Getting on to the housing ladder – 5 options you might not have considered

According to recent predictions from a specialist buy-to-let mortgage lender, Kent reliance, the value of the private rented sector will break the £1 trillion barrier in 2015 1.

By Ben Gosling of turnkeymortgages.co.uk

By Ben Gosling of TurnKey Mortgages

 

Indeed, though it is a long way from overtaking it, the rented sector is growing far more quickly than the owner-occupied sector. The percentage of owner-occupied households has fallen steadily since the recession, from 68% in 2007 to a little over 64% today – a fall that represents nearly half a million properties 2.

The crux of the problem is, of course, affordability. According to the most recent data from the Office for National Statistics, house prices have increased an average of 4.7% year-on-year in the last decade, and 2.0% year-on-year since the recession 3, well in excess of wage growth.

Yet our desire to have a place of our own – something that seems entrenched in our national psyche – is indefatigable. As well as the various government schemes that are in place, there are numerous ways to get on the UK housing ladder. Here are a few that you may not yet have considered:

Gifted deposit

You may be fortunate enough that you have a close relative who is able and willing to contribute towards your deposit. This is known as a family gifted deposit.

Developers also ‘gift’ deposits by offering a discount – usually around 5% – from the market value of the property. The loan to value (LTV) ratio is still calculated against the market value.

For instance, a home building company might offer a 5% deposit gift on a new-build home worth £200,000, meaning that you only need to pay £190,000. This is effectively £10,000 towards your deposit, even though no money has yet changed hands.

Gifted deposits are not something every mortgage lender will consider, as many generally prefer to see evidence that you are able to afford a mortgage yourself. The important thing to remember is to ensure that the lender is aware that a gift or incentive is involved in the transaction – your conveyancer can help to make sure that all the relevant paperwork is complete.

Guarantor

Not every family member will have the cash to pay for some or all of a deposit. But if they want to help, and they have spare equity in their own home, they can offer the lender a charge over some of that equity as security for your own mortgage. This makes them a ‘guarantor’ for your mortgage.

With this option, your guarantor’s income and expenditure will also be factored in to your application.

This is a risk for both parties. Using this option to borrow at very high LTV percentages will increase the size of your repayments, and puts you at risk of falling into negative equity. If you fall behind on your mortgage repayments, your guarantor will become liable for them, putting their own home at risk of repossession.

Longer mortgage term

Average mortgage terms are growing. In the 1990s, less than 5% of mortgages taken out had terms exceeding 25 years; in 2013, the figure was over a third 4.

Having a longer mortgage term means that the amount you need to pay is spread out, reducing the size of your monthly repayments and making it more likely that you will pass a lender’s stringent affordability checks. Beware, though; this option will mean repaying more interest overall, as it will have more time to build up.

If your extended term will take you past retirement age, many lenders will want to see evidence that your retirement income will cover the repayments, whilst some lenders won’t allow it at all.

Joint mortgage

By pooling your resources with (typically) up to three other individuals, saving up for a home becomes that much easier.

This option helps with loan-to-income and affordability checks, though most lenders will only consider the two highest-earning applicants’ incomes. The main appeal of a joint mortgage is how quickly they enable you to save up for a deposit.

Joint mortgagees will either be ‘joint tenants’, who collectively own and are liable for the property, and ‘tenants in common’, who each own and are responsible for their own share, which may or may not be equal.

Whatever the case, you will have entered into a binding financial and legal agreement with other people, who are also at risk if you find yourself unable to keep up your mortgage repayments. Like a guarantor mortgage, you should approach this option with care, and ensure that every party is completely happy with the arrangement and aware of their obligations and risks.

Shared ownership

Local housing associations offer shared ownership schemes that enable first-time buyers to purchase a ‘share’ of a leasehold property that is worth at least 25% of the total value. The share is financed in through a combination of a deposit and a mortgage, just like any other purchase, but the amount required is significantly lower. You then rent the remaining share of the property from the housing association.

You and the housing association share any increase in (or loss of) equity, as well as the proceeds from the sale. You are also allowed to purchase a larger share when you can afford to do so. This is called ‘staircasing’.

The biggest risk with this option is that you owe money to two parties – the lender who provided your mortgage, who can repossess your share if you fall behind on repayments, and the housing association, who can evict you if you fall behind on rent.

There are only a limited number of shared ownership schemes at any one time. This option is usually only available to households earning less than £60,000 per year (£80,000 in London), and existing local authority and housing association tenants are given priority over other applicants.

Find out more about shared ownership schemes from the Gov.UK website.

Sources

[1]      http://www.financialreporter.co.uk/mortgages/btl-property-to-hit-1-trillion-in-2015.html

[2]      Table 101: by tenure, United Kingdom (historical series) [XLS]. Retrieved from https://www.gov.uk/government/statistical-data-sets/live-tables-on-dwelling-stock-including-vacants

[3]      House Price Index, June 2014: Annual Tables 20 to 39 [XLS]. Retrieved from http://www.ons.gov.uk/ons/rel/hpi/house-price-index/august-2014/stb-august-2014.html

[4]      Ibid

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.

