Shared Equity Schemes

 

Stimulating the first time buyer market is now seen as one of the key factors in driving forward the recovery of the housing market.  But with the market dynamics still not being seen as favourably as they could be, what support is there for first time buyers?

 

Well, the good news is that there is assistance in the shape of government schemes.  In December of last year the Homes and Community Agency was set up to spear head the delivery of affordable housing in England.  Over the next three years it will be investing £8 billion that will fund at least 180,000 new affordable homes and by 2010/11 aims to provide 70,000 homes a year, of which 45,000 are for social rent and 25,000 for affordable sale.  The Homes and Community Agency has set up an umbrella initiative called HomeBuy, which will deliver a number of low cost home ownership schemes in addition to those that are already available, such as MyChoiceHomeBuy.

 

These schemes have been established top help, primarily, first time buyers.  They have been designed for those who haven’t been able to afford a property that is suitable for their needs in the area they want to live or work.  To apply for assistance, applicant’s joint earnings must be less than £60,000 per annum.  This means that the net can be cast wide for suitable candidates.  The target audience for these schemes is public sector key workers, such as teachers, nurses and local authority employees.

 

The schemes are also designed to cater for the needs of social tenants and people who have previously owned a property.  However, they are unable to buy another home without assistance because of a relationship breakdown where families are experiencing over crowding in their existing home.

 

Two schemes that I will focus on are MyChoiceHomeBuy which enables people to borrow from between 15-50% of the properties purchase price or market value from the housing association, in order to buy any suitable property on the open market in England.  HomeBuy Direct is focused on new build properties at over 130 developments across England.  The maximum property value is £300,000 and individuals can secure an equity loan of 15-30% that is funded 50/50 by the Homes and Community Agency and the property developer.

 

Hopefully these initiatives will help the first time buyer get on the first rung of the housing ladder, in partnership with traditional mortgage lenders.  These schemes do have some downsides, but overall I believe they are positive developments.  It is possible that there will be further news in this area in The Budget, so it is worth contacting an Independent Financial Adviser who will be able to assist you further.

 

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

 

Kieron Bassett CertPFS

21^st April 2009

Income Multiples

Lord Turner, who leads the Financial Services Authority has hinted that he is looking to make changes to the amounts of money people can borrow based upon their income.  He has shelved a policy statement at the moment, but it is understood an announcement will be made by the end of the year on the matter.

 

The background to how much people can borrow goes back to the 1970s and 1980s when the market was more tightly regulated with borrowing available based on a calculation of three times the main earners income and once the secondary earners income.  In those times the reasons joint incomes were not taken into account equally was to allow the secondary earner to have the flexibility in future years to give up work and perhaps raise a family without putting too much strain on family finances.

 

More recently income multiples have risen and as lifestyles have changed it has allowed lenders to increase joint income multiples significantly.  At the height of the boom we were hearing of lenders who were prepared to lend up to six times joint income.  Unfortunately each increase in income multiples during recent times has fanned the flames of house price increases.  It has also put more and more pressure on borrowers who have had to take out ever larger mortgages due to the house price increases.

 

The mortgage market has changed significantly in the last year with less money available, and larger deposits required than at any time I can remember.  These factors have contributed to the decline in the housing market and desperate measures have been taken to try and revive it.  These range from savage base rate cuts to effectively printing money.  As yet the market has not yet displayed strong signs of recovery, so I would have thought the authorities would be anxious not to do anything to damage the market.

 

However it has been widely trailed that Lord Turner is considering going back to the seventies model of three times income.  I believe that in the long term lower income multiples are desirable, particularly if not taking out long term fixed or capped rates, as uncertainty of rates can lead to problems for borrowers if rates rise quickly.  I think we should go back to clear income multiples that lend more to higher income earners as they have a greater level of disposable income.  In addition I feel that using affordability as a lending tool instead of income multiples is flawed, as it encourages the borrower to potentially manipulate outgoings to a lower level than they actually are in order to allow them to borrow more.  However, I believe that lowering income multiples will have a damaging effect on the market at present, and bring about further house price falls.  With interest rates low I see no reason for legislation at the moment.  In the future I believe income multiples could be used to calm markets in times of growth.  At the moment we need our higher multiples to kick start the market.  Sadly, already some lenders are reacting to the hints from Lord Turner and dropping income multiples.  Let us hope they have a rethink.

 

Whatever level of borrowing you require, it pays to consult an IFA who specializes in mortgages, Kieron Bassett Financial Services has two IFAs.  Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

 

Kieron Bassett CertPFS

14^th April 2009

Islamic Finance – An Attractive Alternative

As traditional UK banks lose their appetite for lending, perhaps an alternative way of funding your next mortgage or remortgage will come from an Islamic Bank. 

