Fears are growing that the credit crisis is about to happen all over again after it was revealed borrowers are able to overstretch themselves financially due to the Help to Buy scheme.
The Help to Buy scheme was introduced too quickly by the Government last year and has been allowing buyers to purchase a property with a deposit of less than 5 per cent, the public spending watchdog has revealed.
The National Audit Office said “buyers are purchasing homes with a deposit contribution of less than 5 per cent” and is now calling on the Government to take further action.
It suggested buyers with a deposit of less than 5 per cent were still slipping through the net.
And it claimed that that the mortgage plus the 20 per cent equity loan available under the scheme was allowing almost a third of buyers to borrow five or more times their annual salary.
Experts warned it was laying the conditions for another credit crisis if households were allowed to borrow more than they could afford.
The financial collapse occurred after banks stopped lending money almost overnight in August 2007.
Home buyers who had previously been able to borrow more than the value of the property were suddenly left unable to meet their mortgage commitments and had no equity to repay their loan.
Jonathan Harris, director of mortgage broker Anderson Harris, says: “It is very important that buyers have an equity stake in a property; one of the indicators that the booming housing market had got out of hand was that people were borrowing more than the purchase price and not investing anything themselves.
“Prices can go down as well as up, and if you have little or nothing invested in your home, you are already in negative equity and will be trapped in the property, unable to move until prices recover.
“Having hardly any deposit is also a sign that a buyer is overstretched: it might make more sense to wait a while and save until you are in a stronger financial position before taking the plunge.”
The scheme has proved popular, with almost 13,000 buyers using it during the first nine months.
The average value of a home in England is just over £250,000, but what type of property does this amount of money buy in different corners of the country?
1. London: Studio flat in Maida Vale for £275,000
2. Torquay: Two bedroom flat for £250,000
3. Dover: Three bedroom detached house for £250,000
4. Isle of Mull: Five bedroom detached house for £265,000
5. Hartlepool: Eight bedroom detached house for offers over £250,000
6. North Yorkshire: Three bedroom terraced house for £275,000
7. Somerset: Three bedroom house for £250,000
8. Alnwick: Four bedroom detached house for £275,000
9. Romford: Two bedroom flat for £275,000
10. Isle of Wight: Two bedroom bungalow for £250,000
Are you applying for a mortgage? New rules being introduced next month mean that the application process could get a lot tougher.
If you thought applying for a new mortgage was difficult following the credit crunch, it is about to get a whole lot harder, according to the Council of Mortgage Lenders.
Banks and building societies tightened their lending criteria after the financial crisis to help prevent borrowers overstretching themselves financially. But as the economic recovery began, many lenders loosened their requirements – a move demonstrated by the greater availability in recent months of mortgage deals for those with smaller deposits of as little as 5 per cent of the value of a property.
However, today, the CML issued five warnings to borrowers ahead of strict regulation – Mortgage Market Review – coming into effect on April 26. They included a warning that the new rules will affect how much buyers can borrow.
The warnings came amid mortgage brokers suggesting the new rules would create a greater number of so-called ‘mortgage prisoners’ – borrowers who are trapped in their homes and unable to move because they cannot afford to remortgage.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Making sure that borrowers do not over-exert themselves and that the borrowing they take on is affordable is no bad thing but processing times for mortgage applications are likely to increase, while existing borrowers could find it more difficult to remortgage, leading to mortgage prisoners.”
The CML warned:
1. Taking out a mortgage could take longer than before. This is because most mortgages are sold on an ‘advised’ basis and the new rules are very prescriptive about giving advice, with an advised sale possibly taking up to two hours.
2. You will need to provide more details about your income and expenditure. The new rules require a detailed assessment of where your mortgage is affordable both now and in the future
3. The new rules could affect how much you can borrow. Lenders will be required to ask detailed questions about your spending, including what you spend on utilities, council tax, telephones, ground rent, insurance and running a car. They will also have to make a realistic estimate of other living costs, including clothing, household goods and childcare costs.
4. You will be able to apply for a mortgage on an “execution-only” basis, but there are strict rules to make sure that you understand the process. You will need to show you have researched the market and understand the features of the mortgage you want to take out.
5. It will still be possible for you take out an interest-only mortgage – but this will remain a niche offering. Lenders continuing to offer interest-only mortgages will need to ensure that you have a credible strategy for repaying the loan when it matures.
If you think London property is overpriced, wait until the middle of the century when an average small flat in the capital could set you back £36m, if the latest forecasts are to be believed.
In less than 40 years, prices could be 24 times as expensive, if current growth rates in the capital continue.
London Central Portfolio said prices would continue in London for at least the next few years due to demand and lack of supply.
Hugh Best, LCP investment director, said: “The average price in prime central London is now £1.5m, and has been growing at 9 per cent a year, which we think is firmly sustainable. They have been growing at that level for 40 years and we see no reason for that to change.”
However, he added that at some point, prices would become unaffordable even for wealthy foreigners.
He defined the prime market as Kensington & Chelsea, and Westminster.
London’s property market has soared in value compared to the rest of the country, with the average price rising almost £40,000 during the past year to £519,138.
In contrast, the typical value of a home in England has risen £11,190 to £256,285 during the past year.
Adrian Anderson, director of mortgage broker Anderson Harris, said: “A price tag of £36m is a truly eye-watering figure and if this is considered to be a reasonable forecast for the price of an average small flat, it goes to show how spectacular house-price growth is in the capital.
“Unless enough property is built to house the growing population, only the richest will be able to afford to live in London which will cause real issues when it comes to filling all those jobs which are so essential to the running of the city.”
Mrs Twilight Years is a 70-something with a passion for property and living life to the full. She covers everything in her monthly Zoopla column, from how to afford an electricity bill on a pension to making a quilt cover at her weekly patchwork group.
My name is Mrs Twilight Years and last month I hit the grand old age of 70. I like to think I’m quite fit and healthy, having celebrated my birthday in the Hampshire skies flying a small aircraft under the instruction of a former RAF pilot.
But there is no denying at this age, there are some things that you have to approach differently. And where you live is one of them.
Having thought extensively during the past few years about how long my husband and I can continue living and maintaining the detached family home, we have decided to move.
Friends recommend moving while we still have the energy to face the emotional and physical upheaval.
We have finally found a smaller house that meets our changing requirements and we put in an offer at the weekend.
It is in the same town where we currently live, meaning we can stay near our friends that we’ve built up during the past decade, but the new property will undoubtedly be less demanding on our time and financial resources.
While the mortgage has been paid off, the running costs on our existing home are higher than we would like and will continue to rise.
We want to get out and travel while we still can, instead of staying indoors and maintaining a property that is now too large for just the two of us (our daughters having long since left home) and a ruby-coloured King Charles Cavalier.
I’m certainly no novice when it comes to moving – having moved 14 times during my adult life – but even now the process is beginning to feel daunting and so now is the right time to downsize.
Searching for a property for later life is certainly a different exercise – is there a downstairs toilet, a walk-in shower and easily accessible fittings. Is there local transport – such as a reliable bus stop nearby to reach services like doctors, shops, family and friends when it is no longer best to drive? And if alterations are required, is there scope to carry them out?
We’re now waiting to see if our offer has been accepted. It’s the beginning of new chapter in our retirement and I hope you will follow – and comment on – our Twilight Years journey as it unfolds.
(*Real name not used to protect the innocent, particularly family and friends)
Retirement properties for sale:
One bedroom property in Bournemouth for £65,000
Two bedroom terrace in Harrogate for £64,950
Two bedroom flat in Leatherhead for £174,950