Should you overpay?

If you have a basic repayment mortgage of £125,000, perhaps paying an interest rate of 4% or so for the next twenty five years, overpaying is something of a no-brainer.  It’s been shown in many other sources that paying extra, relatively small amounts on top of your standard monthly payments will reduce the life of your mortgage substantially.  In the example above, paying an extra £50 a month and assuming the interest rate remains the same, the mortgage will end 35 months earlier.  Over a twenty five year period, just under three years may not sound much but it equates to a saving of around £25,000.  Beware of any overpayment penalties your lender may charge though.

So the question is: now that interest rates are 0.5% is there any point in overpaying?  Well the answer is: it depends.  You will of course still pay off your mortgage earlier and the money is going in to an investment – your property, but it’s currently an investment which is not appreciating in value.  Perhaps you could find a better, more lucrative investment for your extra monthly cash.  Plenty of governments run tax-free savings schemes which earn money well above the base rate.  Of course paying oextra on your mortgage is also tax free.

In the end it may be the piece of mind of paying off your mortgage quicker which wins the day.  To add to that we would also note that although interest rates are currently low and will be for one, two, maybe three more years, in the end a healthy economy demands a higher interest rate and the money you put into your mortgage now will pay off when the base rates start rising again.  We say overpaying is still the way to go.

First, take a look at how much money you make. This should be the after tax amount so you can be sure you won’t be short on funds. Ideally your housing costs should not exceed one third of your income to live at a comfortable rate. This includes the mortgage, taxes, and the insurance. This number should be what you spend per month on your home.

If you’re finding this number hard to achieve then try spending less in other areas or looking for a better deal. There’s plenty of homes you can get for under a hundred thousand dollars now in a lot of areas. You could also save a lot of money by getting a lower interest rate.

Make sure to get more than one quote from banks and insurance companies! The differences in cost can be quite staggering. Just a percentage or two less in interest rates could equal hundreds of dollars back in your pocket every month that would be going to a bank. Try looking at online lenders or local credit unions who may offer you a better rate.

If you’re finding your insurance rate is affecting your ideal one third of income position then talk to your agent about a lower rate. There are lots of things you may not need that you could cut. You could get a higher deductible or cut uneccessary coverage. I save a lot of money by getting rid of replacement value of contents. This basically covers your furniture and such. Most of mine was free so I see no reason to spend hundreds of dollars extra per month to insure it! Other things that effect your insurance premiums include the age of the home, being in a flood zone, proximity to a fire hydrant, hurricane shutters, age of your roof, swimming pools, and whether or not you have a dog!

If you’re having trouble getting a down payment there are many first time home buyer programs that will give you a morgage with as little as 3% down. Buying a home through owner financing is also an option if you have poor credit. If you have a 401k you could also potentially borrow money from that to get your down payment, but watch out for fees. Make sure you know all the rules before betting against your retirement fund!

Need more information on mortgage deals, home ownership, and general finance help? Visit Pennyseeds.com for more great financial assistance articles like this one!

Equity release is not a new concept.  As house prices have risen (before the stabilisation of the last few years), many property owners have found themselves in possession of a house which is worth twice or three times as much as they paid for, far outstripping rises in inflation and the aforementioned plateau in price house prices.  Equity release is the term given to the way in which a homeowner in that position can convert some of that inbuilt profit to real cash.  A remortgage is a basic way to achieve that.

Reverse mortgages will release equity

Reverse mortgages are another way of getting some of that cash – it’s available in the United States but largely unknown in Europe.  It’s a federally regulated scheme that essentially allows a homeowner over the age of 62 to borrow money proportionate to the value of the house.  The more your house is worth, the more money you an borrow.  The main advantage is that the borrower never has to pay the loan back; ultimately the lender will take the property on the death of the applicant.  The borrower can take the loan as a lump sum, a series of monthly payments or a bit of both.

The small print is as follows:

• You must be over 62.
• You must live in the house.
• Each deed holder must be on the loan application and meet the appropriate requirements.
• The current mortgage must be paid off or be lower than the loan amount.
• You must keep up with taxes and home insurance for the life of the loan.
• Just like a mortgage, there will be closing costs but this can be incorporated into the loan.

It’s not a perfect scheme but it does enable those who apply to enjoy that equity if they are cash poor.  Don’t forget though, your house is your kid’s inheritance so perhaps run the scheme by them if you’re thinking about it……..

This being said, the UK still owns one of the leading mortgage markets in the world so having a mortgage is vital to you as a potential buyer obtaining a property. Price comparison sites are therefore the answer when confusion arises when looking for a mortgage. You can easily sort out how how much you want to receive, for how long and the best interest rates. The site will then give you a usually honest feedback of the best banks and building societies that fit your requests. Online comparison sites such as Money Supermarket are most popular.

