Category: Mortgage

Categories

What is the state of the mortgage market after a year of Covid?

Like all markets, the mortgage market has not avoided the impact of coronavirus. A year after the start of the pandemic let’s take a look at what we can learn from the last twelve months and what can be expected as we move forward.

The availability and variety of mortgage products saw a fairly dramatic decrease throughout 2020. Many lenders withdrew deals from the market when the first impacts of the pandemic were felt in the UK, and the hardest hit were high LTV (loan-to-value) mortgages. This is because deals that require a 5% or 10% deposit, known as 95% LTV or 90% LTV are considered higher risk for lenders. This left first time buyers with little choice, if any (depending on the size of their deposit) and those with plans to remortgage using a small deposit also found themselves with fewer options.

For existing homeowners on their lender’s standard variable rate, mortgage repayments may well have fallen over the last year. The average SVR on the 1st of March 2020 was 4.90%.  One year later on the 1st March 2021 the average SVR sits at 4.41%. Borrowers may seek to reduce these monthly repayments further by switching to a fixed rate deal, however it is entirely possible that remortgaging in this way could be out of reach for some consumers depending on how their circumstances have been impacted by Covid. 

In the last few months, we have seen an increase in available mortgage products. As of February 2021 there were 3,215 mortgage deals available. In comparison to March of 2020 when 5,222 deals were on the market, it may seem relatively low, however, it is the highest number since and indicates a trend of expanding options. This is particularly good news for first time buyers, as the largest rise in deals of late is on mortgages with a 90% LTV ratio. This display of willingness to lend out higher risk offerings despite the wider economic uncertainty can be viewed as an indication of confidence in the mortgage sector. With Sunak’s budget outlining a government guarantee scheme for lenders as well as extending stamp duty holidays, this too should lead to an increase in the availability of high LTV ratio mortgages.

The mortgage market, as ever, boasts fluidity. If you are in the process of a new deal, are seeking one, are looking to become a homeowner, or just generally interested further in the options available to you, then it is recommended you seek professional advice relating to your personal situation.

Sources
https://www.mortgageintroducer.com/how-mortgage-market-fared-one-year-on-start-pandemic/

https://moneyfacts.co.uk/news/money/how-has-the-pandemic-impacted-savings-mortgages-and-credit-card-borrowing/

What will 95% mortgages mean for potential first time buyers?

At the virtual Conservative Party Conference on 6th October, Prime Minister Boris Johnson gestured towards a plan in the pipeline to introduce 95% Loan To Value mortgages in an attempt to reinvigorate home ownership and in his words, “help turn generation rent, into generation buy.” 

While the details of this plan remain unclear, the PM declared that there were up to 2 million potential homeowners who would be able to afford repayments but do not currently have access to a mortgage. His proposed solution is to give young, first time buyers the option of fixed rate, long term loans of up to 95% of the value of the home.

Why is this new?

Up until the pandemic, there were many lenders who were providing 95% LTV mortgages, albeit generally requiring a guarantor. Due to the economic uncertainty and job insecurity accelerated by COVID-19, those lenders have chosen to rescind these products which require lower deposits. The result of this is that would-be first time buyers who have been saving for their first home, no longer have a large enough deposit to secure their mortgage.

The lenders, then, will need good reason to return these low deposit mortgages to their offering. The PM has suggested reducing the ‘stress tests’ that have been in place since the 2008 financial crisis, meaning would-be buyers would have to tick fewer boxes to be considered eligible and able to afford repayments.  

This relaxing of stress tests exposes the lenders to a risk of bad debts, should the economy take a downturn. To combat this, the PM has suggested a state guarantee to lenders. This would most likely come in the form of underwriting the debt; with the average home in the UK costing £220,000, underwriting 10 per cent of a deposit for 2 million buyers would leave the government and the taxpayer liable for £44billion.

