Good Trends

There are very positive signs that lenders are returning to the market with positivity this week. Competitive rates are available for both high and low loan to value products, but you must be squeaky clean to make the grade for these competitive deals.
There is a lot of uncertainty over whether interest rates will rise at the moment as we are all sure that rates will not fall. To this end lenders have responded by offering low interest rate tracker mortgages, which will rise when rates rise but having a different set of rules when it comes to fixing rates.
HSBC offer the lowest rates, starting at 1.99%. My response to this great headline rate is wow! However, HSBC are apparently turning down 70% of applications. I can’t be sure of the status of the 70% but I guess HSBC’s criteria to lend is strict. And, why not, they are offering the best rate in the market. Santander and Coventry Building Society have launched similarly good variable rates. The Coventry deal, in my opinion is a real winner. There are low fees, in this environment deals with fees of less than £1,000 are rare, a competitive rate of 3.4%, and, for me, most importantly, there are no fees should you wish to repay the mortgage.
If you are being charged a variable rate of interest, then the ability to switch deals with no penalty is, in my opinion, very important. Fixed rates are currently much higher than variable deals. For a lot of people it could make sense to pay the lender’s variable rate until such time as rates start or appear to start rising. Then, make the switch to a fixed deal. This system is not foolproof, but if rates stay low for more than 18 months I suggest that paying a variable, rather than a fixed rate, will prove profitable.
This is not good news for first time buyers. First time buyers invariably benefit more from a fixed rate due to their inexperience budgeting for costs. They have either moved away from parents or been paying a fixed level of rent. Variable rates are also not suitable due to first time buyers often being at the limit of their affordability. The Coventry Building Society have thought of this too. Their latest deal is a low fee five year fixed rate of 5.99%. This is the market-leading 90% loan to value deal, without a shadow of doubt. There are a couple of caveats. Parents must hold a mortgage or savings account with the Society for their siblings to be able to obtain mortgage finance.
I believe this to be prudent business from the lender who is not asking parents to be on the mortgage but certainly asking for them to have an affinity with their child’s purchase. Essentially, the lender is asking parents to be involved. This invokes a level of responsibility from the parent. A good thing in my opinion if this results in lower interest rates and more competitive deals for buyers and remortgagors.
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
18th September 2009

Protect Youself Against the Downturn

This week I was looking at a policy that was taken out in the 1930s.  The plan’s aim was to provide a lump sum to a child’s parents if he died during childhood, and this money would have been enough to provide for his funeral.  This got me thinking that even though families in the 1930s generally had less disposable income they placed a higher value on protection than we do today.  However, it could also be argued that as they could not afford to self insure they had to buy a policy.  This may be so, but they did seem to be prepared to make significant sacrifices to protect their families, as they had less disposable income than we have today.

 

Many people in 2009 have higher levels of debt than previous generations and these debts remain unprotected.  In this respect we are less well insured than our grandparents.  Purchasing life cover does not appear to be a priority, but why is this the case?  I believe that the welfare state, through healthcare has helped life expectancy to improve over that last 60 years, and benefits paid to families after bereavement have helped them to feel less vulnerable.  Also, in the private and public sector, pensions have often had attached to them generous levels of life cover that have added to families feeling of wellbeing.  Unfortunately, I believe that savage cuts will be made in the public and private sector in the near future, and many benefits will be cut.  This will then perhaps lead us to become come more self-reliant like our forebears in actively buying protection products.

 

I think it is vital that families take time to consider how much of a short fall that they would suffer in terms of repayments of loans and living standards if the breadwinners in the house were to die.  By reviewing protection needs on a regular basis you could for example, be aware of policies that may be expiring in a couple of years time, that you may wish to review.  This may leave you to think about renewing you policies now rather than later, as your health may have deteriorated by the time the original policies ends and cover could be more difficult to obtain.

 

Life cover today is probably a lot cheaper than the 1930s and the market is both innovative and competitive.  For example a 30 year old non smoking male taking a level term policy out over 25 years for £100,000 would only have to pay £6.67 per month for the policy term.  Even if £10,000 of critical illness cover was added to this policy the premium would only increase by £3.04.  To sum up it is worth while consulting an independent financial adviser who can help you obtain the right level of cover to protect you during these difficult times.  Whatever level of protection you require, it pays to consult an Independent Financial Adviser (IFA) who specialises in this area.  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.

Outlook for the Housing Market

It has now been a year since Lehman Brothers went bankrupt and the rest of the financial community had a collective heart attack.  The Banks had then realised that the game was up and you could not be considered too big to go bankrupt.  Unfortunately the demise of Lehman Brothers led to other large corporations failing soon afterwards, and governments around the world had to launch rescue packages to avoid total financial meltdown.  It has been argued that if Lehman Brothers were rescued a feeling of security would have run through the Banking sector and confidence would not have drained away so quickly.  Unfortunately this did not happen and the Banking bailout is probably more expensive than it should have been as a result of the American government’s actions.

