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

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

Buying at Auction

Housing markets are similar to economic cycles.  At different points in time the vendor will have the upper hand and at other times the buyer will be the dominant party.  This is the state of the market in 2009.  The buyer is king.  He can pick and choose his property and to some extent the price he pays for that property.  Don’t get me wrong, many vendors will only sell if the price is right, but there is so much supply that even by taking out of the market those vendors who are hanging on for an unachievable price, there are still a glut of properties on which you can haggle down the price.  Most vendors are aware of this and are willing to negotiate so long as the vendor of the property they are buying is willing to do likewise.

 

Above are examples of vendors who want to sell, but there are some vendors who need to sell.  Those who fall into that category may well be inheritors of estates, mortgage holders who are struggling with affordability, or banks who have repossessed property and need to clear it from their book.

 

Rather, or sometimes as well as, placing their property with an estate agent, vendors who need to sell may place their property into an auction.  An auction for a property has pros and cons for both the buyer and the seller.  The seller benefits by knowing on the day what price he has achieved for the property and has a definite timescale until completion, although he will often receive a lower price for the property due to the restrictive nature of buying at auction.  The buyer on the other hand has agreed to pay a lower price for a property than he might have done via an estate agent, but he is locked into the transaction and has to pay 10% of the price as the hammer falls and usually has 28 days thereafter to complete the transaction.  The Latin phrase caveat emptor is the operative word in an auction transaction as the buyer has to do the due diligence work prior to the auction.  Buying through an estate agent allows surveys to be carried out following the agreement of the price.  A buyer can amend or cancel his offer at any time until he has exchanged contracts.

 

The definite nature of an auction restricts somewhat the buyers who can benefit from this type of transaction.  A mortgage company will want to have a survey prepared for a property on which they lend.  If you have the survey carried out post auction and the surveyor downvalues or declines the property, you have no comeback on the vendor.  You will already have paid your 10% deposit and legally agreed to pay the remaining balance.  If you are subsequently unable to raise monies against the property you are in choppy legal waters and may have to make arrangements with the vendor to pay from alternative sources or over a longer term.

 

Many auction buyers do not raise finance against the property they are buying but rather go into the auction as “cash” buyers.  That is not to say they have not raised finance.  They may have other assets, their main residence, their business, or their buy to let portfolio, and could have used all or any of these to raise the monies required to buy the new property.  It is a case of borrowing against equity in the most cost and tax effective manner.

 

That is not to say you cannot raise a mortgage against a property you buy at auction.  But, the prudent advice is to have the mortgage agreed and a survey prepared before you step into the auction rooms.

 

If you would like advice relating to the most appropriate way of raising money to buy at auction speak to an Independent Financial Adviser (IFA). Their role is to advise the most appropriate and best way of raising finance and the products thereafter.

 

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

23^rd March 2009

Innovative ways to “Kick-Start” the market

As the festive period draws to a close, the majority of us will remember it more due to the dull headache, caused not by too much champagne and whisky, but by the flu, which has caught more out than expected this year.

Hopefully you are over the worst of your cold, but is the housing market?

Will we see a fresh approach to lending in 2009?

There will not be a return to 2007 levels of lending for many years, but we must think differently and change our ways if the property market is to keep going.

The Government is now paying for the biggest redundancy protection policy in my memory. This may slow the rate of repossessions in the market, thus keeping house prices a little more stable.

In addition, there are new ways to buy homes, with mortgages for equity share schemes now commonly available, and with mainstream lenders. If first time buyers are able to buy homes again, prices will quickly stop falling and the market will get back to it’s knees.

Equity share schemes work well for the vendor and the purchaser in this type of market. They allow the vendor to sell and the purchaser to buy. The vendor, who could be a builder or simply a normal seller, allows an interest-free loan for a percentage of the property’s value for say 5 years. This allows the purchaser, who may not otherwise be able to buy a property, to obtain a mortgage and buy a home, with little or no deposit.

After the first 5 years, the buyer can arrange to repay the loan in full or renegotiate the loan on different terms with the vendor.

A working example. A couple earning £20,000 between them are considering buying. They find a property worth £100,000. Once they see their financial adviser he informs them that they cannot buy a property without a deposit, but does talk to them about shared equity schemes. They then approach their estate agent who discusses this option with the vendor.

The vendor does not want to wait until the market recovers to sell, and is happy to agree the asking price for the property, giving an interest-free loan of 25% of the property’s value for the first 5 years. The buyer then arranges a mortgage for £75,000 which allows them to buy the property. In 5 years they will have to repay the loan or renegotiate the terms of the loan with the vendor.

