Flexible Mortgages

The trend over recent years has been to apply for a fixed rate mortgage over either 2 years or over 5 years, with an equivalent tie-in period.  This type of mortgage has been the mortgage of choice for most homeowners and remortgagors.

 

As mortgagees near the end of their current tied-in period many are finding that it makes more sense to remain on their lender’s standard variable rate (SVR) rather than renegotiate a fixed or alternative discount deal.  There are a number of lenders whose SVRs are below 3%.  There are also many lenders who have kept their SVRs artificially high to allow their savings rates to remain attractive.  The building societies and Abbey are the main culprits within this category.

 

If you are taking a new mortgage, fixed rates over 2 years start at 4.1% but increase significantly to 5.7% over 5 years and 6.5% over 10 years.  Fixed rates provide the borrower with safety and security over the period of the fix but are offered at a premium to a variable rate mortgage, whose rates start at around 3% for new mortgages.

 

The disadvantage of variable rates are not only the generally high arrangement fees for those rates around 3% and the exposure to interest rate fluctuations, but the Early Repayment Charges imposed over the two to three year period of the deal.  Over the last couple of years interest rates have fallen to historic lows and with the Quantitative Easing (QE) measures taken by The Government, inflation could force interest rates up equally as quickly over the next couple of years.  An interest rate rise of 5% would increase payments for a £100,000 mortgage over 25 years by £420 per month.

 

Since mortgages became harder to come by and as interest rates have been low clients, both buyers and remortgagors, have asked me for a deal with no Early Repayment Charges.  This type of mortgage simply hasn’t been available. 

 

Perhaps we are now seeing an easing in the availability of finance, with not only a flexible deal being launched but with a competitive rate and low fees.

 

The Coventry Building Society have launched two Flexible products, under their “Flexx” range.  The deals restrict lending to 65% or 75% of the property’s value and charge a current rate of 3.5% or 4.15%.  Fees are £499 (with £199 payable up front) and the Coventry Building Society will also pay for your legal costs of remortgaging.  The main feature of this mortgage, in my opinion, is the ability to repay the mortgage at any time without being penalised.  This allows you to switch to a fixed rate if rates appear to be rising quickly, or lock into a low fixed rate if they fall.

 

You should have a discussion with an Independent Financial Adviser (IFA) who will help you decide on the most appropriate mortgage. 

 

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 DipPFS

20^th August 2009

UK markets to learn from beleaguered car market

Most lenders continue to restrict the supply of mortgages to consumers, and in my opinion these actions are holding back the recovery in the housing market. For example, first time buyers have to raise 10% deposit and suffer high interest rates of over 7%.  These rates have lead to accusations of The Banks profiteering and stalling the market as potential homeowners resist paying these high rates and incredibly expensive arrangement fees, of in excess of £2,000 in some cases.

 

The Banks argue that they are pricing for risk, but even for people with higher levels of equity good track records and secure employment, mortgage rates are often in excess of 5.5% for long-term fixed rate mortgages.  The buy to let sector suffers a similar fate to the two other areas mentioned above.  There are even fewer players in this market than in the mainstream market with just a handful of lenders operating.  Of course this leads to even higher arrangement fees and more uncompetitive rates.  In turn this leaves investors, even with big deposits, turning their backs on the market, as due to high interest rates they cannot make the figures work.

 

Overall, the current lending policy contributes significantly to a stagnant housing market, with the prospect of this continuing for the foreseeable future.  We do not even have the silver lining of investors receiving higher interest rates as a result of the high rates being charged on mortgages.  Rates paid by the banks are miniscule.  So, due to the lack of interest being paid, less money is going back into the economy.  As a taxpayer I cannot help but feel aggrieved that having contributed in bailing banks out last year, I am still being made to suffer as they make excessive profits on both savings and mortgage accounts.

 

However, thankfully change is in the air as the margins made by the banks have not gone unnoticed.  The investment house M&G have established a fund that aims to lend one billion pounds to medium sized businesses.  It is called the UK Companies Financing Fund and the fund is available to British companies suffering from the collapse in bank lending.  It is likely, if this proves successful, then other investment houses will follow suit.  Also, perhaps more ominously for the banks, The Bank of China has entered the UK mortgage market.  This Bank is the third biggest in the world and growing rapidly. I t also intends to lend only money that it holds on deposit and not get involved with complex financial instruments to lend.  I suspect it is awash with cash otherwise it would not be entering the market with such low rates.  It is offering base rate tracker mortgages  for the  life of your mortgage at only 2.5% over base rate meaning the current rate payable is 3.00% with only a one year tie in, and for buy to lets the rate is 3.5 %. Admittedly at the moment it is cherry picking the market as it only lends up to three times income and a maximum of 60% loan to value.  But I believe this new lender could help to galvanise the mortgage market.  It could awaken the banks to the prospect of competition and force them to engage with their clients. They have, in my opinion, a stark choice to either accept lower margins now while they still control the market, or stagnate and let others gain market share.  If they choose the latter they need to be aware of the history of the car industry in the UK that did not listen to what consumers wanted, and as a result is a shadow of it’s former self.

 

Kieron Bassett Financial Services have two Independent Financial Advisers who can assist and recommend the most appropriate product for you. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or log onto www.kieronbassett.com/cms.