The thing about price comparison sites is that they are usually sponsored by the organisations they are comparing. For this reason, you will find that the first three or five results that you see after you have made a product search are, on some sites, in parallel to sponsored listings rather than to the best deal that is available. Also, it is better to compare on a site that includes all the providers in its search, as this will have a great impact on the results and perhaps even your final price! Overall, price comparison sites are a good tool and if used well, could save the consumer hundreds of pounds, therefore there will be more money to spend on that new BMX!

Welcome to 2012 then and it looks like the stagnating value of residential properties will continue for most of 2012.  Predicting house prices much further ahead is a largely pointless activity, especially given the current economic woes in mainland Europe.

According to the Nationwide Building Society, the average house price is now just under £164,000, that’s a level which we haven’t seen since since early 2004, apart from a brief dip at the beginning of 2009.  House prices have actually risen in London, for reasons which we’ve explained before, which means that in the rest of the country the values will have dipped slightly.

The Halifax Building Society has also said that their figures show a fall of 1.3% in the value of residential property.  Their figures reveal an average house price of just over £160,000.

Broken down region by region, the U.K. land registry also shows a disparity between house prices changes as follows:

Essentially the further North and away from London one travels, the bigger the falls in value.  If you’re house is in commuting distance the fall is minor – up in the north-east and north-west it’s around 5%.

Commentators suggest that the U.K. housing market is proving itself to be resilient but the reality is that no one is buying and no one is selling; this is artificially propping up the  values and it won’t be until credit in the mortgage market frees up and prospective buyers are able to qualify for reasonably priced mortgages that we’ll really see any realistic moves in property prices.

Less Credit Available In 2012

Added to the stagnation in the value of house prices is the unwelcome news that mortgages may become even harder to obtain.  If you didn’t think that was possible you’d better think again; lenders who responded to a Bank of England survey say that the possibility of worsening economic conditions in Europe, added to a flat U.K. economy and  tighter household finances mean their ability to lend will be hampered.  Banks with major credit liabilities in struggling countries such as Portugal, Greece and Italy will be the ones introducing more strict criteria into their products.

Interestingly, in mid-December, the Financial Services Authority (FSA) will introduce new ‘common sense’ standards in 2013 which will govern the way mortgage companies lend to consumers.  It hardly seems relevant now but there was a time when applicants were able to ‘self-certify’ their own applications, meaning one could essentially make up a salary to get a mortgage approved.  It was also possible to obtain a mortgage for seven times an applicants salary in some cases and perhaps the most famous piece of irresponsibility was Northern Rock’s ‘Together’ mortgage which lent applicants 125% of the property value.

A huge economic crash brought all that to end of course and it’s difficult to predict a time when banks and other lenders will start lending at ‘normal’ terms again.  It’s certainly a case of bolting the stable door after the horse has escaped but, as the chairman of the FSA, Lord Turner, explains: “….it is important to ensure that better practice endures in future when memories of the crisis recede and the dangers of poor practice return.”

On Tuesday evening the Reserve of Bank of Australia reduced the interest rate by 25 basis points.  Although not as badly affected by the economic events of 2008 onwards and the current fun and games in Europe, Australia is still a moderate player in the global economy and events around the world effect it accordingly.  The RBA’s stance in lowering the rate reflects the challenging economic conditions in Australia and around the world.

The big question for mortgage holders in Australia will be whether the big four banks – Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, Westpac Banking Corp, National Australia Bank Ltd – follow the prompt and pass the decrease on to the customers.  Treasurer Wayne Swan clearly feels this should be the case but so far there has been no movement from any of the four big lenders.

A similar decrease last month did lead to a decrease in the rates from all but National Australia Bank but this month has seen a downgrading in all the banks credit ratings from Standard & Poor, leading many commentators to speculate that a failure to pass on the rate decrease is an attempt to shore up their finances;  the credit rating drop means credit required by the banks will cost more.

Unsold Australian property

Short of some sort of legislation, it’s hard to see what Swan can do to persuade the banks to pass on rates decreases to their borrowers – it’s economically important for the customers and politically important for Swan; 90% of mortgages are variable rate and the big four banks control 80% of the entire mortgage market.

Swan made the point that Australian banks are among “….the most profitable banks in the world” but his only advice to customers was to swap their accounts if they weren’t happy with the behaviour of the lenders.  We’re not the first website to pass negative comment on the disproportionate power of Australian banks and for sure we won’t be the last.

Australian Mortgage Applications Up

In contrast to the above story, in November the Australian Finance Group recorded an 18.4% increase in mortgage applications countrywide.  AFG is the countries largest lender and a good indicator of underlying financial trends.

