House Price Review and The Future

As the front pages, and in many papers the next twelve pages, have been taken by the MP’s expenses row, you may have lost touch over the last two weeks with the economy and the state of our finances.  Fear not, the economic world is still ticking, although some fear the ticking is that of a self-destruct timer.  Standard & Poor’s seem to follow that line with the distinct possibility of UK Plc’s credit rating being downrated.  At a time when The Government is borrowing more than it has done since the Second World War, the idea of paying a premium to service the debt is not an attractive prospect, and could lead to significantly higher budget deficits.

 

When we interpret the gloomy news, it means one thing for us, the taxpayer.  Taxes will rise.  Whoever wins the next election, Labour, The Tories or The Monster Raving Loony Party, they will have to increase taxes to repay the huge debts we are incurring.

 

With the amount of money being poured into the economy, we are likely building up an inflationary problem.  As more money sloshes around, inflation starts to rise.  At the moment this is not a problem, but should inflation rise above 3%, which could be by the end of 2010, then interest rates will have to be increased to curtail the rising inflation level.  The inflationary problem could be exacerbated if GB£’s relationship with the US$ and the € remains volatile.  For example, rising inflation occurs if the GB£ weakens, as the cost of imports rises, and vice versa.

 

The above is all about costs rising over the next few years.  Therefore it was heartening these last few weeks to read that mortgage debt is becoming more easily serviceable.  In fact, the relationship between earnings and the price of a house is now at it’s narrowest margin since 2004.  The cost of a house in The North West is down from over 5 times (2006) to just 3.8 times the average earnings in this area.  Also, your mortgage payment as a percentage of your income has fallen from 44% to a new low of 28%.

 

To some analysts, the statistics in the above paragraph will signify that a recovery in house prices is ¨just around the corner.¨  However, temper your enthusiasm in the knowledge that although your mortgage may be costing less, in the future the taxman will have taken a larger slice and interest rates will be higher than they currently are, leading to strains on your budget.

 

If you are coming to the end of your tied-in period and although you are happy the rate has fallen, are nervous of rates rising and would like a financial review, you should seek professional advice.

 

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

 

Adam Elkin CertPFS

22^nd May 2009

A Helping Hand From The Older Generation

I have a client who recently enquired about releasing a small amount of capital from his home, and although he potentially had some requirement for capital he spoke at length at the problems his daughter had in her attempt to buy her first home.  She started looking a few years ago and her income was reasonable, but she was being priced out of the market, mainly by buy to let investors, and eventually this stopped her looking as the market became too hot.

 

As the market has cooled she has started to look at houses again and is horrified to see how lenders attitudes to first time buyers have changed.  Although she can now identify properties she thought were in her price range she was surprised to find out that lenders had cut their income multiples and therefore this affected what she could borrow.  Also, she had anticipated getting a 100% mortgage but she has soon found out they are not available.  Previously, if a first time buyer had to fund a deposit, 5% was sufficient, and lenders were falling over themselves to offer special rates.  Now lenders want a minimum of 10% deposit and charge premium rates of between 6.5% and 7.5% to reflect what they would say is for the risk they are taking.  It could also be argued that perhaps the rates they are charging reflect their attempts to rebuild their profits by exploiting the most vulnerable borrowers.  Unfortunately, the nett result for this lady, in her late thirties, is that due to her inability to save due to her relatively high rent, she is still locked out of the housing market.

 

The man telling me this story lived quite well on his retirement income and was just enquiring about releasing a small amount of capital to perhaps replace his car and do some home improvements.  He was unable to save up for these items but as mentioned earlier could live on his pension for day to day living.  He was also most anxious that his daughter would inherit something from him, although aware that by taking out a lifetime mortgage the estate would diminish.  He was hoping enough equity would be left over for her to buy a house, but as he was in his mid sixties, and in good health, I got to thinking she could be retired before she eventually got her foot on the housing ladder.  By then she could have paid rent for a further 25 years and all that dead money paid out when she could by then own her own house outright all for the lack of a deposit.

