The Future Is…

A report has been written for the building societies to enable them to prepare for the future.  They have tried to predict market conditions in 2020 whilst at the same time reflecting on developments over the last hundred years.  They acknowledge flexibility and mortgage term changes during the last century, but they have concluded that the standard variable rate mortgage still dominates the market just as it did then.

 

The Building Societies Association (BSA) have decided that accelerating prices over the last decade, combined with the ever changing lifestyles of potential homeowners mean the present model is no longer as effective, relevant or accessible as it once was.  The old model of people leaving school and getting a job for life and entering the housing market before age 25, often with a partner, is no longer reflective of the society we live in.

 

Young people today remain single for longer, are happy to move around the country or go abroad to work.  They also appear to delay the start of their careers for longer by extending their education or looking at new experiences travelling.  Therefore they are willing to rent, whether out of choice or necessity, rather than buy.  It is reasonable to say that first time buyers enter the market later than they once did.  This could mean they find themselves taking out shorter term mortgages or paying their mortgages after normal retirement age.

 

The Building Societies are aware that even with house prices having weakened over the last couple of years, a growing number of twenty and thirty year olds are finding it difficult to enter the housing market.  It could be that they are earning less than their parents did as they are entering the job market later.  However, the main reason for this situation is the high level of deposit which is required from the first time buyer.  The report predicts that although stabilisation of the current situation may occur, pressures will remain with the lenders into the future.  This will mean that home ownership levels will fall.

 

To try and help counter the potential fall in home ownership levels, the report suggests looking at the Islamic Home Finance model.  The BSA report believes it could benefit the mainstream housing market with a rent to own approach that underpins the Islamic structured product market.  Also, the author suggests an incentive for first time buyers to save, to help stimulate the market.  For both of the above suggestions Government intervention would be needed to facilitate and fund these markets properly.

 

Finally, the report refers to a new group of super prime borrowers who will emerge.  There will be intense competition for these customers who will likely have very good credit records, low loan to values and very secure employer prospects.  The prime mortgage customers will be able to access the market but it won’t be easy.  For none prime and sub prime, the report concludes the landscape looks bleak for the future.  It is possible that these categories for the medium term could form part of a growing rental market.

 

Overall, as you can see from the above, the BSA report veers towards negativity.  This is due to the vision of a constrained, heavily controlled market with less funding and products.  But, they could be wrong and other lenders from areas away from financial services could emerge if they see opportunities and the future may be somewhat brighter.

 

If the findings of this report are implemented it is going to become increasingly difficult to find a mortgage and therefore it may become increasingly important to have a good credit record in the future.  Consult an Independent Financial Adviser (IFA) now to help you ensure your credit record is A1.  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

15th June 2009

 

Deal or No Deal? Which Rate Will You Choose?

Interest rates have been low for some time now.  The Bank of England (BoE) kept the Base Rate at a record low of 0.5% for the third consecutive month recently.  How are mortgage rates reacting to this news?  You would expect them to fall.  But, you’d be wrong.  Mortgage rates are actually rising. 

 

A few weeks ago Abbey had five year fixed rates at or around 4.5%.  Now their rates start at 4.69% for five year fixed rates.

 

So, is it worth buying a variable rate?  Well on the face of it you would think so.  The Furness Building Society have a competitive lifetime tracker with a current rate payable of 3.19%.  (BoE Base Rate + 2.69%).  The rate payable is among the lowest available for any deal.  Short term fixed rates are now at 3.8% with longer term creeping above 4.5%. 

 

If we assume that you can afford to take the risk with a variable rate mortgage then when compared to a short term fixed I would argue a variable rate is better value.  Analysts predict rates won’t rise for another year or more.  Therefore, if rates do rise at that time they would have to rise considerably to make the fixed rate more attractive over 2 years.

 

If we assume over the longer term that the BoE Base Rate returns to it’s more normal realms of 5% then the Furness Building Society variable rate deal would have a pay rate of 7.69%.  It could be argued that rates are more likely to revert to “normality” over a 3-5 year period so a 5 or even 10 year fixed rate paying 4.5-5% looks extremely attractive when compared to a variable rate mortgage. 

 

I would suggest therefore that you should pay more attention to variable rate mortgages over short periods and be more aware of fixed rate mortgages for tie-in periods in excess of 4 years.  The security of payments over a longer period will be valuable as interest rates begin to rise as we enter 2010 and beyond. 

 

Of course, everybody’s situation is different.  You should seek advice from an Independent Financial Adviser (IFA) before you choose a mortgage product.  An IFA will recommend the most appropriate product for you.

 

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

13th June 2009

Elect a Lender

Last week we had the County Council and European elections.  We used our collective voice to show our displeasure with MPs on two fronts.  For allowing the economy to get into such a mess and for MPs’ excessive expenses claims.  Out with the old and in with the new was the resounding result.  By the time this is published we may even be preparing for a new Prime Minister.