I believe that innovations such as the above shared equity scheme can “kick-start” the housing market in 2009. My opinion is that the market must evolve to allow a recovery as soon as possible. You may see further innovation this year with incentives for property landlords or additional help to first time buyers.

If you are considering buying and would like to discuss your options, you should contact an Independent Financial Adviser. The IFA will discuss your options with you and recommend the most appropriate course of action.

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
9 January 2009

Early Christmas Present

We received more good news in the housing market this week. The Government has announced that as a result of the downturn, families experiencing a significant loss of income or redundancy will be able to defer a proportion of their interest payments for up to two years while they get their family finances back on track. This initiative, in addition to the change in help given to people who have lost their jobs, having interest payments being paid for, now after three months unemployment rather than nine months, and up to £200,000 covered, is forming one big mortgage protection policy for the whole country.

If for some reason you manage to get into trouble even with all the help available above, then at least you will have the comfort of knowing that lenders appear to be queuing up to defer repossession proceedings for up to six months. Then if all else fails the government have announced they are bringing forward their mortgage rescue scheme. This scheme is a £200 million programme that will allow homeowners either a shared equity option, enabling monthly mortgage payments to be reduced in return for giving up a share of their property. Or you can stay in the property as a tenant having sold your property to a housing Association and pay a subsidised rent.

Although these measures are being put into place I would urge people to think twice before cancelling protection policies as most of the help appears to revolve around redundancy. I believe that once the economy has stabilised it could become politically embarrassing as well as expensive to continue with such generous schemes. The costs could eventually be seen as a tax on the retired who have no mortgage and who feel they have not contributed to the situation we find ourselves in.

Not content with early Christmas presents from Mr Brown and Mr Darling, the Bank of England have joined in the festivities and gifted the housing market a further 1% rate cut. This makes the Bank rate the lowest since the Second World War. Unfortunately Scrooge, in the shape of the Halifax in particular, have not extended goodwill to all men and have not passed on the full rate cut. I believe that as we are in exceptional times that they should be encouraged to pass on the cut. As an incentive perhaps savers should be able to deposit up to say £20,000 this year in tax free ISAs with lenders that pass on the full rate cut. If this action were taken not only would it benefit the housing market, but it would ensure that savers who pay tax are being compensated for their loss in interest rates. This would also enable more people to get the Christmas they deserve.

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
9 December 2008

Mortgage Assistance

The pre-budget report stated some measures which may help, but there was one measure which will definitely help those who find themselves out of work, and was not highlighted by the media.

 

You can’t fail to read or hear of the rapidly rising number of redundancies due to our economic slowdown.  Without redundancy protection you would have 9 months of mortgage payments to find before the Government would help to ease the burden.  The Government at that time would pay your mortgage interest (upto 6%) on your debt upto £100,000.  However, following the pre-budget report, from April the Government will pay your interest (upto 6%) after only 3 months, upto debts of £200,000.

 

On the face of it this partially takes away the need for redundancy cover.  However, what most people do not realise is that the interest is only paid on the amount of money you borrowed to buy the property.  For example, if you bought a house 10 years ago and borrowed £50,000.  The interest will be paid on the £50,000, not on any additional monies you have since that time.  Also the Government will only pay the interest upto a maximum of 6%.  Therefore your mortgage would not be being repaid.  Crucially, if the mortgage is joint and one party continues to work, no payments are made by the Government.  This excludes a significant proportion of claims.

 

Redundancy protection can be as cheap as £28 per month for £1,000 per month of cover and can be paid after you have been redundant for 30 days.  The policy can last for either 12 or 24 months.  You can protect your monthly mortgage payment inclusive of mortgage related insurances and also extra to assist with maintaining your standard of living.  The policy can either be taken out in one name or joint names. 

 

This type of policy is simple to set up and can be in force immediately.  However, bear in mind that most firms have an exclusion period where they will not pay out if you are made redundant within the first three months.  However, many firms offer free cover for the first three months of the policy. 

 

You should review your redundancy protection arrangements regularly.  An Independent Financial Adviser (IFA) will advise you on the most appropriate protection arrangements for your needs.

 

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

1 December 2008

Delay Could Pay

A lot of people are coming to the end of their fixed or discount deals at the end of this year and are wondering what deals they should select.  The decision is a very difficult one with such uncertainty in the markets and the possibility of more interest rate cuts before Christmas.  Normally people are very keen to source a new deal for two main reasons.  Firstly borrowers do not want to revert to the variable rate that is normally much higher than their current pay rate, and secondly they are worried if no action is taken rates could move up and the opportunity of a good deal is lost due to delay.

