MONEY MATTERS


The financial crisis has meant that mortgages are


in shorter supply than in previous years. Dorothy Lepkowska considers the options for people looking to buy a home


T


HE BIGGEST single monthly outlay for most working people, including teachers, is their mortgage payment. Two of the biggest questions currently facing house-buyers is what type of mortgage to choose and whether the Bank of England base rate will


increase or remain the same. Given the base rate currently stands at 0.5 per cent,


it seems likely that it can only go up. However, the market is divided on when this could happen. One of the arguments in favour of increasing the


base rate would be to counter the inflation rate, which at around four per cent is double the Bank of England target. Increasing base rate is seen to reduce inflation by decreasing the spending power of consumers, as they have to pay more to service debt, and therefore in theory at least, businesses cannot increase prices. The counter argument, however, is that inflation


is high because of VAT increases and global factors such as the high cost of oil and other commodities (for example wheat). Increasing the base rate will have no effect on these inflationary factors. There is also an argument as to whether an increase


in base rate is sensible given the current economic issues and the forthcoming job losses expected with the government’s austerity measures. There is no real consensus on when the base rate


might increase. Some experts believe that a slow recovery will probably lead to rates starting to rise from the third quarter of this year, reaching three per cent by the end of 2012 and 4.5 per cent by 2015. The Monetary Policy Committee is now deeply


split over how soon to raise interest rates, but much will depend on how well the economy performs over the next few months as the austerity measures kick in. However, it will be some time before the high


percentage loans become readily available again and the Financial Services Authority’s proposed rules around affordability could mean that mortgage loans will be tougher to secure than before the crisis. Therefore the question for teachers and all buyers


at the moment is whether to fix or take a variable rate. It should be noted that there are various types of mortgages. You can choose between fixed-rate, trackers, a variable rate, discounted rate or a capped rate.


Which mortgage is right for you?


Fixed-rate mortgages tend to be good for those people who want the security of knowing that their monthly payments will not increase for the period of the fixed rate. First-time buyers often choose a fixed-rate when they take their first mortgage to make budgeting easier. Fixed-rates will generally cost more than the equivalent tracker. A variable mortgage has an interest rate that moves


up or down at the lender’s discretion and may be influenced by the changes in the Bank of England base rate. There are many types of variable rate mortgage but the most popular are probably tracker rate mortgages. A tracker rate mortgage is a variable rate mortgage


that is equal to or a set amount above or below a base rate, usually the Bank of England base rate; it therefore tracks the base rate as it moves up and down. In general they are cheaper than the fixed-rate equivalent. However, as the base rate rises, so will your rate, making levels of payment over a longer period uncertain and harder to predict. So the choice is a personal one and should be based


on whether your finances can withstand interest rate rises. If they can, a tracker might be the best option at the moment. However, if interest rate rises are likely to lead to financial hardship, then a fixed-rate could be a better option.


Mortgage availability


The second issue is mortgage availability and there is currently a lot less money for banks to lend, chiefly because the securitisation markets are effectively closed. Securitisation is the process where banks borrow money from wholesale markets and lend this to customers in the form of mortgages. The lenders then ring-fence the borrowed funds and sell this on to an investor. The mortgage lender receives a fee and the investor receives the on-going income generated from the mortgages.


SecEd • April 7 2011 Providers are now only lending out money that


savers have deposited, and because banks are being asked to hold back more money for the risks they take, they have less to lend out and therefore mortgages are in short supply compared to the years leading up to 2007. Therefore with less money to lend and an increased


risk (or capital) cost, banks are being more selective about who they lend to. This is why customers are being required to provide deposits of at least 15 per cent in many cases, and why even minor credit blips like missed credit card payments cause banks to reject applications. However, things are beginning to loosen slightly


with an increase in the number of 90 per cent loan to value (LTV) rates and also a new deal being offered jointly by Lloyds and local authorities that could allow 95 per cent rates for first-time buyers. The Local Lend a Hand deal allows local authorities to help first-time buyers on to the housing ladder with a five per cent deposit. The scheme is an extension of its existing Lend a


