Posts filed under ‘Finance’
With interest rates rises looming, it is tempting to believe that the only sensible course of action is to fix your mortgage – and preferably for as long as possible. But this may not be the right option, mortgage experts warn.
A five year fix is attractive in terms of guarding against future interest rate rises, but their recent increase in cost means they are beginning to look expensive, according to some experts.
And with some analysts predicting that the Bank of England will not increase interest rates until later than expected, are variable rates now coming back into the frame?
Ray Boulger, of mortgage brokers John Charcol, exclusively told Zoopla that if the cost of five year fixes rises much further, a two year tracker or other variable rate would be preferable.
But the deals would require no early redemption fees in order to look competitive or a droplock option so that fixing is an option during the term of the initial deal.
“This would offer the best of both worlds in that the borrower starts off with a very cheap rate, but buys time to decide if and when to switch to a fix,” he said.
He recommends a two year tracker at Bank Rate, plus 1.29 per cent, from Santander. The mortgage is available to those looking to borrow up to 60 per cent of the value of a property.
It follows the first anniversary this week of the Bank of England keeping the Bank Rate at 0.5 per cent.
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.”
Home buyers using the Help to Buy scheme are being given a foot up the property ladder to the tune of £600m, despite growing concerns about a house price bubble.
The latest figures from the Government, published today, show the true extent of how the taxpayer is subsidizing the scheme and has led to concerns it is fuelling the increase in house prices.
Help to Buy was launched amid a fanfare by Chancellor George Osborne almost a year ago in the last Budget to help those with a small deposit to buy a home.
But the popularity of the equity loan scheme, which includes an interest free loan of up to 20 per cent of the value of a property, comes amid fears about the property market overheating.
The cash means home buyers can purchase higher priced properties they may not otherwise be able to afford, and mortgage experts suggest the taxpayers’ funds may be better spent elsewhere.
Jonathan Harris, of mortgage brokers Anderson Harris, said: “It is crystal clear how important the housing market is to the overall economic health of the country when the Government is handing out such significant subsidies to buyers.
“The idea is that we all benefit when the housing market is operating efficiently, with the knock-on effect being felt by estate agents, mortgage brokers, surveyors, solicitors, lenders, builders, and removals firms.
“However, £600m is a lot of money and one wonders whether it could be better spent elsewhere.
“The Government might be better off ensuring that enough homes are built to keep properties at realistic price levels rather than further fuelling house-price inflation in this way.”
A total of 14,823 properties were bought during the first 10 months of Help to Buy equity loans, according to the Department for Communities and Local Government.
The average price of a home purchased under the scheme was £184,000 , with the average equity loan of £36,599.
The majority of home purchases in the Help to Buy equity loan scheme were made by first time buyers, accounting for 89 per cent of total purchases.
The figures do not include the Government’s second phase of Help to Buy, which was launched at the beginning of October last year, with the mortgage guarantees coming into force at the start of this year.
Is your interest-only mortgage about to end? If so, you may be in for a nasty shock as lenders start pushing borrowers onto higher rates.
Home owners with interest-only mortgages are being made to pay higher monthly payments after being moved onto costly capital repayment deals once their initial deal comes to an end.
The enforcement by lenders comes amid fears about interest-only mortgage customers having no plans in place to pay off the capital.
Almost three million borrowers are understood to have interest-only deals, which are attractive due to the monthly mortgage payments being lower than on traditional repayment deals.
During the economic recovery, the additional monthly income has proved a lifeline to many families.
But lenders are now adopting a hard line approach to interest-only mortgages to ensure their customers do not end up in a home they cannot afford, warn experts.
Measures include demanding that borrowers have a minimum income of as high as £75,000 or have at least 50 per cent equity in their home. Without these, a remortgage application for an interest-only deal may be rejected, depending on the lender, according to mortgage brokers.
So what can borrowers expect and what options should they be considering? Zoopla talks to leading housing market commentators get their views.
Jonathan Harris of mortgage brokers Anderson Harris
“Borrowers with an interest-only mortgage are finding that there are a limited number of options available to them.
“Many are penalised with higher mortgage rates when they come to the end of their deal yet remortgaging elsewhere is tricky as many lenders no longer offer interest only.
“Lenders want to see investments in place that will cover the capital at the end of the term. There are also restrictions on which investments are allowed, with some lenders not accepting equity in other properties, such as buy-to-lets, or cash ISAs. Other lenders require borrowers to have a minimum income of £75,000 or more, while some insist that you have a low loan-to-value of say 50 per cent.