 

I believe it is worthwhile for parents or grandparents who do not have large amounts of savings, but who want to help their children or grandchildren get onto the housing ladder, to consider releasing money from their house to fund a deposit via a lifetime mortgage.  Lifetime mortgages do not require any payments as the mortgage interest gets added to the mortgage and is paid off when the house is sold.  This will mean less inheritance, but I believe this could be more than outweighed by the benefits of the children or grandchildren owning their own home.  Lifetime mortgages have evolved and some schemes allow payments to be made, so if the recipient of the deposit wants to protect their inheritance they could pay the deposit off.

 

I think the above scheme could benefit first time buyers and give relatives the satisfaction that they have helped out at a time when it is most needed.  Also, by providing more than a 10% deposit the interest rate falls significantly.  However, this arrangement is not suitable for every one and I would urge you to consult an IFA who specialises in these areas.

 

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

18^th May 2009

Buying to Let may be attractive in 2009

Buy to Let was one of the drivers of the housing market during the period of massive house price growth between 2000 and 2007.  Investors bought into the sector in search of income and capital growth.  Over the longer term house prices tend to grow more quickly than cash savings.

 

Since late 2007 new entries into the buy to let market have reduced proportionately with the rest of the housing sector.  The number of house purchases has reduced by more than 50% over the last 12 months.

 

For an adventurous and definitely long-term investor, buying to let could be more attractive in 2009.  I am sure that the buy to let market would be more buoyant if mortgage availability was as it was in 2007.  At that time you required only a 10% deposit, no proof of income, no experience and the rent simply had to cover the mortgage payment (interest-only). 

 

Lenders have tightened their belts and are somewhat scared of continued house price falls.  To that end they are restricting the availability of mortgages.  The criteria in 2009 to be eligible for buy to let mortgages is; 25% deposit, minimum £30,000 per annum personal income, rental coverage at least 130% of the mortgage payment (interest only) and a preference for an experienced landlord.  The lenders are also charging typically 2% of the loan amount as arrangement fees.

 

There are fewer individuals who can meet the enhanced criteria and to that end there are significant barriers to entry to the buy to let market compared to 2007.  The barriers also make it more difficult to justify the purchase but if you can see a profit even after paying high interest rates, high arrangement fees and you can meet the criteria then the purchase is likely to be a good investment over the longer term. 

 

There is some good news for potential landlords.  House prices have fallen by close to 20% since their high point in late 2007 and buyers are definitely in the box seat.  The savvy investor with a keen eye could snap up a bargain property.  Many properties have been repossessed and there are inevitably going to be those who need to sell irrespective of the losses they may incur.

 

If you are considering entering the buy to let market and would like to further discuss your options you should consult an Independent Financial Adviser (IFA).  The adviser will explain the pros and cons of the investment and be able to find the most appropriate lender. 

 

Kieron Bassett Financial Services have two IFAs and we are open six days a week.  Contact the office on (01524) 832057 or via e-mail adam@kieronbassett.com to arrange an appointment.

 

Adam Elkin CertPFS

10^th May 2009

Budget 2009

Alistair Darling delivered his second budget speech last week amid The UK’s worst financial crisis in more than 60 years.  As Chancellor of the Exchequer he perhaps has the most unenviable job in The UK at this minute.  Rocks and hard places spring to mind.

 

Mr Darling expects the economy to contract by 1.6% during the first three months of 2009.  This has already been called into question by PriceWaterhouseCoopers who stated, only hours after the Chancellor delivered his speech, that the economy had in fact contracted by 1.9% over that period.

 

The annual budget deficit will rise to £175billion for the next two years and total government debt will double to 79% of GDP by 2013, with the books not balancing until 2018.  These estimates are based on Mr Darling’s ambitious growth projections.  The reality is that we will be paying higher taxes for many years to come in order to repay the costs of the current financial crisis.

 

The average man on the street will be unaffected by the 50% tax on income in excess of £150,000 per year, but it is possible that a future government will have to raise the basic rate of income tax in the future.  Perhaps in a honeymoon period after the next general election?

 

For homebuyers the stamp duty holiday for homes below £175,000 has been extended until the end of this year in an attempt to stimulate the declining housing market.  This means savings of more than £1,250 for purchases between £125,000 and £175,000 and will help people in our area who are prepared to commit to buy before the end of this year. 

