a break or underpay; otherwise it will assume you have defaulted on your mortgage. Whether the lender agrees the holiday or underpayment will often depend on your history of payments. Martin Allton explains: ‘The minimum criterion is that the mortgage cannot run beyond the 25-year term or the end of the agreed term.’ In effect, this means you can only take a break or underpay if you have overpaid in the past.
There are mortgages, however, that allow breaks without overpayments. Standard Life Bank, for instance, will allow you to take up to two months off each year as long as you have made six consecutive payments. Bristol & West permits breaks from day one as long as you have a further loan facility agreed. See ‘Drawdown’ (below) for more on this option.

Drawdown

What is it? On some mortgages you can borrow back any money you have overpaid on the deal; on some you can apply for extra borrowing up to a limit agreed when you took out your loan. Bristol & West’s Dominic Toller explains: ‘If you borrow £75,000 but you’re good for £100,000, from day one you have a further loan facility of £25,000. Any time you want to borrow any of that money you can give us a call.’ At Standard Life Bank this fund is called a Cash Reserve.
Why would I want it? If you expect to make an expensive purchase in the period while you have the mortgage, this may prove more cost-effective than using a personal loan. You may not want this facility enough to apply for a mortgage on the basis of it, but if the loan you want has this facility you have nothing to lose. While the money sits there unused you don’t pay for it, and when you draw it down you usually get it at your mortgage rate.
Where can I find it? This kind of facility doesn’t tend to be available on standard mortgage deals, but many lenders do allow extra borrowing. On a fully flexible deal this facility will only be available if you don’t borrow the maximum available to you at the outset, or build up equity through overpayments.
How do I use it? The reserve will be set up when you apply for the mortgage. To use it you need to contact your lender. The extra amount you have borrowed will be scheduled over the remaining term of your mortgage, unless you request otherwise.

Daily interest

What is it? Interest on your mortgage is calculated daily rather than annually as in the past.
Why would I want it? There’s little point making monthly overpayments on your mortgage if they don’t reduce your balance until the end of the year, and this is what happens if interest is only calculated once a year. If interest is calculated daily, overpayments have a greater effect on the total cost of your debt – which means, of course, you immediately start paying for any extra borrowing through drawdown.

Where can I find it? Pretty much everywhere these days.
How do I use it? You just make your monthly repayments and let the lender get on with it.

whatmortgageonline.co.uk

Hotproperty offers those looking to buy jointly some legal tips to ensure an easy ride. By Anna Bowden

Previously associated with married couples or partners setting up home together, joint ownership is now becoming popular with other segments of society who have been priced out of the market and can no longer buy a property alone or who want to maximise the amount they can borrow.
The Council of Mortgage Lenders says as many as four friends can have a joint mortgage, but there aren’t that many lenders who will actually give a mortgage based on multiples of three or four individual incomes — most will only offer up to three times the highest income plus the sum of all the others. There are two legal forms of joint purchase – joint tenancy and tenancy in common. These are explained below.

Joint tenants

This applies to two people only with each paying 50 per cent of mortgage and household costs. Neither party can sell his/her share without the consent of the other person, and when the property is sold 50 per cent of the profit (or loss) is taken by each partner. Should one die, his/her share passes to the survivor. This type of agreement is usually undertaken by couples when they buy together.

Tenants in common

This is the most usual type of contract for friends or family buying together and is usually defined by the different proportions paid by each partner. For example, 60 per cent of the deposit and mortgage payments might be made by one person and 40 per cent by the other. If the property is resold, the profit or loss is distributed according to the established proportions, and if one person dies his/her share goes to the next of kin rather than the surviving tenant(s).
This type of contract is a great idea for those struggling to get onto the property ladder, but can be more problematic in the event of a death as the deceased’s next of kin may want to realise their inheritance in the form of a cash sum instead of a share in a property. A clear will or formal contract setting out what will happen in the event of a death will help to resolve the situation should it ever occur.

For both types of contract it is worth remembering that if one mortgage borrower disappears or defaults, the lender is entitled to and will pursue the other(s) for the full amount, so make sure you are protected with the right insurance.

According to the Knight Frank London property index, London’s top priced property has risen to an all-time high, meaning that London now has the most expensive residential properties in the world. The index indicates that the London prime property market is recovering strongly – it rose by 0.3 per cent in April, bringing the capital value increase to 2.8 per cent in the first four months of 2004 and contrasting strongly with the fall of 1.9 per cent in 2003. On an annualised basis, price growth in the first four months of 2004 equates to an increase of 8.6 per cent.

Prices at the very top end of the market are showing the strongest gains, with properties worth £3 million and above rising by 0.6 per cent in April and properties between £2 million and £3 million rising by 0.5 per cent. Overall, London prime property prices rose by 0.3 per cent.
These rising value changes must, however, be seen in the context of higher-than-average falls experienced during 2003.

Liam Bailey, head of residential research at Knight Frank, comments: ‘The London prime property market continues to recover, following a period of weakness in 2003. The shortage of stock remains a feature of the market and underpins recent price growth. It is also self-perpetuating, however, as potential purchasers are wary of putting their own property on the market before they find a new home. Despite the acute shortage of stock, vendors must remain realistic when setting the asking price as only high-quality property attracts premium prices.

‘Whilst price growth nationally is set to slow over the next two years, the trend in the prime central London market is likely to be upward as the City employment market recovers. As buyer confidence continues to increase, our forecast of six per cent price growth for 2004 may be revised upwards when we consider the issue in our London Residential Review in the summer.’
Noel Flint, partner at Knight Frank’s Sloane Avenue office, says: ‘The supply of prime central London houses and apartments is still restricted, which has resulted in many purchasers chasing similar properties. There is an increasing amount of sealed bids and, generally, asking prices are being achieved or exceeded. Prime central London continues to be a top destination for overseas purchasers from around the world, attracted by the cosmopolitan lifestyle, security and the City.’

First-timers buying new

Research by SmartNewHomes.com, the UK’s leading online new homes specialist, has shown that new homes are proving increasingly popular with first time buyers who are taking advantage of price discounts and other incentives to help them get onto the property ladder.
As house prices continued to increase to an average of £165,838 at the end of 2003, the average person is now not buying their first home until the age of 33 and the number of under 25s buying a home has fallen to a low of 10.5 per cent.
The percentage of total sales to first time buyers was an average of 16 per cent in 2003. However according to SmartNewHomes, the percentage of sales of new homes to first time buyers was 29 per cent, indicating that new homes are proving an attractive option for buyers taking their first steps on the property ladder.

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.’