The potential knock on effects

A side effect of the temporary reduced rates of stamp duty and the subsequent inflated house prices is that first time buyers are currently hesitant to commit to high LTV mortgages, where they are able to. They fear that they’re at risk of finding themselves in negative equity upon the return of full rates of stamp duty, and the possibility of reduced property value that may come with it. With reduced checks to validate who’s eligible for these mortgages, we could also see a larger portion of new buyers unable to afford their repayments, turning generation buy into generation foreclosed. 

While the state guarantee to lenders could incur a potential risk of £44billion of the public purse, experts believe this to be a high end estimate, and unlikely in practice.

95% LTV mortgages were available before the pandemic, and yet owning a home remained a pipe dream for many. Why this would be different now is up for debate, but time will tell.

Sources

https://www.thisismoney.co.uk/money/mortgageshome/article-8810561/How-Prime-Ministers-plan-offer-95-mortgages-work.html

https://www.ftadviser.com/mortgages/2020/10/06/industry-cautious-about-pm-s-95-mortgage-plans/

What happens to your mortgage if there are negative interest rates?

With the Bank of England’s base rate being at an historic low of 0.1%, there is talk that we will soon see negative interest rates.

In the past, Andrew Bailey, Governor of the Bank of England, had not been in favour of such a step but has admitted that he is now not ruling it out in order to kickstart the economy. 

The Bank is under pressure to push interest rates below zero as data has shown that inflation dropped from 1.5 per cent in March to a four-year low of 0.8 per cent in April. Low inflation might sound good but it can suppress economic growth and prevent wages increasing. The bank’s usual target is to keep inflation around 2% but lockdown has understandably had a severe effect on spending so economists think inflation will stay low for some time. 

How would negative interest rates work?

Anyone wanting to deposit money with the Bank of England, such as high street banks, would have to pay to do so. This is designed to encourage the banks to lend to households and businesses.

Negative interest rates have already been used as a tool by the European Central Bank and Japan. Typically, the Bank will lower interest rates when the country is facing a recession because it encourages borrowing and spending which stimulates the economy. But negative interest rates are controversial as it is felt they have limited effectiveness in encouraging spending and investment in the long term. 

They also do little to encourage companies to keep a cash buffer in times of crisis which, as many have found during the coronavirus outbreak, has been crucial.       

What would the effect be on your mortgage? 

If you have a fixed rate mortgage, the most common type, it would not be affected. If you have a variable rate mortgage that follows the standard variable rate of the bank that made the loan, or a tracker mortgage that follows the Bank of England base rate, it could fall a little if the base rate is cut.

It’s likely, however, that any drop would be limited by certain terms and conditions. Most tracker mortgages these days have a ‘collar’ which stops the lender having to cut the rate at all. It’s worth checking your paperwork to see whether your lender has specified the lowest rate it would ever charge.

Could new mortgages be free? 

Denmark has shown this could be a possibility. The rate, last year, for borrowers at Jyske Bank was -0.5% which meant the total sum they owed each month fell more by more than the sum they had repaid. That’s a great kind of mortgage! Although it looks like the UK is a way off that.             

While fixed term mortgages are falling in price, some tracker mortgages have been withdrawn and re-priced with larger margins to protect lenders against falling rates. 

A negative base rate would mean banks and building societies would have to pay to keep money on deposit. The thinking behind this policy is that it would encourage them to lend instead.      

Sources
https://www.theguardian.com/business/2020/may/21/what-would-negative-interest-rates-mean-for-mortgages-and-savings

https://www.thisismoney.co.uk/money/news/article-8341497/Interest-rates-cut-zero-suggests-Bank-England-boss.html

Is the UK mortgage market still open for business?

You may be wondering what the current situation is with the mortgage market. Have providers stopped lending altogether? Are all new mortgage deals off?  

It’s true that some providers have withdrawn their higher loan to value (LTV) mortgage products.  Nationwide, Santander and Skipton Building Society have recently announced that they’re only going to be offering loans to borrowers with a 75% LTV ratio. So only people who have a 25% deposit or equity in their home will be approved for a mortgage.   

