Delay Could Pay

A lot of people are coming to the end of their fixed or discount deals at the end of this year and are wondering what deals they should select.  The decision is a very difficult one with such uncertainty in the markets and the possibility of more interest rate cuts before Christmas.  Normally people are very keen to source a new deal for two main reasons.  Firstly borrowers do not want to revert to the variable rate that is normally much higher than their current pay rate, and secondly they are worried if no action is taken rates could move up and the opportunity of a good deal is lost due to delay.

 

This approach is sound in most scenarios, but as we are experiencing what could be described as unusual times it may be worthwhile pausing and taking stock before applying for  a new rate.  The reason for this is because variable rates are coming down.  Although, I hesitate to say fast as most lenders did not fully pass on the cut of 0.50% in October.  However, the signs are that they are doing better, with the 1.5% cut in November being passed on to more borrowers.  For example, the Halifax Benchmark Rate is now down to 5.00%.

 

As mentioned earlier it appears more cuts are on the way so delaying and paying the not to high variable rate for the foreseeable future could work out well for some borrowers.  However I would advise that if this tactic is used that the borrower keeps a close eye on the market or keeps in touch with their Financial Adviser as rates will eventually turn.  So it is important to consider taking action at this point to perhaps secure a fixed rate just as the rates come off the bottom.  This approach may not suit everyone as I believe the hard pressed need certainty of fixed rates and cannot afford to take risk as a sharp upward movement of rates could make the pressure of payment too great.

 

People who are in the process of moving now because they may want to buy into a base rate tracker that may seem attractive need to take great care as they may be better off staying with their current lender.  The reason for this is that after a deal has ended whether it be fixed or discounted some lenders quoted a variable rate that was linked to the base rate for the rest of the mortgage.  At the time these offerings did not seem so generous as the base rate was much higher.  However, now these deals are highly attractive with rates charged in some cases at less than 1% over base rate, with no arrangement fees charged and no penalties.  As you can imagine in this climate these offerings are very valuable, and as yet I am unsure whether margin hungry lenders are going to be very keen to extol the virtues of staying with them on these terms.  The reason for this is because at present they borrow money from each other at approximately 4.00%.  So they would lose money on some of the follow-on base rate trackers.  To find out if you have one of these deals or indeed any queries with regard to remortgaging it is worthwhile consulting an Independent Financial Adviser who specialises in mortgages.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

Kieron Bassett CertPFS

25^th November 2008

Deal Breaker

 

We have a large number of clients approaching the end of their current tie-in period and if you are in the same boat, now could be a time of uncertainty.

Your lender may have offered you a deal to remain with them, but that was before the Bank of England reduced the Base Rate by an unprecedented 1.5% to 3%.  Those deals that your current lenders were offering at or around 6% now do not seem so attractive.  However, what other deals are there available, and will rates continue to fall?

 

If you have a buy-to-let mortgage, or you have little equity in your home, then remaining with your current lender is likely to be your best option.  But, ring me and we will check first.  Also, remember that now could be a good time to review your insurance arrangements.

 

As more and more houses fall into negative or near negative equity, and as companies lay off employees due to the impending recession, you would be excused for beginning to feel the pinch.  However, this could also be part of the reason why interest rates may remain low for the foreseeable future.  Whilst interest rates are low, repossessions are likewise.  To avoid large scale repossessions, house prices need to recover before interest rates rise to allow those unable to obtain a deal at the moment to remortgage.

 

For those of you with 25% or more equity, remortgage deals are available.  Rates start at around 4.6% for fixed rates (Northern Rock 4.59% 2 year fixed) and 4.4% for tracker mortgages (Cheltenham & Gloucester 4.39% 2 year tracker).  However, these also incorporate quite high arrangements fees and it may be worthwhile paying a higher interest rate to benefit from a lower arrangement fee. 

 

Even though it is likely interest rates will continue to fall during the next 12-18 months, I have noted above a tracker and a fixed rate deal.  If you cannot afford to gamble on interest rates then you should always opt for a deal which incorporates an element of security (fixed or capped interest rate).  This is true in all circumstances as we can never be certain which way interest rates will go.  Tracker/discount/variable rate mortgages should only be taken by those with enough free income to be able to afford their mortgage should rates rise by say 5%.  This scenario is unlikely over the next few years, but it is better to play it safe and be able to afford the mortgage than be unlucky and be repossessed!

 

It is imperative that you seek independent financial advice to ensure you are saving money wherever possible, be it with your mortgage, insurance or life assurance arrangements.  You should take the opportunity to meet with an independent financial adviser to discuss your options relating to variable or fixed rate mortgages in these uncertain times.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms

 

Adam Elkin CertPFS

17^th November 2008

Base Rate Cut and the Consequences!

The big news this week involves base rates being cut by a shocking 1.50%.  This has been bad news for savers who out number borrowers by six to one and arguably the lenders.

