Buying at Auction

Housing markets are similar to economic cycles.  At different points in time the vendor will have the upper hand and at other times the buyer will be the dominant party.  This is the state of the market in 2009.  The buyer is king.  He can pick and choose his property and to some extent the price he pays for that property.  Don’t get me wrong, many vendors will only sell if the price is right, but there is so much supply that even by taking out of the market those vendors who are hanging on for an unachievable price, there are still a glut of properties on which you can haggle down the price.  Most vendors are aware of this and are willing to negotiate so long as the vendor of the property they are buying is willing to do likewise.

 

Above are examples of vendors who want to sell, but there are some vendors who need to sell.  Those who fall into that category may well be inheritors of estates, mortgage holders who are struggling with affordability, or banks who have repossessed property and need to clear it from their book.

 

Rather, or sometimes as well as, placing their property with an estate agent, vendors who need to sell may place their property into an auction.  An auction for a property has pros and cons for both the buyer and the seller.  The seller benefits by knowing on the day what price he has achieved for the property and has a definite timescale until completion, although he will often receive a lower price for the property due to the restrictive nature of buying at auction.  The buyer on the other hand has agreed to pay a lower price for a property than he might have done via an estate agent, but he is locked into the transaction and has to pay 10% of the price as the hammer falls and usually has 28 days thereafter to complete the transaction.  The Latin phrase caveat emptor is the operative word in an auction transaction as the buyer has to do the due diligence work prior to the auction.  Buying through an estate agent allows surveys to be carried out following the agreement of the price.  A buyer can amend or cancel his offer at any time until he has exchanged contracts.

 

The definite nature of an auction restricts somewhat the buyers who can benefit from this type of transaction.  A mortgage company will want to have a survey prepared for a property on which they lend.  If you have the survey carried out post auction and the surveyor downvalues or declines the property, you have no comeback on the vendor.  You will already have paid your 10% deposit and legally agreed to pay the remaining balance.  If you are subsequently unable to raise monies against the property you are in choppy legal waters and may have to make arrangements with the vendor to pay from alternative sources or over a longer term.

 

Many auction buyers do not raise finance against the property they are buying but rather go into the auction as “cash” buyers.  That is not to say they have not raised finance.  They may have other assets, their main residence, their business, or their buy to let portfolio, and could have used all or any of these to raise the monies required to buy the new property.  It is a case of borrowing against equity in the most cost and tax effective manner.

 

That is not to say you cannot raise a mortgage against a property you buy at auction.  But, the prudent advice is to have the mortgage agreed and a survey prepared before you step into the auction rooms.

 

If you would like advice relating to the most appropriate way of raising money to buy at auction speak to an Independent Financial Adviser (IFA). Their role is to advise the most appropriate and best way of raising finance and the products thereafter.

 

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

 

Adam Elkin CertPFS

23^rd March 2009

Capped Interest Rates

The base rate has fallen again this month, and this rate change has fed through to base rate tracker mortgages.  Typically we are seeing lenders charging between three and three and a half per cent over the base rate, so mortgage rates are now averaging out at about four per cent annum.  On the face of it these rates seem rather good, but when I cast my mind back to last year it occurs to me that if base rates return to last years levels some attractive looking base rate trackers could turn out to be disastrous.  Base rate was then 5.5 per cent and 3.5 per cent over could lead to you paying 9 per cent.  This could translate into your rates having at least doubled and in some cases nearly trebled.  You could argue that this scenario is unlikely to happen, and I would tend to agree with this assertion in the short term but in the longer term there is nothing to stop rates returning to previous levels.  Due to our economy being in uncharted territory nothing should be taken for granted and it is worth referring to previous maps to try and help us to navigate into the future.

 

I seem to recall some years ago in the early 1990s base rate trackers became popular as they were more transparent and cheaper than the standard variable rates.  Unfortunately, interest rates rose and the base rate tracker mortgages automatically followed.  The variable rate lender who charged a higher rate when interest rates were relatively low managed to respond better when rates were high.  These lenders tended to take a pragmatic approach and were aware that by working on smaller margins at that time they were more likely to keep people in their houses.  This can be illustrated by the base rate reaching a peak of 15% in 1990 when the variable rate was only 15.4%.

 

So what do you do if you feel that fixed rates are too high, and you want to opt for a tracker rate?  How do you protect yourself against rate rises?  One tip is to look at the rate after your tie in period ends, so if rates are rising and you are not in a position to remortgage at least you may have a lender who operates a fair variable rate policy.  At the moment Nationwide and Cheltenham and Gloucester spring to mind as their variable rates are 3 per cent and 2.5 per cent respectively.  As their tracker rates are higher than these rates, a modest increase in the base rate could mean that your payment would be lower once you are out of your deal because of their very low variable rate.  Unfortunately, the nature of tracker and variable rates means that if rates rise you have to go with it and rates can rise significantly in a short space of time.  One potential solution is to consider capped rates which have just returned to the market.  The Coventry has a tracker rate charging 3.49% over three years with a cap on it of 4.99%. This means it will not exceed this rate over the three years.  This type of deal could prove very popular as it combines both a competitive rate and security.

