their mortgage on credit cards. This is shocking and needless. Worryingly, should interest rates go up by as little as 1 or 2%, there is a whole section of the population that could be tipped into real financial distress.
It is estimated that the homes of some 50,000 families will be repossessed this year and rating agency Moody’s has warned that 80% of UK mortgage holders could face a payment shock if interest rates rise this year.
The UK has traditionally had shorter fixed-term rates with many borrowers on repayment mortgages. But this has changed recently, with an increasing proportion of borrowers taking out interest-only deals. There is the assumption that anyone who bought at 95% LTV in the past three years is probably facing negative equity now. The likelihood is that they won’t be able to remortgage and if their payments rise and they realise their house is worth less than they are paying for it, they could be forced to simply walk away.
This combination of a significant number of interest-only mortgages and the high volatility of short-term rates is a toxic cocktail of which the British economy has yet to feel the full effects. All the evidence from the recessions of the 80s and 90s is that the social lag hangs on much longer than the economic lag. The awaited increase in interest rates is likely to lead to future delinquencies. But the worst effects could have been prevented with some foresight and customer care. However the industry seems once again to be short-sighted and pursuing only the fast buck as lenders have responded by withdrawing the numbers of fixed rate products on the market. There can only be one consequence concerning both the frequency and
the size of a rate shock – a rise on repossessions. With house-buyers focused on how much they can borrow for a mortgage and saving for a deposit, other essential costs such as the survey, solicitor fees, and even Stamp Duty tax are not always sufficiently accounted for.
additional costs
Research by financial website Unbiased. co.uk has revealed 24% of home buyers have a distinct lack of knowledge when it comes to the additional costs that go into buying a home, beyond the deposit and mortgage.
One in 10 house buyers estimate the extra house-buying costs won’t exceed £1,000, when in reality the conveyancing fees alone could cost this much. Furthermore, 4% admit it never even occurred to them there are any additional costs. In order to cover the additional costs of house buying, 41% say
they will dive into their savings. Nearly a fifth plan to add these costs on to their mortgage. It is up to the mortgage broker to instil a dose of reality in the house-buying process. Too often the prospective purchaser is so bound up in the process of moving into a new home that they fail to take into account other essential elements. One of these elements must include insurance cover should the borrower be unable to make their mortgage repayments because of accident, sickness or unemployment. As an industry, we must get the message across that buying insurance to keep the roof over your head is as vital as insuring your car. Purchasing MPPI to ensure your home is protected should become as natural and generally accepted as wearing a seat belt when driving or not smoking in a public place and the onus is on intermediaries to ram this message home to clients. n
mortgage introducer MAY 2010 31
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