 

Savers will be happy that their Individual Savings Account (ISA) allowance has been increased to £10,200 from 2009/2010 (6^th October 2009 for the over 50s).  This goes some way to mitigating the reduced income pensioners receive from their savings following interest rate reductions and incentivises all of us to save in a tax-free environment.

 

All mortgage holders have the ability to consider using savings in stocks and shares ISAs as the repayment method for their mortgage.  A typical capital repayment mortgage offers the guarantee that the mortgage will be repaid, but for some people the flexibility of savings in ISAs and potential for your mortgage to be repaid more quickly will be attractive. 

 

If you are unsure what changes to the budget may mean for your circumstances, or if you are considering buying a house, you should consult an Independent Financial Adviser (IFA) who will review your current financial position and recommend the best way forward for your individual circumstances.  Advice should always be sought if you are considering using an ISA as the repayment method for your mortgage as there is the risk that your mortgage may not be repaid.

 

Kieron Bassett Financial Services have two IFAs and we are open six days a week.  Contact the office on (01524) 832057 or via e-mail adam@kieronbassett.com to arrange an appointment.

 

Adam Elkin CertPFS

27^th April 2009

Tax Efficiency For Homeowners

I think it is fair to say that the recent Budget has left us with the impression that we will be paying higher taxes for many years into the future.  Although higher rate earners are already being hit with a tax rate of up to 50%, I do not think rate hikes will end there.  Directly or indirectly I can see lower rate tax payers shouldering most of the cost of the financial crisis we find ourselves in.  So what strategies do taxpayers adopt in connection with housing to combat higher taxes?

 

Firstly for people with mortgages consideration should be given to offset mortgages that allow a mortgage holder to offset their savings against their mortgage.  If you have savings and place them against your mortgage you are effectively cancelling out your mortgage interest with your savings.  It is likely you are being charged a higher rate of interest on your mortgage than you are receiving from savings, so placing your savings against your loan can make good sense.  This type of mortgage is particularly relevant to the higher rate tax payer, as you would be taxed at a higher rate on your savings if held away from your offset plan.  You may instead opt for a borrow back mortgage that allows you to overpay on your mortgage and borrow this overpayment back at a later date.  This mortgage has the same overall effect of the offset plan, but care needs to be taken with this type of mortgage as some lenders having taken overpayments may be reluctant to lend it back to you due to changes in their lending criteria.

 

For people with cash in the bank who are prepared to take some risk the buy to let market could be the answer if you want tax efficient returns.  The Centre for Economics and Business Research thinks that house prices have only a little further to fall and prices could start picking up next year.  This statement is a revision of their earlier forecast were they expected house prices to fall 40% from their peak.  This upbeat assessment has a measure of support from the Land Registry that showed house prices had only fallen 0.4% in March the lowest fall in nearly a year, and the Royal Institute Of Chartered  Surveyors reporting new buyer enquiries increasing at the fastest rate since 2003.  

 

So with this back drop it may be time to enter the market.  I would estimate that a semi property costing £100,000 could yield up to 6.5% per annum gross netting down to perhaps 4% provide you have a good steady tenant and 2.5% for the proposed 50% taxpayer.  Although these rates of return do not seem high, they compare favourably with deposit rates, but some effort has to be put in to achieve these returns.  However the big gain could come when you sell the property as capital gains allowance for a couple amounts to the first £20,200 of your gain being tax free.  The rest of the gain is then taxed at 18% regardless of your tax rate.  If by 2014 house prices have picked up by say 50% then a tax payer would not only have received a better rate than deposit but also have made £50,000 gross netting down to £44,636, therefore only paying tax of just over 10% on the total gain if all the rates stay static.  This scenario is potentially very attractive and may be used by an increasing amount of investors, if they buy into the notion that due to a lack of new builds in the last couple of years that an undersupply of properties will occur in the medium term and therefore force prices up.

 

Purchasing a property is usually one of the biggest financial transactions you will carry out, so it is worth contacting an Independent Financial Advisor.  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.