The two stories here may seem to contradict each other in certain ways but the AFG’ figures are pretty clear that the increase is due to November’s rate decrease which, as stated above, was passed on to three out of four of the big banks.  It also comes on the back of a consistent slowing down of the mortgage market for various reasons including unaffordable products for first time buyers and high property prices in general, something that is deterring potential buyers in economically uncertain times.

The current economic climate means that many property owners have found themselves in desperate financial straights and the Australian Bankers Association have responded by setting up a website – www.doingittough.info – to provide customers with some handy advice if they feel they are slipping into debt.

The British Labour party have predictably called the new government proposals “too little, too late” but the ruling coalition believes that their new measures could help around 100,000 people in England & Wales who are struggling to get on the housing ladder.  An average first time buyer is now over 40.

The problems for first time buyers are familiar to us all – low housing stock, lack of affordable mortgages and and very few new houses being built – and the mortgage indemnity scheme is designed to address at least one of those factors.  It will provide those who qualify for the scheme with up to 95% mortgages which will still come from the usual lenders but the government will underwrite some of the risk.

Mortgage Indemnity Scheme

The theory is that the knock on effect of the scheme will be an unblocking of the housing market in general.  If first time buyers can start buying again, houses further up the chain will start moving as well.  Developers will become involved again and begin to build new houses and it’s that activity which can have a beneficial effect on the economy by getting people back to work.

David Cameron (right) and Nick Clegg

Along with the mortgage indemnity scheme there are a number of other measures the government coalition is planning and it is hoped that these will complement the headline-grabbing part of the proposals:

• A £400 million fund to aid developers in kick-starting housing developments which have stalled.
• A focus on supporting social housing (council house residents) to revitalise the once popular right to buy scheme.
• More government owned land to be made available for building projects.
• A renewed look at those development projects which have ground to a halt, usually because of planning restrictions.
• A £150 million fund to investigate and revitalise unused housing.

Objections

Some of these proposals will not be popular with various groups, especially those who object to the relaxation of planning laws.  Stalled housing developments have stalled because local people may have genuine objections to the proposals facing them; will they now lose their right to object?  Local pressure may also be the reason behind the government making it’s own land available for new developments – planning permission may be easier.

With regard to the ‘right to buy’ scheme for social housing residents, there will undoubtedly be many who feel the fund would be better spent helping potential first time buyers who live in private rented accommodation rather than those already subsidised by the local authorities.

Of course the whole mortgage indemnity scheme is being backed up by taxpayers money; the governments money is our money and from a wider perspective the taxpayer will once again be underwriting the risks taken by the lending institutions.  If the scheme works it will certainly give a boost not just to first time buyers but the economy in general as the housing market loosens up.  If it doesn’t work and if the lenders continue to prevaricate on mortgage approvals, all we’ve done is chucked a load more money away.

It had better work then.

The property market in the United Kingdom shows no signs of escaping from it’s recent years in the doldrums.  The supply of properties appears to be shrinking, prices are largely static year on year and the that property which is for sale is remaining on the market for longer.

The average asking price for a home in England & Wales is now £228,047, a 0.1% decrease on the average reported in November 2010.  Between October 2010 and 2011 there has been a 15% drop in the number properties being put on the market as a new listing.  Despite the fall in available properties, the average asking price is being reduced by more than £16,000 before a successful sale.  Even so, houses are remaining on the market for an average length of 212 days – that’s 20 more days than 12 months previously.

Rental Demand and FirstBuy

Bearing the above figures in mind and the difficulty for first time buyers to get onto the

FirstBuy Logo

housing ladder it’s really no surprise that there are now five prospective tenants for every rental property, according to some estimates.  There are in fact more rental properties available now, due to the lack of movement in the selling side, but there are far more tenants, unable to buy because of the high prices and restrictions in the mortgage marketplace.

So it’s a good time for the government to introduce the FirstBuy scheme which is a collaboration between house builders and the Homes and Communities Agency. The idea is to help first-time buyers get on the housing ladder and it will work as follows:

To be eligible, applicants must:

• Have a household income of less than £60,000
• Be unable to afford a house in the local area
• Have savings or resources sufficient to pay a 5% deposit and other fees
• Not already be home owners or mortgage holders
• Have a healthy credit history
• Apply for a mortgage with a qualified lender
• Buy a property from a developer taking part in the FirstBuy scheme
• Apply before 31st March 2013

What the prospective mortgage applicant can look forward to is the following:

• Provide a 5% mortgage
• Successfully apply for a mortgage for 75% of the asking price
• The government and house builder will provide a loan of 20% of the asking price

On the surface it sounds like a sensible idea, but there will almost certainly be some devil in the details.  It’s also a little worrying that a scheme as simple as this hasn’t already been put into a place sometime during the last three years.  First time buyers are one of the main drivers of any economic growth, especially when buying new-build properties. There are plenty of people out there who can afford houses but cannot cope with the excessive deposits demanded by the lenders.  Once these potential buyers are given access to credit, the housing market may get back on track once more.