 

To make the most informed decision if you are looking for a mortgage it is worthwhile contacting 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

17 March 2009

Interest Rates and Inflation – The Future

I seem to not go a month at the moment without writing an article where the Bank of England have again reduced the base rate of interest.  This time the Bank of England Base Rate has been reduced to 0.5%. 

 

This announcement will please some mortgage holders who are paying the Bank Base Rate minus 0.35%.  Their interest payments on £100,000 borrowings will be only £150 per year!  I don’t think anybody predicted rates being this low 2 years ago.  Others who have chosen fixed rates may be a little less happy.  However, in an exercise this week I compared rates from 18 months ago with today, looking at whether it was worth paying the early repayment charge and buying a current fixed rate.  In two different circumstances it was not.  This could change though so keep your mortgage under review.

 

At the base rate announcement we also heard that £75billion would be injected into the economy from the Bank’s reserves in an effort to stimulate corporate credit markets.

 

With more money in people’s pockets from lower mortgage payments, and with the Government and the Bank of England attempting to kick-start the economy with masses of investment, we should emerge from recession in the third or final quarter of 2009.

 

Surely a return to growth is a good thing?  In theory yes, but what have we put in the oven which will need to be taken out in the future?  First we will have to repay the additional debt that has been taken over by having our taxes raised and we will also start to feel inflation rising meaning that the cost of living will rise more quickly than it has done in recent years.

 

One way The Bank of England controls inflation is to raise and lower the main lending rate giving people more or less money in their pockets.  If inflation is rising The Bank will increase interest rates in an attempt to curb rising levels of inflation.  And, as we have had an extreme reaction to the credit crunch, with rates falling to unprecedented levels, we may in the future require unprecedented increases in rates to combat rates of inflation which could spiral out of control.

 

This has a direct effect on your mortgage payments.  The person above paying £150 per year in interest could be paying £9,850 interest if rates rise to 10%, and £19,850 if rates rose to 20%.

 

There is nothing we can do now to stop any future rate rises from the Bank of England.  However, we can protect our own mortgages and their rates from those sharp rises.  The Leeds Building Society re-entered the mortgage market last week with a 4.75% fixed rate for 10 years.  This could provide you with peace of mind over a long period of time.  Of course you may lose out if rates remain low but having the knowledge your payments are set at the same affordable level for such a long time may be worth the risk of losing out on rates.

 

It is worthwhile contacting an independent financial adviser (IFA) for a full financial health check.  They will discuss your mortgage options and the costs and appropriateness of your other general and protection based insurances.

 

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

9^th March 2009

Are Attitudes to Lending Changing?

It’s depressing looking at mortgage deals for first time buyers even if they have saved a 10% deposit. Tight underwriting makes it difficult for the borrower to secure the loan even with the deposit, and when I look at the rates I find it difficult to justify the deal due to the interest rates being charged. No cutting edge base rate trackers or sharply priced fixed rates here. A five year fixed rate deal with Cheltenham & Gloucester is leading the way at 6.59% followed by the Halifax charging 7.49%. In addition they are charging fees of upto £1,589 to pick up these miserable deals.

Unless the purchaser is getting the deal of the century or thinks house prices are about to rise, my advice is to carry on saving, as much better deals are available if a bigger deposit of around 15% can be found. I suppose my advice is not helping the market to recover, as first time buyers are the life blood of the market and without them the market stalls.

But what about the savings rates that the Government – sorry, Cheltenham & Gloucester (Lloyds), Halifax (HBOS), Natwest (Royal Bank of Scotland) are offering. The deposit rates they offer are around 2%, so they are making more than 5% on some of these loans. The Government in the past would have launched an enquiry into such usury, with the lender being accused of exploiting the weakest link in the housing market, the first time buyer. As yet I have heard nothing, but then I don’t expect to.

I have a question to ask. Why are savers suffering so much, and in the main borrowers are not benefitting, even if you exclude the First Time Buyers, as lenders such as the Woolwich and The Leeds Building Society still have their variable rate set at over 5%? I don’t think the lenders have a satisfactory answer unless they say that house prices are in freefall and the economy is in a total state of collapse. If this is the case, and with LIBOR averaging at 2%, there is something very wrong here because most borrowers do not default on their mortgages and become unemployed. In addition, the government pays the interest now after three months unemployment so I do not think they can justify these higher rates due to higher risk of non-payment.

Through all this gloom, help could be at hand from Nationwide Building Society who are allowing borrowers to access sensible rates if they can persuade the vendor to retain a stake in their house. For example a borrower could borrow £85,000 on a value of £100,000 and the vendor would retain a £15,000 or 15% stake in the property. No interest has to be charged on the “loan” for the first 5 years. After 5 years the purchaser and vendor make an agreement on how the “loan” will be repaid. This could be by raising equity through mortgage borrowing, regular payments or by selling the property.

This type of deal could apply to landlords who may want to sell and the tenant wants to buy. The tenant does not have enough deposit but the landlord may not be too concerned about this as long as he can get the lion’s share at the outset. With the remainder being paid in 5 years, the landlord may reason it is possible that the capital gain on the 15% over the years may be better than the returns that would have been received on deposit.

The other scenario may be where a vendor is desperate to complete a chain and move to a job at the other end of the country. This type of mortgage, although a niche with potential pitfalls, nevertheless is a step in the right direction to help to unlock the mortgage market.

If you wish to review your mortgage needs, 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
3 March 2009