Hand scheme which allows parents to contribute up to 20 per cent of the property value, this combined with the borrower’s deposit must be at least 25 per cent of the property value. So, effectively, the local authority becomes the parent in this case. Local Lend a Hand is for loans between £25,000


and £350,000 but the maximum loan size will be dependent on the local authority and each one will decide where in their area the scheme will be available. Stephen Noakes, commercial director of mortgages


at Lloyds TSB, said: “We know that a lot of young people turn to the Bank of Mum and Dad to get their foot on the ladder, but that’s not a solution for everyone. “By developing Local Lend a Hand and working


with local authorities across the UK, we’re broadening the prospect of home ownership to even more first- time buyers. Helping people to buy their first home is crucial in achieving and maintaining a sustainable housing market.”


The Budget


In his Budget last month, the chancellor George Osborne also announced measures to help first-time buyers, with the launch of a new shared equity scheme, called First Buy. It is aimed at people who want to purchase a newly built property but cannot afford the high deposits. He said this proposal would help 10,000 families


get on to the housing ladder for the first time. However, mortgage experts said they were sceptical about any possible impact. Peter Williams, executive director of the


Intermediary Mortgage Lenders Association, said that the numbers mentioned by the chancellor would “only equate to a five per cent rise in the number of loans to first-time buyers compared with 2010 numbers”. Meanwhile, Bob Pannell, chief economist at the


Council of Mortgage Lenders, added that the First Buy scheme was not an original idea, and was very similar to Labour’s successful HomeBuy Direct scheme. He said that the modest measures laid out in the Budget were unlikely to create any fundamentally different landscape for home-buyers. Movement in the housing market will also depend


Wesleyan for Teachers provides you access to our Mortgage Service where we offer whole- of- market advice.


Talk to Wesleyan for Teachers today to arrange your personal no-obligation review and receive £20 M&S vouchers:*


Tel: 0800 316 6554 Email: teachers@wesleyan.co.uk Quoting reference 60540


to some degree on house prices, as some potential sellers sit it out for the situation to improve, rather than sell at a reduced price. According to figures from the Halifax, house prices


are 2.8 per cent lower than at the same time last year, with the average house price now £162,657. Martin Ellis, a housing economist, said: “House


prices continue to fall slightly, however there has been little change over the first two months of 2011


as a whole. Overall, we expect a modest two per cent decrease in house prices in 2011. “Fewer properties have been coming onto the market


in recent months. This trend, if sustained, should improve the balance between demand and supply and help to prevent a more significant fall in house prices.”


SecEd


• Dorothy Lepkowska is a freealance education journalist.


in association with


Your mortgage options


Mortgage Service exclusively for teachers


We can guide you and answer your questions in many areas including the following:


• Moving home • First purchase • Government incentive schemes


• Re-mortgaging for a more competitive product


£20 M&S vouchers


FREE* Illustrative vouchers only YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.


* Terms & conditions: For any teacher or related profession booking a no-obligation financial review by 31 May 2011. Offer based on one voucher per person and only 1 appointment can be booked during this particular promotion. No purchase is necessary. No alternative is available. Employees of the Wesleyan are excluded. If a meeting is cancelled you will not be entitled to the vouchers. You will be required to complete and return a confirmation card after your first meeting and £20 of Marks and Spencer vouchers will be sent to you within 14 days of the card being received by Wesleyan for Teachers.


Wesleyan for Teachers is a trading name of Wesleyan Financial Services Ltd, which is authorised and regulated by the Financial Services Authority. Wesleyan Financial Services Ltd is wholly owned by Wesleyan Assurance Society. Registered No. 1651212. Head Office: Colmore Circus, Birmingham, B4 6AR. Fax: 0121 200 2971. Website: www.wesleyanforteachers.co.uk. Telephone calls may be recorded for monitoring and training purposes.


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