 

These events starting off on the other side of the Atlantic have had a shattering effect on our economy and particularly on the housing market.  House prices had just stopped rising after many years of growth in the early part of 2008, and we were hoping for a period of time were house prices would just tread water for a few years, as affordability was becoming a big issue.  All these hopes were dashed as lenders after receiving Government support hoarded money, made staff cuts and maximised profits.  The market was being starved of cash causing the market to almost seize up at the back end of 2008 and the early part of 2009.  This impacted on house prices significantly as cash became king and the few buyers around were able to squeeze vendors.

 

In recent months house price statistics have started to look favourable again with for example the land registry recording house prices rising 1.70% in July.  So are we entering a new phase of house price growth or are recent statistics just a false dawn.  Looking at the bigger picture the land registry has indicated house prices are down 16.7% since January ‘08 with the drop over the last year standing at 8.7%.  It could be argued that the volume of house sales is still low and recent rises are due to a lack of supply in the market.  This may be due to potential vendors delaying putting their houses on the market due to job insecurity, or maybe tight lending criteria that makes it difficult to borrow what you could a couple of years ago.  Other factors could be due to a slowdown in house building.  It is well known that builders became obsessed with building flats in the boom years, but perhaps did not construct enough family houses and they are certainly not building them in big numbers at the moment.

 

However, I feel that it is reasonable to buy now provided you are buying for the long term as I can see the annual house price index turning positive over one year in the near future.  This continued house market recovery will in my opinion take place so long as interest rates remain low and we do not have any major market shocks.  However I can see problems in the future when interest rates start rising after the election and the government starts to tackle public spending that will probably lead to higher unemployment and some repossessions.  Although these events will affect the market I think new lenders and a lack of supply due to a lack of new properties will help guard against the sort of drops we have experienced in the last couple of years.

Bank of England’s Big Decisions

The Bank of England (BoE) and their interest rate decisions are starting to fill the minds of many of my clients.  I am being asked my opinion on the likely future of interest rates more frequently than ever before. 

 

The reason interest rates are such a hot topic at the moment is due to the differential between tracker/variable rates and rates which are fixed.  The margin, which can be as much as 2.4%, (equivalent to £200 per month for a £100,000 interest only mortgage) is greater than I have seen in my 10 years in this industry.

 

There seems to be a conception among many of my clients that the BoE base rate won’t rise significantly and The Government won’t allow it to return to the recent average rate of 5-6%.

 

This, I believe, is a mis-conception as the BoE base rate will definitely rise, we just don’t know when.  It is only a year ago that The BoE base rate was 5%.  Rates were cut so drastically that they fell from 5% in October 2008 to 0.5% in March 2009.  The cuts were drastic as our economy was in meltdown.  At some point in the future when we are into a recovery cycle I believe rates will return to “normal” levels.

 

I do have two caveats to the above.  There is the possibility that the economy will be in a slump for many years and inflation may stay very low or even be negative.  This would be a similar position to the Japanese economy which has been virtually neutral for more than a dozen years.  In this environment The BoE base rate would stay low and mortgage rates would decrease as the long-term outlook for rates became more determined.

 

The other alternative, rates rising sharply and significantly, is also viable.  There has been more than £125 billion pumped into the economy since The BoE launched the quantitative easing program in April 2009.  When more money swashes around the economy inflation generally increases.  The BoE’s monetary policy committee have a primary objective to keep inflation at or around 2%.  If inflation soars the BoE will increase The BoE base rate to try and maintain their target level.  Interest rates have been as high as 15%.  They were extraordinarily high rates.  We currently have extraordinarily low rates.  If the economy dictates that The BoE should increase rates they will do. 

 

The BoE will make their decisions for the long-term stability of the economy and if that means interest rates of 10% or interest rates of 0% then so be it.

 

There will always be winners and losers with interest rate decisions.  Mortgage holders benefit considerably in environments with low rates and savers profit when rates increase.

 

The advice that you should only opt for a variable/tracker rate mortgage if you can afford for rates to rise holds true even when the margin between those and fixed rates is as considerable as it is currently.

 

It is imperative that you seek independent financial advice to allow you to make an informed choice and understand the pros and cons of different types of rates.  For example, 2 year fixed rates are currently quite low, maybe around 4%, with 5 year fixed rates at 5.69%.  For many people the 5 year fixed rate will represent better value due to the security it affords over the 2 year deal, which may have to be renegotiated at a time when rates have risen.  At least 5 years gives you more time to plan for rates rising and benefit from wage rises.

 

Kieron Bassett Financial Services have two independent financial advisers.  To make an appointment, or discuss your circumstances over the phone, ring me on (01524) 832057.  Alternatively send me an e-mail to adam@kieronbassett.com.

 

Adam Elkin DipPFS

6^th September 2009