 

This approach is sound in most scenarios, but as we are experiencing what could be described as unusual times it may be worthwhile pausing and taking stock before applying for  a new rate.  The reason for this is because variable rates are coming down.  Although, I hesitate to say fast as most lenders did not fully pass on the cut of 0.50% in October.  However, the signs are that they are doing better, with the 1.5% cut in November being passed on to more borrowers.  For example, the Halifax Benchmark Rate is now down to 5.00%.

 

As mentioned earlier it appears more cuts are on the way so delaying and paying the not to high variable rate for the foreseeable future could work out well for some borrowers.  However I would advise that if this tactic is used that the borrower keeps a close eye on the market or keeps in touch with their Financial Adviser as rates will eventually turn.  So it is important to consider taking action at this point to perhaps secure a fixed rate just as the rates come off the bottom.  This approach may not suit everyone as I believe the hard pressed need certainty of fixed rates and cannot afford to take risk as a sharp upward movement of rates could make the pressure of payment too great.

 

People who are in the process of moving now because they may want to buy into a base rate tracker that may seem attractive need to take great care as they may be better off staying with their current lender.  The reason for this is that after a deal has ended whether it be fixed or discounted some lenders quoted a variable rate that was linked to the base rate for the rest of the mortgage.  At the time these offerings did not seem so generous as the base rate was much higher.  However, now these deals are highly attractive with rates charged in some cases at less than 1% over base rate, with no arrangement fees charged and no penalties.  As you can imagine in this climate these offerings are very valuable, and as yet I am unsure whether margin hungry lenders are going to be very keen to extol the virtues of staying with them on these terms.  The reason for this is because at present they borrow money from each other at approximately 4.00%.  So they would lose money on some of the follow-on base rate trackers.  To find out if you have one of these deals or indeed any queries with regard to remortgaging it is worthwhile consulting 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

25^th November 2008

Deal Breaker

 

We have a large number of clients approaching the end of their current tie-in period and if you are in the same boat, now could be a time of uncertainty.

Your lender may have offered you a deal to remain with them, but that was before the Bank of England reduced the Base Rate by an unprecedented 1.5% to 3%.  Those deals that your current lenders were offering at or around 6% now do not seem so attractive.  However, what other deals are there available, and will rates continue to fall?

 

If you have a buy-to-let mortgage, or you have little equity in your home, then remaining with your current lender is likely to be your best option.  But, ring me and we will check first.  Also, remember that now could be a good time to review your insurance arrangements.

 

As more and more houses fall into negative or near negative equity, and as companies lay off employees due to the impending recession, you would be excused for beginning to feel the pinch.  However, this could also be part of the reason why interest rates may remain low for the foreseeable future.  Whilst interest rates are low, repossessions are likewise.  To avoid large scale repossessions, house prices need to recover before interest rates rise to allow those unable to obtain a deal at the moment to remortgage.

 

For those of you with 25% or more equity, remortgage deals are available.  Rates start at around 4.6% for fixed rates (Northern Rock 4.59% 2 year fixed) and 4.4% for tracker mortgages (Cheltenham & Gloucester 4.39% 2 year tracker).  However, these also incorporate quite high arrangements fees and it may be worthwhile paying a higher interest rate to benefit from a lower arrangement fee. 

 

Even though it is likely interest rates will continue to fall during the next 12-18 months, I have noted above a tracker and a fixed rate deal.  If you cannot afford to gamble on interest rates then you should always opt for a deal which incorporates an element of security (fixed or capped interest rate).  This is true in all circumstances as we can never be certain which way interest rates will go.  Tracker/discount/variable rate mortgages should only be taken by those with enough free income to be able to afford their mortgage should rates rise by say 5%.  This scenario is unlikely over the next few years, but it is better to play it safe and be able to afford the mortgage than be unlucky and be repossessed!

 

It is imperative that you seek independent financial advice to ensure you are saving money wherever possible, be it with your mortgage, insurance or life assurance arrangements.  You should take the opportunity to meet with an independent financial adviser to discuss your options relating to variable or fixed rate mortgages in these uncertain times.

 

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

17^th November 2008

Base Rate Cut and the Consequences!

The big news this week involves base rates being cut by a shocking 1.50%.  This has been bad news for savers who out number borrowers by six to one and arguably the lenders.