 

The basis for all Islamic finance lies in the principles of the Sharia’a, or Islamic Law, and this form of finance is as old as the religion of Islam itself.  

 

The Islamic Bank of Britain have launched their Home Purchase Plan into the UK market.  It is available to both Muslim and non-Muslim borrowers and is based on the accepted and widely used Islamic financing principles of Ijara (leasing) and Diminishing Musharaka (reducing partnership).  For example, the bank may contribute 80% and you 20% of the purchase price.  Over a period of up to 30 years, you will make monthly purchase instalments through which the Bank will sell its share (80%) of the home to you.  With each instalment paid, the Bank’s share in the property diminishes while your share correspondingly increases.

 

To make the transaction simpler to understand the Bank have published leasing rates.  These start at a rate which is fixed at 3.99% with only £299 of arrangement fees.  This is significantly better than the market leading traditional UK mortgage rate.

The Islamic Bank of Britain hope to encourage all types of borrowers to use their finance and have made their products available directly and through intermediaries.

 

The principles are that you in effect repay the debt plus you pay a percentage of the debt each year back to the Bank as payment for leasing the property from the Bank.  In effect they own say 80% of the property and it costs them say £100,000 to buy that share.  The Bank agree to sell you that share but charge you a lease for the privilege of you deriving benefit from the share of the property which they own. 

 

This way of lending money and having it repaid avoids interest charges and encourages borrowers to take a risk with their investment.  The Bank also holds the risk that the “loan” will not be repaid and they would have to sell the property.  As there is no interest chargeable this type of finance is able to be approved by the Sharia Supervisory Committee.

 

As mentioned above, whether you are Muslim or non-Muslim, this type of finance may appeal to you as a sustainable and cost-effective form of financing house purchases.  Your Independent Financial Adviser may already be au fait with the principles of Islamic Finance.  However, as this is an area which has not been frequently sold over the years it is likely your adviser will have a good basic knowledge of the principles but not the fine detail.  You may need to prompt your adviser to discuss the pros and cons of Islamic Finance prior to signing up for a mortgage.

 

An Independent Financial Adviser (IFA) will advise and recommend the most appropriate method for you to raise finance.

 

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

5^Th April 2009

The death of 100% Mortgages?

 

 

Last week the Financial Services Authority appeared to have deferred the decisions to ban all 100% mortgages, and to limit all borrowing to three times income.  It is reported that the FSA chairman Adair Turner will revisit this area of lending towards the end of the year.  I suspect he is waiting to see what market conditions will be like at that time, before making a final decision.   

 

With regard to 100% mortgages, I believe that generally they send out the wrong message as this type of mortgage requires no financial commitment from the borrower.  So it makes it easier for them to walk away if the going gets tough in a poor market when house prices are static or falling.  This in turn exposes lenders to losses as negative equity kicks in.  With the number of 100% mortgages granted between 2005 and 2007 being double that of previous years, it is hardly surprising that lenders are now filled with foreboding as a high percentage of these borrowers could now be in negative equity.  Also, rising unemployment could increase the pressure on 100% borrowers who, in my opinion, tend to be at more risk of unemployment than other groups.

 

However I do believe that 100% mortgages should be retained for groups who have to carry large amounts of student debt into the workplace or undergo longer training programmes before they start earning, due to their delayed entry into the jobs market.  This means that they could be in their mid twenties and may have family commitments but not have had the opportunity to save a deposit.  Usually, Doctors, Dentists and Pharmacists would fall into this category, and I would classify them as being at low risk of default due to their occupations not being as linked to the general economy like most jobs.

 

The decision to look to ban 100% mortgages at this time for me is perplexing as no lenders are currently offering this type of mortgage.  Indeed they are not even offering what used to be the standard 95% mortgage to first buyers, remortgagers and home movers.  The maximum loan to value is 90% with some lenders having little appetite for even for lending at comparatively competitive rates above 60% loan to value.  Although I am in favour of lending being prudent, I feel at this time efforts should be concentrated on bringing back the 95% mortgage for first time buyers and rates to be competitive across the board.  I know that lenders are concerned that house prices are still falling and therefore justify their actions with this refrain.  However for the market to move ahead and to avoid accusations of profiteering, lenders and the government need to do better than offering first time buyers borrowing rates in excess of 7% even with a 10% deposit.

 

Even with all these restrictions it is more important than ever to consult 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

31st March 2009