Is Quantitative Easing Working?

Quantitative Easing (QE) is the Government’s way of putting money into the economy by buying gilts from investors.  To date they have bought £122bn of gilts.

 

If we assume that the cash the Government uses to buy the gilts ends up in the British Banking system.  If this is the case then the banks are happy as they have a higher ratio of customer deposits to loans, thus reducing the banks’ dependence on wholesale finance.

 

This is crucially important as it was the banks’ complete and utter reliance on wholesale finance which led to the near collapse of the British Banking system and the loss of Lehman Brothers.

 

Royal Bank of Scotland, last week, announced it’s intention to reduce it’s ratio of loans to deposits from 156% to 100% by 2013.  This equates to a reduction of £200bn in wholesale funding, so when RBS, and many other banks, receive cash their instinct surely is to sit on it and say, “Thank you.”

 

Lloyds Banking Group tell a similar story.  In the first 6 months of 2009 they reduced their loan to deposit ratio from 166% to 152% by increasing deposits by £20bn and reducing loans by £25bn.

 

This makes these two institutions much safer for their depositors than perhaps they were 6 or 12 months ago and it is a deliberate policy which is being helped in no small way by the Government’s QE policy.

 

There is little chance that the money will be put into the real economy any time soon.  If we look at the RBS again, the regulator has instructed them to increase their “liquidity reserve” from £90bn to £150bn.  To do this they will likely buy gilts with the additional cash, thus one lot of gilt purchases by the Government spurs another by the banks.  This is great news for the Government who would like to reduce the public-sector deficit but it does nothing to help us who would like more credit to be available in the wider economy.

 

QE hasn’t been a waste of time though, there would have been even less lending without it.  There are also signs that confidence is returning to banks, albeit not those based in the UK.  Bank of China, who have incredibly large reserves, are trying to break into the UK mortgage market.  They are offering common sense mortgages to all types of borrowers.  The small price to pay is an interview at a branch and that you bank with them.  Save me £1,000s a year or even give me a mortgage nobody else would and of course I’ll do that.

 

If you want to know which mortgage is the most competitive for your needs then contact an Independent Financial Adviser (IFA).  Kieron Bassett Financial Services have two IFAs and are open 6 days a week.

 

Ring me on (01524) 832057 or contact me via e-mail, adam@kieronbassett.com.

 

Adam Elkin DipPFS

10^th August 2009

Mortgages To Aid Retirement

I was reading a report recently about retiring after age 65.  It was saying that if we carried on working past normal retirement age we should be able to significantly increase our pensions.  Although this would be welcome news for some people who love their jobs so much they have given no thought to retirement, I feel that for the majority of people this report would leave them with a sinking feeling.  Most people talk about retirement as being sooner rather later.  Many have ambitions to retire before age 60 so they can start to enjoy retirement when they are still fit enough to do so.  However, this aim is little more than a pipedream for the majority, as the credit crunch in part has dashed many people’s hopes.

 

If you notice I do say only in part that the credit crunch has made a difference.  I think that our collective behaviour before the credit crunch occurred is having a greater impact on our retirement plans.  We saddled ourselves with personal debt which allowed us to purchase items that made us feel better off than we actually were.  So now, as they say in the movies, is payback time.  Also it could be argued that we have generally been totally unrealistic about the amounts of money we have to save per month to retire comfortably.  In defence many of us could say that we feel let down by pensions as they have failed to deliver what they had promised.  A case could be put forward that personal pensions are inflexible and have not changed as much as people’s lifestyles, making them unattractive for retirement planning for many people.

 

So is there a better, more secure way forward for people who are serious about retiring early?  I believe there is and it revolves around your mortgage.  Many borrowers take out mortgages over twenty five years but do we ever ask why?  I must admit I do not know the answer but I could hazard a guess.  I think that until the 1970s borrowers came to the market later at around age forty having rented for many years.  So twenty five years took them through to retirement age.  But now first time buyers are coming to the housing market earlier with arguably more disposable income.  So if they are serious about retirement and are prepared to examine their outgoings carefully they could increase affordability further and potentially shorten their mortgage term.  Based on a £90,000 mortgage over 15 years at 4% interest the payment is only £190 per month more than what you would pay for a twenty five year plan.  This would mean a twenty five year old would be mortgage free at forty with their mortgage payment available to help start a plan for retirement from this early age.  Due to people’s misgivings with regard to pensions, possibly the more flexible Stocks & Shares ISA will be more appropriate for savings than the more tax efficient pension.  So if the mortgage payment of £665 was invested with an average charging fund and 7% growth per annum was achieved, a tax free lump sum of £271,600 would be available at 60 to allow you to prepare for your retirement.

 

Mortgages are now more flexible so you could with most lenders still have a twenty five mortgage, but make over-payments that reduce the term say to fifteen years as described above.  This would leave you with the flexibility to drop your payments to a twenty five year term if money was tight.  Anyone can shorten their mortgage, you do not have to be a first time buyer.  But you do have to be prepared to make sacrifices to achieve your goals.  As they say no pain no gain.  If you are thinking of reducing your mortgage term it is worth contacting an Independent Financial Adviser who specialises in mortgages to help guide on the best path for you.