 

It looks like the government have leant very heavily on the lenders to pass on the full rate cut to borrowers, and this could cause them problems.  Although the base rate is now 3% the Banks borrow from each other currently at approximately 4.5%.  This rate reflects the base rate drop having moved down in recent days, but it could be argued that lenders should only drop their rates by 1% as their rate has only moved down by this amount.  Therefore lenders margins have been hit, with many not charging much over the 4.50% that they currently borrow from each other at.  This is happening at a time when lenders are trying to rebuild their capital base and price risk more accurately than they have done in the recent past.

 

The governments insistence on the 1.5% cut will possibly lead to a tight market tightening further.  Lenders can do very little with existing borrowers but allow them the rate cut.  This will be very welcome for I believe for a large segment of borrowers whose tie in has ended, and who could not take advantage of a new deal when their deal expired due to arrears, negative equity or income requirements.

 

Potential new borrowers may find it even more difficult to borrow as lenders could effectively shut up shop to all but the lowest risk borrowers, as they may be unable to get a satisfactory margin on new borrowing.  Also the mortgage book they have with perhaps a higher level of under pressure borrowers than normal will perhaps struggle to remain profitable with rising arrears.

 

Unfortunately the option of appealing to savers to plug the lending gap could be tricky as lenders will be struggling to offer competitive rates with best rates likely to be 4% gross to allow them to make a return.  These lower rates could encourage borrowers to withdraw money and invest in holidays or even take a punt on the stockmarket with many FTSE 100 companies offering dividends in excess of 6%.  When stockmarkets begin to recover it could be a real problem for lenders to hold onto deposits.  I believe that the next few weeks will be very interesting as lenders try to adapt to low interest rates and withstand the pressure put on them by the government to lend at 2007 levels.

 

I think that lenders could start to try and increase margins by offering new loans linked to the rate they borrow from each other known as the LIBOR rate.  In addition I believe lenders will have collars on their mortgages to ensure the rate they charge can not fall below a certain level, and high arrangement fees will remain a feature of most mortgages.

 

Although the above measures, if endorsed, may prove less popular than Base Rate trackers , at least it may increase the availability of mortgages as lenders increase their margins.

 

The mortgage market is likely to be very volatile in the near future due to the Base Rate cuts, so it is vital that borrowers obtain the best advice to allow them to make an informed decision. 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 

11 November 2008

Investment Opportunities for the Brave!

Although the tale of economic woe continues, there are those who will make money in the face of adversity.  At the most unpopular time for buying property for many years, buy-to-let is looking more and more attractive. 

 

Buy-to-let is based on buying a property with the intention of renting it to tenants.  The business derives an income for the owner by the rent earned exceeding the cost of borrowing and other expenses.  There is also the added incentive that if property increases in value over the long-term, if and when the property is sold you may realise a capital gain.

 

Profitability for buy-to-let, calculated by assessing the relationship between rental income, house prices and cost of borrowing, was at a peak in the early 2000s.  However, new entrants to the market were buying as late as mid-2007 in full knowledge that they were not expecting to make a profit from the rent, merely relying on capital growth.  This approach has proved to be foolhardy for those wishing to make a quick buck.  The most prudent reason for investing in buy-to-let should be the potential for profit from the rental income, with the capital gain a potential added bonus, but not something to rely upon. 

 

Property price falls have led to investment in property becoming viable once again.  Prices have fallen by 15% nationally and look set to continue to fall for the next year or two.  In Morecambe, Lancs, UK, you may expect to pay around £80,000 for a typical first-time buyer property which would rent for close to £500 per month.  A 3 bed semi is in last week’s “The Visitor – property today”© listed at less than £100,000 and also as “open to offers.”  This type of property may rent for £550 per month. 

 

Mortgages for buy-to-let become competitive at or below 75% of the property’s price.  However, when assessing profitability we assume that you are borrowing 100% of the property’s value.  This then takes into account the loss of interest/growth that you would have derived from the deposit monies. 

 

At current interest rates, around 6 – 6.5%, a 30 year repayment mortgage for £80,000 would be £480 per month.  This is not going to be profitable for an investor.  However, interest rates are destined for significant falls over the next 6 months.  If the mortgage lenders pass these rate drops onto the mortgage customer, you may see buy-to-let mortgage rates starting at 4% or below.  This would lead to a monthly payment of circa £380 and is likely to allow profits to be made. 

 

Buying property with the intention of renting it to tenants is not without risk.  These include void periods where the property is unoccupied, the cost of maintaining the property, interest rate rises and ultimately house price falls.  You should speak to an Independent Financial Adviser (IFA) before deciding whether buy-to-let is appropriate for you.

 

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

03 November 2008