Buying, selling and letting - October, 2001

Want to reduce your home loan by £50,000? Then making regular overpayments on a flexible mortgage should be your goal this season, writes Paula John of Your Mortgage magazine

Since they arrived from Australia six years ago flexible mortgages have transformed the UK property-purchasing market with consumer-friendly features such as overpayments, underpayments, payment holidays and the facility to borrow back overpayments. But it is really the option to overpay that makes most sense. For example, if you were to pay an additional £50 on top of your usual monthly payments with a £50,000 interest-only mortgage, at a rate of seven per cent, with Skipton Building Society, you would be able to pay your mortgage off six years and eight months in advance while saving £25,478 in interest. While if you were to pay an extra £100 a month you would be able to pay off your mortgage 10 years and three months ahead of schedule and save £45,510 in interest. Not a bad saving for paying just over £3 extra a day.

How you CAM save

Current Account Mortgages (CAMs) allow the borrower the same benefits as a flexible home loan but with one added extra. With a CAM you can combine your salary, savings and in some cases your credit cards and personal loans with your mortgage and run all your finances in a single account, which could be more convenient for you. As with an ordinary current account you can still withdraw money as and when you please. But at the same time your mortgage debt will be further reduced because instead of paying interest on the whole of your mortgage you only pay interest on the difference between your mortgage debt and your savings. Your savings will work harder for you saving money at the mortgage rate than they would earning money in a traditional savings account.

And if you pay your salary into your CAM each month the total amount you could reduce your mortgage by is particularly impressive. ‘By paying your salary into your CAM you can overpay by default,’ says Matt Smith, head of marketing at Britannic Money. ‘Instead of earning little or no interest the money that you would normally have left in your current account at the end of each month can have a dramatic effect on the amount that you owe on your mortgage. Choosing to pay your salary into a CAM is a painless way of reducing your mortgage debt and paying it off perhaps years in advance.’

Separately together

Another new type of flexible home loan, the offset mortgage, also allows the borrower to combine all their finances together. However, unlike a CAM, your mortgage, savings and salary all remain in separate accounts. At the end of the day a virtual sweep is done automatically to make sure your money earns the best rate of return. For some borrowers this method may be easier to follow than a CAM. ‘With an offset mortgage borrowers can adapt their budget and funds to suit changes in their circumstances,’ says Northern Rock spokesperson Ron Stout. ‘Basically they are a great way of making
your money work efficiently for you.’ Northern Rock's Together Connections offset mortgage allows you to make overpayments on both your mortgage and any personal loans you might have. For example if you paid £50 extra a month on a 25-year £65,000 repayment mortgage at 6.99 per cent combined with a personal loan of  £18,000 more you would reduce your mortgage and personal loan term by three years and six months and save £16,320 in interest.

The flexible future

Flexible mortgages, CAMs and offsets may be tipped to be the home loans of the future but with talk of a possible recession also looming on the horizon, is it really worth overpaying on your mortgage at this time? ‘If a recession is imminent it could be a good idea to overpay on your mortgage now because you will be minimising your debt,’ observes Britannic Money's Smith. ‘Flexible mortgages are just as relevant when times are bad as they are when they are good because you can borrow back any overpayments you have made and take a break from paying your mortgage if you need to.’ Although flexible mortgages may well be recession-proof it is important to remember that they are not suitable for everybody. This type of mortgage will be of little use to those borrowers who run their current account in the red every
month or have little or no savings.

As the boundaries between leisure and work time blur, the need for a home office grows and, as Karen Keeman discovers, becomes one of our main considerations when buying a new home.

About 7.5 million people now work from home and this figure is set to grow, suggests research from the Henley Centre. By 2006 more than 30 per cent of the UK workforce will have a home base.

The key to your success is to make sure you actually have the space for a home office. Carrie Bradshaw in Sex in the City may be able to turn out a weekly newspaper column perched on the end of her bed in her pyjamas, but for most of us finding the right space and filling it with the right equipment is imperative to our professional lives.

If you are going to work from home, you will need to have the latest technology to compete in the world of business. The developer behind the homes at the Greenwich Millennium Village has ensured that a structured cabling system is installed in all units. This allows residents support to computers, telephones, televisions, home entertainment systems, safety and security systems. Every home will have access to the internet through Greenwich Millennium Village’s own domain that will keep you up to date with local news and events on the community website.