Other lenders, including Barclays, Halifax, Virgin Money and The Family Building Society, have gone even further, reducing the LTV ratio to 60%, while the Coventry Building Society has reduced thiers to 65%.   

As a result, first-time borrowers or those with low equity in their homes won’t be able to proceed with their plans.  

Support for existing customers

Nationwide has stressed the change in policy won’t affect deals in progress. In fact, they say the step has been taken so that they can focus on helping existing members to process ongoing applications.They will still be offering mortgage deals of up to 95% LTV to existing customers.

It’s hoped the changes will be temporary but they were taken to limit new applications so that  providers could concentrate on their existing customers. Many are dealing with thousands of calls from worried borrowers requesting mortgage payment holidays while at the same time coping with staff shortages due to the virus. In addition, as valuers can’t get out to see properties under the current restrictions, it’s not possible for the more complex property purchases to go ahead anyway.  

What’s still possible?            

Despite the difficulties, however, industry experts stress that the mortgage market is very much open for business. Lenders are still working with existing borrowers, advisers are still contacting existing clients to offer support and conveyancers are still communicating with people over whether their housing transaction will complete. Mortgage products are still available, albeit with lower LTVs, and online or automated valuations are still possible for some cases. 

So no one should feel that the mortgage industry is in lockdown. Providers are urging anyone who is concerned to talk to them, whether it’s about taking a mortgage holiday, reducing a payment, remortgaging, doing a product transfer or even starting a mortgage journey. There are many options available, even in the current circumstances.  

Sources
https://www.bbc.co.uk/news/business-52106119

https://www.financialreporter.co.uk/blogs/e-mortgage-market-is-as-far-from-lockdown-as-it-is-possible-to-be.html

How to get your child on the property ladder

It’s a tough environment for first time buyers. Rising house prices and stagnant wage growth have pushed up the average age of buying a first property to 33. What’s more, first time buyers need to borrow 18 times more than those in the 1970s.

Given this context, it’s unsurprising that more and more parents and grandparents are giving their loved ones a helping hand to get on the property ladder. However, because there are several ways of doing this – all with their distinct advantages and disadvantages – it can be hard to find the right way to help out. Here is a breakdown of a few common ways of giving the next generation some extra support:

Gifting a deposit

Gifting a deposit might seem like the most straightforward way of helping your child, but there could be unexpected tax implications. For instance, cash gifts of over £3,000 in one year may be subject to inheritance tax, if you die within seven years of making the gift. 

If you do think gifting a deposit could be a good option, you might want to act sooner rather than later. A cross-party group of MPs is currently proposing an overhaul of the IHT system where all gifts over £30,000 will be subject to a flat 10% tax rate.

Guarantor mortgages

A common alternative to directly gifting cash is to use a guarantor mortgage. These mortgages are sometimes referred to as 100% mortgages because they don’t require the borrower to put down a deposit. Rather, a parent will lock up cash in a savings account with a lender or agree to use their property as collateral if the buyer defaults on repayments.

If you use savings as security, you’d normally need to place either 5% or 10% of the cost of a new property into a savings account with the lender for several years (three or five years are the standard). The interest returned varies from lender to lender, with some not paying any at all.

Joint mortgages

These mortgages allow you to buy a property together with your child. Notably, this option increases your child’s chance of getting a mortgage in the first place as your income will be taken into account. 

However, it can be expensive and risky. As your name will be on the deeds of your child’s home, you’ll need to pay the stamp duty surcharge if you already own a property. What’s more, you’ll be jointly responsible for repayments. 

Sources
https://www.which.co.uk/news/2020/02/from-gifted-deposits-to-guarantor-mortgages-how-to-help-your-child-buy-a-home-in-2020/

What’s a Rio Mortgage?