“If you are on interest only, it is important to consider your repayment strategy. Ideally, switch to a repayment loan to guarantee that the capital will be cleared at the end of the term but this will mean much higher mortgage payments, which may be unaffordable. Alternatively, overpaying where you can will reduce the outstanding capital and make it easier to remortgage as you will have more equity in your property.”
Ed Foley of estate agents Winkworth
“While the interest repayments may be affordable now, an increase in interest rates or personal circumstances and suddenly you may not be able to afford the repayments.
“Worse still, if the property has not increased in value or if you don’t live in a property hotspot, you may have to sell your home to pay off the debt.
“Experienced estate agents have seen this before and it would be prudent to pay off as much as you can afford while interest rates are this low. Take advantage now.”
Fionnuala Earley, research director, of estate ageants Hamptons International
“About 2.6 million UK householders have interest-only mortgages according to the Financial Conduct Authority, but many do not have the savings or investments in place to ensure that the loan can be repaid at the end of its term.
“Many of these loans were taken out when rapid house price growth meant that borrowers were convinced that house prices would rise enough to cover the mortgage debt and with lots left to spare. But in a low inflation world the risks of this not happening are much higher.
“On top of that the fall in house prices since 2008 means that the average home is now worth about 8 per cent less than was paid for it which will have eaten up some of the equity leaving even less left over at the end of the mortgage term.
“Existing borrowers with interest-only loans need to make sure they have a strategy to repay the debt at the end of the term. Savings and investment plans and/or conversion of some or all of the mortgage to repayment terms is sensible.”
Ray Boulger of mortgage brokers John Charcol
“The first thing you need to be aware of is that, assuming you want to continue on an interest-only basis, remortgage options will be at best very limited, and at worst nil.
“However, most lenders will offer product transfer deals to existing interest-only borrowers and for many that will be the only option to the alternative of reverting to their lender’s SVR.
“Most lenders will not offer a further advance to interest-only borrowers unless they switch the whole mortgage to repayment and so anyone with an interest-only mortgage wanting a further advance is likely to be restricted to obtaining a second charge mortgage.
“Obviously, anyone with an interest-only mortgage needs to have a robust repayment strategy, but the problem is that what may be perfectly sensible for many borrowers is often not acceptable to most lenders. For example the repayment strategy for someone with a second home, or some buy to lets, could be to use some of the equity to repay the mortgage on the main residence when they retire. “Others will plan to repay their mortgage from a variety of sources, not necessarily all at the same time. These might include the tax free cash from their pension, the sale of a business or simply realising some investments. However, borrowers also need to be realistic about their repayment strategy.
“Selling up and trading down on retirement will be some people’s stated intention, but it is unlikely to be a viable option for those living in those parts of the UK where property is relatively cheap.
“Some homeowners will have chosen an interest-only mortgage because it is an affordable alternative to renting, whereas a repayment mortgage may not be, at least in the short term. This will be particularly true for older borrowers who have recently divorced, or split up with a long term partner.
“In the worst case scenario that they have to sell the property as the only way to repay the mortgage at least they will have had security of tenure for many years plus the knowledge that any improvements they have made to their home will benefit them financially and not a landlord. In addition their monthly payments will probably have been similar to, or less than, they would have been paying in rent, and will not have increased over the years broadly in line with inflation, as rents tend to, although of course they would have been subject to interest rate fluctuations. In addition any increase in the value of the property while they own it will of course benefit them, rather than a landlord.
“Therefore, even in a worst case scenario where an interest-only borrower who has owned their home for several years and expected to have the means to repay it, has to sell as the only way of repaying the mortgage, it is very probable that owning the property with an interest-only mortgage will nevertheless leave them in a much better position than if they had rented a similar property for the same period. This is however something the regulator won’t acknowledge and hence nor will lenders.
“For most people it will be sensible to take advantage of the current low interest rate environment to overpay as much as possible, especially for those getting close to their planned retirement age.”
Too Long, Didn’t Read? Here are the main points from our experts that you need to know:
- Interest-only borrowers are being penalised with higher mortgage rates when they come to the end of their initial deal
- Switch to a repayment mortgage as early as you can to guarantee that the capital will be paid off at the end of the term or overpay as much as you can, especially while interest rates are low
- In the worst case scenario, interest-only borrowers without a repayment plan will have to sell the property at the end of their mortgage term
- However, it is probably that owning a property with an interest-only mortgage will leave borrowers in a much better position than if they had rented a similar property for the same period