Y o u r M o n e y
Mortgage Trouble A
Al Voice of FORCES Financial believes ‘When the Going Gets Tough the Tough Get Going‘
range of factors is affecting the economy at the moment, and the credit crunch, which
was initially caused by the greed of financial institutions across the world, has undoubtedly been responsible for the following:
• Increases in the cost of borrowing • The fall in lender confidence resulting in more conservative lending decisions
• The shortage of funds in the money markets
• Higher interest rates for savers
But what does this mean for the mortgage market?
Falling house prices Tougher lending criteria and the increased cost of borrowing have dramatically reduced demand in the housing market, and transactions are now at their lowest level for 30 years and economists are forecasting further price falls in 2009, this is likely to be the position for the next couple of years. Conversely as purchasers, the majority of us will not want to pay for something now that will be cheaper next month! But remember a house is also a home. By taking informed decisions about the purchase – and a medium term view of the investment – the cyclical nature of the market predicates you should not lose over time. A good example is a property I bought in November 1988 for £97,000. The following spring it was worth £145,000, but by the autumn of 1990 its value had slumped to £91,000 – yet today I understand it is worth circa £350,000! Remember there is still a shortage of properties in the UK, and once the economy starts to pick up history indicates market values will re-adjust.
The Cost of Borrowing As I write the average interest rate charged by the UK's banks and building societies for a two-year fixed deal mortgage, to someone with a 25% deposit, is at an eight-year high of
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6.26%. In addition arrangement fees on fixed term deals can be in excess of £1,000. Consequently, whilst the cost of borrowing continues on its upward trajectory, many people are considering switching from traditional combined capital and interest repayment mortgages to interest-only mortgages where no capital is repaid. Any decision to do this is obviously dependant upon individual circumstances, but at some stage you will still have to repay the loan. It’s not for me I must admit, but in some cases needs must.
Tightening Lending Criteria Gone are the days when mortgage providers would lend you pretty much what you liked as long as you had a reasonable deposit. Income multipliers used to calculate loans are back to more traditional levels of three times the main income, or twice the joint income, with proof of income and clean credit histories regarded as prerequisites. Increasingly lenders require at least a 10% deposit – the 110% mortgage is a thing of the past. The impact of this has been particularly felt in the new property development sector, where builders increasingly have to come up with unique schemes to sell their properties.
Transaction Chains
The shortage of buyers can mean house sales take a long time to complete, so when buying or selling ensure your solicitor thoroughly investigates the robustness of the chain involved. It might be wiser to sell to a buyer offering £200,000 rather than the individual who is prepared to pay £250,000 but is stuck in a difficult transaction chain.
The current market also encourages buyers to renegotiate the price when they are close to exchange; only you can judge whether to engage in this practice as a buyer or to hold out as a seller. However looking someone in the eye at the agreement stage and discussing the issue may save later frustrations.
Buy to Let
The buy to let market has been attractive to those in the Armed Forces but, as with
standard house purchases, lending criteria is now tougher with some lenders looking for deposits in the region of 25%, as compared to 15% in 2007.
So in summary those greedy bankers, particularly in the United States, have made the going difficult for us all, but as always if the proposition is a good one then funds will be available. Lots of legwork, both physically and on the internet, is the order of the day. Or you could consult an independent mortgage advisor – you may find some, like Forces Financial, have special offers available for their military clients.
When the going gets tough no group is better at proving its metal than those in the forces and their families – so get going and in the medium term it is my belief that you will be a winner.
TOP TIPS TO HELP YOU MANAGE THE COST OF YOUR MORTGAGE
• Speak to an Independent Mortgage Adviser
In a volatile market this is one of the best ways to keep abreast of the changing deals.
• Act early You should review your mortgage at least three months prior to your review date.
• Be wary
If a mortgage rate looks too good to be true, the chances are it is. Look out for very low interest rates mixed with very high fees.
• Act quickly Don’t dither, if you like a deal you are offered get on and apply for it. It may well be gone tomorrow! Equally if you are struggling to pay an existing mortgage speak to your lender sooner rather than later.
Autumn 2008 23
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