Prices for the newly released homes start at £185,000 for a one-bedroom apartment and £195,000 for two-bedroom apartments. Call 020 8293 6900 for more information.

Gerard Hodges has been working from home for the last seven years. But as his property maintenance company grew even bigger he realised that he was going to have to find alternative accommodation.

Not wanting to take out a lease on an office, he thought about building on top of his double garage. This is when he found out about a new development by Bellway Homes. At Fennlands Down in South Woodham Ferrers, Essex the company is building homes with double and triple garages and studios – ideal for conversion into office space.

Gerard believes the development will be extremely popular with those running small businesses. ‘More and more people are working from home and this type of house is ideal,’ he says.

When completed, Fennlands Down will comprise 45 four- and five-bedroom houses. Prices start at £290,000. Call 01245 425120.

As working from home has become more popular, so has the boom in live/work units. Reflecting the changing requirements of today’s homebuyer, RLD has launched Orchard Wharf, minutes away from Canary Wharf. The minimalist loft-style apartments and duplexes can be arranged in a way to suit the needs of the home worker while retaining their riverside charm. Prices start at £210,000. Call 020 7538 1830.

At the moment, there’s every chance a mortgage adviser will offer you the option of a base rate tracker mortgage deal.

While it may sound like a technical term, the concept behind these loans is very simple.

A tracker mortgage is a variable rate loan, linked to the Bank base rate. The interest rate you pay on your loan goes up and down in line with the general interest rate, set by the Monetary Policy Committee of the Bank of England. Unlike a standard variable rate, a tracker mortgage promises to follow the base rate wherever it goes, no matter how low. The difference between the tracker and the base rate stays constant for the life of the loan.

Some people love the idea, as rate decisions are taken out of the lender’s hands. ‘People like to think the rate they’re being charged is in the hands of the Bank of England, rather than in the hands of a business which at the end of the day has to be looking at making money,’ explains Ian Giles, director of marketing at First Active.

But lenders like base rate tracker mortgages too, as they are guaranteed to make money from the margin built into the deal and there is no risk involved.

Watchers of the mortgage market will have noticed that a plethora of base rate trackers has sprung up since the middle of 1999. ‘In many cases it’s a reaction to the Government’s call for CAT standards – fair charges, access and terms,’ says Giles. ‘Tracker mortgages are squeaky-clean in these terms, as they are completely transparent to borrowers.’

Ian Darby, managing director of mortgage brokers John Charcol (recently acquired by Bradford & Bingley) agrees. ‘Trackers have come to the forefront in the last year because the Office of Fair Trading accused lenders of failing to pass on cuts in the bank base rate quickly enough to customers,’ he adds.

‘With a tracker, the interest rate changes are passed on immediately. Of course the irony is that since trackers took off last summer, interest rates have in fact been rising.’

This is a point any potential base rate tracker mortgage borrower must take on board: ‘When Bank base rates are going down, that’s great,’ observes a spokesperson from the Council of Mortgage Lenders. ‘But when they spiral upwards, the rate you pay will definitely go up too.’ So buyer beware.

The standard variable rate mortgage deals have never offered the best value for money. Selecting the right fixed or capped rate at the right time can save you a fortune in a rising interest rate environment.

That said, many borrowers seem wary of going for longer-term fixed and capped rates. ‘People seem to expect greater alignment with the rest of Europe to be a real possibility in years to come,’ observes Darby.

However, none of us know where Bank base rates, and hence base rate tracker mortgage interest movements, are headed. Much depends on politics – whether or not we move closer to the rest of Europe – as well as wider economic trends. We don’t know if or when rates will come down. So going for a tracker could be an unnecessary gamble, particularly in the short term, when base rates are tipped to continue rising. It could make sense to sign up for a fixed, capped or discounted rate with no tie-ins instead, and wait and see which way interest rates decide to head next year.

If you took out an endowment in the 1980s or '90s and now face a shortfall on your mortgage you are bound to be worried. Act now, says Andy Stuart, Editor-in-chief of Your Mortgage magazine, and you could solve the problem

The endowment-type mortgage was a favourite for many years. With an endowment you regularly invest money, in addition to the interest you pay to the lender, and hope it grows substantially to pay off the capital still owed on your mortgage by the end of the term and, maybe, even leave you with a bit on top. This was certainly the basis on which many policies used to be sold, as the idea of a surplus appealed to customers as a nest egg for later life. And so people signed up in their millions. By 1990 endowments accounted for over 80 per cent of mortgages sold.