Sadly, this type of mortgage won’t help you jet off and buy a pad in Rio de Janeiro. It can, however, be a useful option to provide you with more flexibility in later years.      

A RIO mortgage stands for ‘retirement interest-only’. It’s valid for people over 60 who are keen to release some equity from their home. With this type of mortgage, the borrower only makes  monthly interest payments until they die or go into long term care, at which point the lender will get their loan repaid by the house being sold.

It allows the homeowner to remortgage their existing loan under similar terms to their current agreement. So if you’re on a pension income, the fact that you’d only have to repay the interest can make it an attractive proposition. If there’s any value left in the house once the property is sold and the mortgage repaid, that would become part of your estate.

RIO mortgages are relatively new on the market. They came about in March 2018 when the FCA relaxed their rules and separated them from equity release, by re-classifying them as standard mortgages rather than lifetime mortgages. 

The FCA wanted to make ‘affordable borrowing’ more widely available to an older population as long as they had a steady income.Take up of the new mortgage was initially slow but it has been growing in popularity. It’s simpler than equity release, offers an attractive alternative to downsizing and also means the interest isn’t racking up.  

Despite being called RIO or interest-only, some lenders are also offering an option where the borrower can repay part of the capital as well, which means they can leave more of an inheritance to their loved ones. Other providers are offering set repayment dates.

When are RIO mortgages suitable? 

A RIO mortgage can be worth considering if you are reaching the end of a standard interest-only mortgage in retirement and are concerned about how to repay the loan due to a shortfall in your savings. Rather than having to consider a house sale or expensive loan repayments, it offers flexibility and stability.            

This type of mortgage also provides an effective way of managing intergenerational wealth as it can enable you to help younger members of the family buy their first home. In addition, it can act as a means of reducing any inheritance tax burden.   

Points to consider

On the plus side, the monthly repayments on a RIO mortgage are likely to be cheaper than with   alternative repayment mortgages. It also provides a way you can stay in your own home without the worry of repaying the capital sum during your retirement. 

However, you will have to pass an affordability check to show you can afford the interest-only repayments. Bear in mind that it may be difficult to subsequently change mortgage provider or move house. You would also not be protected from short-term dips in the housing market.

It’s important to make a will and let your beneficiaries know about the mortgage so they will be aware of the reduction in the proceeds of your estate on death.

Sources
https://www.ftadviser.com/mortgages/2020/01/06/does-your-client-need-a-retirement-interest-only-mortgage/?page=2

What is a green mortgage, and what can it do for you?

Back in 2017, the UK government published their Clean Growth Strategy, a report that included plans to work with lenders in order to create “green mortgage products,” that are able to “take account of the lower lending risk associated with more efficient properties and the reduced outgoings for customers living in more efficient homes.”

More recently in June 2019, The World Green Building Council Europe launched a new report: ‘Creating an energy-efficient Mortgage for Europe: the supporting role of the green building sector.’ So steps are certainly being made all over the world to introduce green mortgages into the market, but what exactly are they?

Green mortgages in the UK are mortgages that support energy-efficient homes. Barclays launched their first green mortgage back in April 2018, partnering with construction companies all over the UK in offering green mortgages on energy-efficient new builds. The home has to have an energy efficiency rating of 81 or above, or be in energy efficiency bands A or B, to be eligible.

Analysis by the Bank of England in October 2018 found that homeowners living in energy-efficient properties are less likely to be in payment arrears. The study of 1.8 million properties found that around 1.14% of energy-inefficient homes are in mortgage payment arrears, compared with 0.93% of energy-efficient properties, concluding that “energy efficiency of a property is a relevant predictor of mortgage risk.”

In support of these new energy efficient mortgages, providers are offering reduced rates for those looking to purchase property. The premise is simple: those owning energy-efficient homes are less likely to be in arrears, therefore carrying reduced risk to the lender.