In past years, a financial problem affecting one part of the world would not necessarily have any adverse affect on other areas but this is no longer the case.  Of course we know that countries buy goods from one another, meaning a tightening of belts in, say, America will adversely affect China for example.

The recent economic crises have now demonstrated another issue – the interconnectedness within the banking industry and the levels of debt held by large banks.  When that debt belongs to other countries which may not be able to pay it back (Greece), the web of banking institutions affected is spread wide.

Italian PM Resgins

So when we observe that U.S. mortgage rates have risen slightly following the news that Italian Prime Minister Silvio Berlusconi has announced his resignation (conditional on the passing of new austerity measures), it should really come as no surprise.  But maybe it should – what possible connection could a European PM standing down have with a change in the cost of American mortgages?

Silvio Berlusconi

In the long term there could be an effect; Italy has a big economy and the ripples from it’s financial problems could be felt in many other countries, but not for some time and the mortgage rates could well change again tomorrow.  In this case the answer seems to be a little simpler – a quiet day in the U.S. markets meant that they were susceptible to ‘interesting’ news from anywhere.  The bond markets suffered (Italy will be paying more to borrow money) and subsequently the mortgage markets reacted negatively, hence the rate rise.

Fannie Mae & Freddie Mac Asked To Write Down Balances

Negative equity is something homeowners from many of the major economies have had to come to terms with in recent years – many who were desperate to get on the housing ladder pre-2007 were approved large mortgages which stretched their ability to pay the monthly instalments.  When house prices began to fall in 2008, negative equity once again reared it’s ugly head as the value of the property fell below the value of the mortgage.

A shrinking jobs market and a struggling economy in the United States added to the problem, increasing the number struggling to service large mortgages.  One of the measures the Obama administration has been keen to implement is a write down of the balances where negative equity has occurred.

Taxpayers Money

Fannie Mae & Freddie Mac, the mortgage giants which were rescued with taxpayers money when facing disaster, are the principal targets of this proposal but have so far resisted the representations of various parties, including California Attorney General, Kamala Harris and Congressional Democrats .

Kamala Harris

The big two have some valid arguments why they do not want to do this; they don’t want to create a situation where it becomes attractive for borrowers to default, they argue that their own repayment modification plans are having a beneficial effect and lastly, they are both partially covered by mortgage insurance – meaning they would recoup some of the loss of a foreclosure.

Shared Ownership

In Part One we looked at owning a property with friends in a 50/50 financial arrangement but shared ownership in this context is different.  A shared ownership scheme will be run by a local Housing Association.  The idea is that the purchaser will be buying a property from the Housing Association stock and will buy from between a 25% to 75% share of the house and then pay rent on the rest.

The outstanding balance (on which you are paying rent) can then be paid off in stages. There are various qualifications to this scheme depending on where you live, but it’s still fairly inclusive.  You’ll have to be a first time buyer or a key worker (police, nurse, etc), a current council tenant and usually have a combined household income of less then £60,000.

Housing Association low-fee loans are also available which can help buyers obtain a mortgage which could result in a lower interest rate or up front fees.  Be aware though that if you sell the property in future the loan will have to be repaid as a a proportion of the sale price.  If the original loan was 20% of the purchase price, you will repay 20% of the sale price.

Right To Buy

Right To Buy is a scheme that has long been available to council house tenants in England & Wales and will enable prospective buyers to get a substantial discount (of between £16,000 and £38,000 depending on location and house type) if they have lived in the same property for at least 5 years.

Right To Buy may be an answer

You will still need to apply for a regular mortgage but with the discount it should be easier.  Again, if you want to sell the property at some point in the future, some or all of the discount will have to repaid to the local authority.

Rent To Buy

Rent To Buy is a scheme operated by many local Housing Associations in which a new home from the Housing Association stock can be rented for 80% of the open market rent. However the rest of the money must be saved towards the cost of buying a shared ownership property.

Some Housing Associations will require a rental tie-in of up to five years before the prospective owner can apply for the shared ownership scheme.

Developers Deals

Various developers and house builders are now offering schemes which are designed to

Look out for developers deals

help first time buyers onto the property ladder.  It benefits the buyer who may otherwise not be able to afford a new property and the developer who may be struggling with slow sales.

Some are offering 95% mortgages in conjunction with lenders, which has been unheard of since early 2008.  Others have schemes to help parents lend money to their offspring. Various qualifications may apply here also such as income limits and a need for you to be a first time buyer.