Reality bites

But endowments have turned from friend to foe in recent years, as it has emerged that many are not on target to grow sufficiently to repay customers' mortgages. This could leave hundreds of thousands of borrowers facing a shortfall when they reach the end of their term and the endowment policy matures. And this shortfall could amount to thousands of pounds. If you have an endowment policy you should have received a letter from your provider at some point over the last year. This letter will tell you what your endowment policy is currently worth and if it is on track to repay your loan. Of course, there are no guarantees and your provider will give you three estimates of what your policy could be worth, assuming growth rates of four, six and eight per cent each year, and what the shortfall would be given each scenario. These are known as green, amber and red letters. A green letter means your policy should grow sufficiently to repay your loan in full even given a growth rate of four per cent - if this is the case all you need to do is continue your payments into the policy. An amber letter means that given the worst case scenario (four per cent growth) your mortgage will not be covered by the endowment, but if it grows at six or eight per cent, you should be able to cover your homeloan when your endowment matures. The dreaded red letter, however, warns you that your endowment policy is not on target to repay the mortgage, even assuming an optimistic growth rate of eight per cent.

So what now?

The letter you receive from your provider may explain how you can increase your endowment payments each month to cover any shortfall. You should be informed of how much extra you would have to pay in order to meet the target at four, six and eight per cent growth. If not, contact your provider and find out. Of course there is no guarantee that by paying more into your mortgage, your policy will grow enough to meet its target, but the more you pay in the better chance you will have. Whatever you do, don't panic and trade in your policy. Take expert advice instead.

On the heels of the ongoing endowment misery comes the news that thousands of home owners have bought endowment mortgages that lack one vital component – the endowment policy. According to the Financial Ombudsman, these customers are being left without the money to repay their home loans and ought to be fully compensated by their lenders. An Ombudsman spokesman said, ‘In the vast majority of cases we look at, we find the lender is 100 per cent to blame.’

Endowment mortgage holders are advised to check their details themselves to make sure they have things in place to cover full repayment. Those who find they have no record of an endowment policy are advised, first of all, to contact their lender to find out what compensation they may be owed.

The Financial Ombudsman can be contacted on 0800 080 1800.

An ambitious system of electronic conveyancing is planned for the UK. Johnny Turner visited the Land Registry as they unveiled their vision of a faster and easier purchase process

A comprehensive e-conveyancing system is to be introduced over the next decade, according to the Land Registry. Solicitors and licensed conveyancers, connected to a secure nationwide database, will guide their clients’ cases through a streamlined system, communicating with each other via e-mail. Part of the aim is to speed up the process. The immediate transfer of information and funds could cut as much as two weeks from the time of the average property sale – and drastically reduce the periods of limbo that buyers regularly endure.

In a recent demonstration of an early prototype, members of the Land Registry’s e-conveyancing taskforce stressed that there is still much to be done before the network is launched; the system is expected to be in place in approximately five years. A key part of the groundwork has been an ongoing phase of consultation between the Registry, ministers, conveyancing professionals and the House of Lords, where a bill laying the foundation is expected to be debated within months. According to a consultation document, ‘this will be the most revolutionary change ever to take place in conveyancing practice’. The key features are:

It is paperless This not only cuts down on the need for the storage of hefty files of documents after each sale, but speeds up the communication between the solicitors for the buyer and seller – this means less time between exchange and completion.
There is no ‘registration gap’ A notional register allows solicitors an up-to-the-minute view of the current status of a sale and any problems or holdups connected with it. Conveyancers for the buyer and seller alert each other via e-mail to any progress made or action required.

Improved efficiency and accuracy Currently, as many as half of all registration applications have some sort of discrepancy. This will be drastically reduced by validation checks to be built into the system.
Automatic simultaneous payments Funds will be transferred to and from lenders, solicitors etc. electronically and at exactly the same time. As completion is currenty often held up while the parties await the wire transfer of money, the new method will save the parties to the sale both time and worry.
Chain transparency One of the most infuriating features of a chain sale, both for solicitors and their clients, is the lack of information about which link is holding up the transaction. With the new system, each solicitor involved in the chain will be able to spot where the holdups lie, allowing them to give their clients a better idea of when the sale will be completed.