These new mortgage options herald a more ethical, mutually beneficial approach to lending that fits within the new swathe of greener policies being enacted by governments around the world. Craig Calder, Director of Mortgages at Barclays, says that: “Green Mortgages need consistent support at the highest levels if they are to become the norm rather than a strand of alternative lending.”

With more and more companies seeking to improve their energy efficiency and their carbon footprint, financial opportunities such as green mortgages may become the norm. However, with such schemes still being relatively new, it seems that only time will tell.

Sources
https://www.mortgageloan.com/environment
https://www.barclays.co.uk/mortgages/green-home-mortgage/
https://bankunderground.co.uk/2018/10/16/insulated-from-risk-the-relationship-between-the-energy-efficiency-of-properties-and-mortgage-defaults/
https://www.worldgbc.org/creating-energy-efficient-mortgage-europe-access-report
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/700496/clean-growth-strategy-correction-april-2018.pdf

financial planning in your forties

It’s well known life begins at forty. Doesn’t it?

It should be an exciting decade, full of plans and aspirations. It’s also likely to be a time of optimum earning potential.

What’s more, it’s a crucial decade to take a step back and make sure your finances are on track to meet your goals.

There’ll be some decisions you’ll already have taken in your twenties or thirties, which will have had an impact. You may have bought your own home, for example, or put some savings away in cash, investments or pensions.

If things don’t look quite as rosy as you’d hoped, though, your forties are a good time to take stock, as there’s still time to make adjustments and give your investments time to grow.

Don’t forget, whatever savings you can make now will enable you to pursue your dreams later on.

Here are four key tips for shrewd financial planning at this important time of life.

Budget ruthlessly

Just because life may feel comfortable with regular pay rises and bonuses don’t fall into the temptation of spending more than you need. Do you really need that Costa coffee or M&S lunch every day?

Apps like Money Dashboard or Moneyhub can be helpful in showing you where your money’s going. Simple steps like cancelling subscriptions or switching bill providers can make a significant difference.

Historic studies show that investments usually outperform cash savings so any disposable income you can invest will be beneficial. If you can put money aside in a pension you’ll also be taking advantage of the tax relief available. Make sure you use your ISA allowance too for more accessible funds.

Carry out a protection audit

Think about what if the unexpected happened. Your forties are a time of life where you may find yourself part of what’s known as ‘the sandwich generation’ i.e. caring for elderly parents at the same time as looking after young children. This can put extra pressure on you. Make sure you’re protected should the worst happen by ensuring you have a good emergency fund in place. Also think about critical illness cover and life insurance.

Property plans

Your home will be a fundamental part of your financial planning at this time of life. If you feel you need a larger property, these are likely to be your peak earning years so now is the time to secure the best mortgage you can and find your dream home. On the other hand, if you’re quite happy where you are, it may be a good time to remortgage to get a better deal.

Family spending

Everyone’s situation is different. You may have children at university or you may still be having to pay for nursery fees. Whatever your position, make sure you budget accordingly and allow for inflation, especially if you’re paying private school fees. Work out the priorities for your family – the best education now or a house deposit in the future. It’s important not to derail your own life savings for the sake of your children as no one will benefit in the long run.

By doing some sound financial planning now, you’ll have more hope of continuing in the style you want to live, well beyond your forties.

Sources
https://www.telegraph.co.uk/money/smart-life-saving-for-the-future/financial-advice-in-your-forties/?utm_campaign=tmgspk_plr_2144_AqvZbbk8gXHK&plr=1&utm_content=2144&utm_source=tmgspk&WT.mc_id=tmgspk_plr_2144_AqvZbbk8gXHK&utm_medi

interest rate rise: what does this mean?

goldfish jumping from small bowl to big bowlThe Bank of England has raised interest rates from 0.5% to 0.75%, only the second rise in a decade. Currently, interest rates stand at their highest since 2009 and reflect what the Bank of England perceive as a general pick-up in the economy.

The Bank said that a rise in household spending has strengthened the British economy. Economic growth for the year is predicted to be 1.4% this year and the unemployment rate is expected to fall further below 4.2%, where it currently stands.