 

So, eventually MPs do pay for the mistakes they have made as the electorate is able to make a choice.  Is the same true in the banking world?

 

If we could vote for mortgage lenders and banks, which would you vote for?  I suppose the first choice is between banks and building societies. 

 

Banks operate to target profit for their shareholders, who aren’t necessarily their customers.  In that sense they have to strive for growth and outperformance against their competitors.  Profit is imperative in the Banking World as shareholders seek dividends.  As such, without adequate regulation, banks may grow without constraint.

 

Building Societies on the other hand work for the benefit of their members.  They distribute the proceeds of the business to their customers.  This is achieved by offering higher rates to savers or lower rates to borrowers.  Building Societies may use their “profit” to invest in the local community, or to expand the business thus creating jobs and economic prosperity region by region. 

 

Northern Rock were once a building society operating on the above principles.  However, as they demutualised, becoming a plc, the board were incentivised to increase profit to enable dividends to be paid to shareholders.  They targeted growth in the mortgage market, lending in a reckless manner in search of higher profits.  Halifax would also fit the above profile.  Both of these former building societies required rescuing.

 

Personally, I would vote for a building society.  Building societies are run with prudent and sustainable values.  A building society is not going to lend you 125% of a property’s value, nor will they lend to somebody who is unlikely to be able to repay.  Building societies will also not offer market leading savings rates only to reduce them two months later.  They tend to offer mortgages to those who can afford to save a deposit and are willing to share the risk of home ownership.  They offer savers rates which will be among the most competitive for most of the time.  This type of business model promotes long-term sustainability and encourages saving to buy a home.

 

I believe that the current financial crisis will give all of us a fresh perspective on credit.  There will be a mindset change from a “buy it now” culture to one where you will have to save to buy a home, a car, or for a holiday.  This will promote community spirit as we will discuss our finances more than we have been doing recently.  It won’t take long to change either.  A simple conversation about having to save for your deposit, quite quickly becomes accepted as the normal way to buy a home among those potential buyers.  Borrowers will not expect 100% mortgages and if home ownership is important they will make plans to save and be financially disciplined.  This can only be good for our state of mind and for a more sustainable wider economy.

 

If home ownership is on your mind then contact an Independent Financial Adviser to discuss your mortgage and also savings options.  The IFA will recommend the best route for you to attain your new home.

 

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

6th June 2009

Offset Mortgages

Offset style mortgages were introduced into the UK by the Australians in the 1990s to give people more freedom in the way they paid off their mortgages.  Until that time most people were resigned to paying their mortgage off over 25 years and indeed the system actively encouraged borrowers to do so.  It was not until tax relief on mortgages was abolished, and most lenders stopped charging interest on an annual basis and moved to daily charges that the scene was set for more flexible mortgages.

 

At first the flexibility took the form of people paying their mortgage more often, say on a weekly basis rather than on a calendar month basis and seeing this process shaving years off their mortgages.  Then the lenders, who were mostly Banks in this area of lending, encouraged people to use the balance in their current accounts to be offset against their mortgage.  In practise this meant that if you had a £100,000 mortgage and £10,000 in your current account you would only be charged interest on £90000.  So if you were already paying your mortgage down on a weekly basis based on the original £100,000 loan you would be paying your mortgage off even quicker.

 

It would have been reasonable to think that offset mortgages would have become a mainstream product due to their obvious advantages as highlighted above, but I feel that up to now they have not taken off in a big way.  I believe that the main reasons for this are that they can be complex.  This is because when borrowers are attaching their mortgage to their current accounts it takes good organisational skills to keep track of were they are, and the progress they are making in paying off their loan.  Also, offset mortgage providers have been charging higher rates than on their conventional products, and have generally not been offering fixed rates on their mortgages.  This excluded borrowers who want security of payment.

 

Fortunately I believe the market is changing and lenders are beginning to offer better rates, with fixed rates at last being featured.  Also lenders tend to now offset with an account linked to their mortgage rather than a current account, making the process simpler and more transparent.  It could also be argued this is an account designed for credit crunch Britain.  It allows the cash strapped lenders to draw in savings on the back of mortgages and for borrowers, particularly the higher rate taxpayer, it makes more sense to offset your savings against your mortgage than accept the meagre savings rates on offer.  For example a higher rate tax payer receiving 3% on savings rates will nett down to1.8% after tax, so unless their mortgage rate is less than 1.8% offset makes sense.  It could be argued that if you have savings and no plans for spending it to just reduce your mortgage balance rather than use offset.  Again this may have been good advice in better times but at the moment it may be advisable to keep money in reserve as a financial cushion, as it may not be so easy to borrow back money you have paid off.  This could be due to a change in circumstances or a change in the lenders borrowing criteria. 

 

Offset mortgages may be right for you but it is a complex area and it is worth taking advice from 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.