 

It looks like the government have leant very heavily on the lenders to pass on the full rate cut to borrowers, and this could cause them problems.  Although the base rate is now 3% the Banks borrow from each other currently at approximately 4.5%.  This rate reflects the base rate drop having moved down in recent days, but it could be argued that lenders should only drop their rates by 1% as their rate has only moved down by this amount.  Therefore lenders margins have been hit, with many not charging much over the 4.50% that they currently borrow from each other at.  This is happening at a time when lenders are trying to rebuild their capital base and price risk more accurately than they have done in the recent past.

 

The governments insistence on the 1.5% cut will possibly lead to a tight market tightening further.  Lenders can do very little with existing borrowers but allow them the rate cut.  This will be very welcome for I believe for a large segment of borrowers whose tie in has ended, and who could not take advantage of a new deal when their deal expired due to arrears, negative equity or income requirements.

 

Potential new borrowers may find it even more difficult to borrow as lenders could effectively shut up shop to all but the lowest risk borrowers, as they may be unable to get a satisfactory margin on new borrowing.  Also the mortgage book they have with perhaps a higher level of under pressure borrowers than normal will perhaps struggle to remain profitable with rising arrears.

 

Unfortunately the option of appealing to savers to plug the lending gap could be tricky as lenders will be struggling to offer competitive rates with best rates likely to be 4% gross to allow them to make a return.  These lower rates could encourage borrowers to withdraw money and invest in holidays or even take a punt on the stockmarket with many FTSE 100 companies offering dividends in excess of 6%.  When stockmarkets begin to recover it could be a real problem for lenders to hold onto deposits.  I believe that the next few weeks will be very interesting as lenders try to adapt to low interest rates and withstand the pressure put on them by the government to lend at 2007 levels.

 

I think that lenders could start to try and increase margins by offering new loans linked to the rate they borrow from each other known as the LIBOR rate.  In addition I believe lenders will have collars on their mortgages to ensure the rate they charge can not fall below a certain level, and high arrangement fees will remain a feature of most mortgages.

 

Although the above measures, if endorsed, may prove less popular than Base Rate trackers , at least it may increase the availability of mortgages as lenders increase their margins.

 

The mortgage market is likely to be very volatile in the near future due to the Base Rate cuts, so it is vital that borrowers obtain the best advice to allow them to make an informed decision. Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Kieron Bassett CertPFS 

11 November 2008

Investment Opportunities for the Brave!

Although the tale of economic woe continues, there are those who will make money in the face of adversity.  At the most unpopular time for buying property for many years, buy-to-let is looking more and more attractive. 

 

Buy-to-let is based on buying a property with the intention of renting it to tenants.  The business derives an income for the owner by the rent earned exceeding the cost of borrowing and other expenses.  There is also the added incentive that if property increases in value over the long-term, if and when the property is sold you may realise a capital gain.

 

Profitability for buy-to-let, calculated by assessing the relationship between rental income, house prices and cost of borrowing, was at a peak in the early 2000s.  However, new entrants to the market were buying as late as mid-2007 in full knowledge that they were not expecting to make a profit from the rent, merely relying on capital growth.  This approach has proved to be foolhardy for those wishing to make a quick buck.  The most prudent reason for investing in buy-to-let should be the potential for profit from the rental income, with the capital gain a potential added bonus, but not something to rely upon. 

 

Property price falls have led to investment in property becoming viable once again.  Prices have fallen by 15% nationally and look set to continue to fall for the next year or two.  In Morecambe, Lancs, UK, you may expect to pay around £80,000 for a typical first-time buyer property which would rent for close to £500 per month.  A 3 bed semi is in last week’s “The Visitor – property today”© listed at less than £100,000 and also as “open to offers.”  This type of property may rent for £550 per month. 

 

Mortgages for buy-to-let become competitive at or below 75% of the property’s price.  However, when assessing profitability we assume that you are borrowing 100% of the property’s value.  This then takes into account the loss of interest/growth that you would have derived from the deposit monies. 

 

At current interest rates, around 6 – 6.5%, a 30 year repayment mortgage for £80,000 would be £480 per month.  This is not going to be profitable for an investor.  However, interest rates are destined for significant falls over the next 6 months.  If the mortgage lenders pass these rate drops onto the mortgage customer, you may see buy-to-let mortgage rates starting at 4% or below.  This would lead to a monthly payment of circa £380 and is likely to allow profits to be made. 

 

Buying property with the intention of renting it to tenants is not without risk.  These include void periods where the property is unoccupied, the cost of maintaining the property, interest rate rises and ultimately house price falls.  You should speak to an Independent Financial Adviser (IFA) before deciding whether buy-to-let is appropriate for you.

 

Kieron Bassett Financial Services have two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Adam Elkin CertPFS

03 November 2008