How does the rise affect you?
If you are on a variable rate ‘tracker’ mortgage, your repayments will increase. For example, if you have a £100,000 mortgage, this will add £12 to your monthly repayments.

It’s important to highlight that if you are on a fixed rate mortgage, your payments will stay the same until your base rate comes up for renewal. The Bank of England’s announcement does not mean that your rates immediately rise.

For prospective borrowers, the interest rate rise signals a change in the Bank of England’s tone. Further rate rises are a definite possibility. However, the Bank’s governor took a rather cautious tone which indicates that there are unlikely to be any more rises until 2019.

For the time being, base rates on mortgages are unlikely to rise above 3%. That said, the demand for rate fixes will be higher than usual this year.

Unfortunately for those of you going on holiday, after the announcement the pound fell by 0.9% against the dollar. This is due to the extreme political uncertainty surrounding the sterling with Brexit taking an unchartable track.

Reactions from U.K. businesses have been a mixed bag. The Institute of Directors, which represents about 30,000 members in the U.K., has said, ‘the Bank has jumped the gun’, whilst the British Chamber of Commerce similarly described the decision as ‘ill-judged’ at an uncertain time.

This negative perspective wasn’t unanimous among all lobbying groups. The Confederation of British Industry, the country’s biggest business lobby, welcomed the rise saying the case for higher rates had been building.

A small rise of 0.25% is likely to have a minimal impact on your finances. However, larger hikes down the line could have a substantial effect on the British financial landscape.

Sources
https://www.bloomberg.com/news/articles/2018-08-02/pound-fails-to-shake-off-blues-despite-unanimous-boe-rate-hike
https://www.theguardian.com/business/2018/aug/02/how-will-interest-rate-rise-affect-mortgages-savings-and-property
https://www.bloomberg.com/news/articles/2018-08-02/-mark-carney-what-have-you-done-cry-u-k-business-bodies?utm_source=google&utm_medium=bd&cmpId=google

over 60s are jumping off the property ladder. Here’s why….

In 2007, there were 254,000 older people living in private rented accomodation. According to research by the Centre for Ageing Better, over the last decade that figure has skyrocketed to 414,000. If things continue the way they’re going, they estimate that over a third of those over 60 will be privately renting by 2040.

So why the shift? Renting comes with some clear benefits. Having to pay stamp duty becomes a thing of the past, as does worrying about managing property maintenance. A certain sense of freedom comes with renting too, particularly in terms of location. It’s a great opportunity to finally live on the coastline or in the city centre that you’ve always wanted to, but have not been able to afford to.

For example, one couple had previously owned a retirement flat in Torquay which they subsequently sold for £55,000. They dreamed of moving to Bournemouth, where a modest one bed apartment would have set them back closer to £150,000 and so was out of their reach. They found a home to let on an assured tenancy, allowing them to remain in the property for life for a fee of £775 a month including service charges. Selling to rent has allowed them to liquidate their biggest asset, and free up their capital to spend on travel.

Renting needn’t be forever, and for some people it’s a great opportunity to stop and think about your next move. It can give you time to really look at the options out there if you intend to get back on the housing ladder. Your requirements will change as you grow older and downsizing can be a great idea for some. Before you find the perfect property which will suit your needs going forward, renting gives you the chance to release some capital and decide what to do with it.

It’s worth bearing in mind, though, that by selling up and moving into private rented accommodation, your estate could receive a higher IHT bill. The inheritance tax exemption introduced in 2017 allows parents and grandparents an additional IHT allowance when their children or grandchildren inherit their main home, and so selling your home could remove your eligibility for the exemption.https://www.telegraph.co.uk/property/retirement/renting-retirement-over-60s-jumping-property-ladder/
https://www.telegraph.co.uk/financial-services/retirement-solutions/equity-release-service/should-you-sell-up-and-rent-in-retirement/