 

 

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Homeowners should be wary of rate rises – but shouldn’t panic

By Ben Gosling of Turnkey Mortgages

By Ben Gosling of Turnkey Mortgages

The Money Advice Service released a warning on 2 October that suggested as many as a fifth of UK homeowners would struggle to cover their repayments in the event of an increase in interest rates (1).

The warning comes after months of speculation as to when the Monetary Policy Committee – the nine-member Bank of England Committee responsible for setting the base interest rate each month – will finally decide that the time has come for rates to start rising again.

For the past two months, two members of the MPC have voted in favour of a 0.25% increase; the first break in its unanimity since July 2011, over three years ago (2).
Most experts currently believe that the MPC will vote for a rise early next year, though many are concerned that this will have a negative impact on the millions of households that have become used to low mortgage rates over the past few years.

Surveying just over 3,000 mortgage holders, the Money Advice Service discovered that:
- 28% don’t know what interest rate they are currently paying
- 47% would struggle to cover an increase of up to £150 each month
- 19% would struggle to cover any increase at all

If applied to the UK as a whole, this 19% would account for 2.1 million mortgages (3).
This is of course a cause for concern for the MPC, and a chief reason for their caution. Research into household debt and spending, published recently by the bank of England, concluded that increased household indebtedness dampens consumer spending and leads to longer and deeper recession (4).

However, some members of the MPC believe that waiting too long to increase interest rates could lead to sharper increases in the future (5). This is evidently a tricky balance to maintain, and the central bank faces a difficult decision.

“Gradual and limited”
When the base rate does begin to rise, it is expected to do so by no more than 0.25% per quarter (6). Homeowners should therefore be aware that, whilst it is important to account for an imminent increase, they shouldn’t panic.
As observed by the Council of Mortgage Lenders, for the average mortgage – which, as of the end of 2013, amounted to just under £115,000 (7), (8)– the £150 increase that nearly one half of households would struggle to cover represents a 2.0% interest rate increase (9). If the Bank of England’s assurances are to be believed, this would not happen for a full two years.

If you are a mortgage holder, you should consider taking the following practical steps:

1. Check your mortgage documentation or contact your lender to confirm what interest rate you are currently paying. Find out whether the rate is a fixed or variable rate, when the initial deal period ends, whether any early repayment charges (ERCs) will apply for switching out and when they apply until.

2. Use a mortgage calculator (such as the one on the TurnKey Mortgages website, linked at the top of this article) to find out how much a 0.25% increase in your interest rate would increase your monthly repayments by. Repeat this test for larger increases; 0.5%, 1.0% and so on.

3. If you believe you would struggle, strongly consider whether you could reduce any of your household spending to accommodate the increase. Companies such as the Money Advice Service and National Debtline offer free calculators and planners to help you with your day-to-day budget.

Finally, contact a professional mortgage advisor to see if switching your mortgage could save you money each month. Factors such as ERCs and mortgage fees will make it difficult to say exactly whether a new mortgage will be cheaper overall than your current deal; however, a professional advisor will take all of your personal circumstances into account and help you to find out if there is a more suitable product out there for you.

Sources:
[1] https://www.moneyadviceservice.org.uk/en/static/interest-rates
[2] http://www.bankofengland.co.uk/monetarypolicy/pages/decisions.aspx
[3] https://www.gov.uk/government/statistical-data-sets/live-tables-on-repossession-activity
[4]http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q304.pdf
[5] http://www.ft.com/cms/s/0/04b464a2-e679-11e3-9a20-00144feabdc0.html#axzz3F5pKvco4
[6] ibid
[7] https://www.gov.uk/government/statistical-data-sets/live-tables-on-repossession-activity
[8]http://www.bankofengland.co.uk/statistics/documents/mc/2013/dec/moneyandcredit.pdf
[9] http://www.cml.org.uk/cml/media/press/4021

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Homeowners should be wary of rate rises – but shouldn’t panic

By Ben Gosling of TurnKey Mortgages

Capture

The Money Advice Service released a warning on 2 October that suggested as many as a fifth of UK homeowners would struggle to cover their repayments in the event of an increase in interest rates (1).

The warning comes after months of speculation as to when the Monetary Policy Committee – the nine-member Bank of England Committee responsible for setting the base interest rate each month – will finally decide that the time has come for rates to start rising again.

For the past two months, two members of the MPC have voted in favour of a 0.25% increase; the first break in its unanimity since July 2011, over three years ago (2).

Most experts currently believe that the MPC will vote for a rise early next year, though many are concerned that this will have a negative impact on the millions of households that have become used to low mortgage rates over the past few years.

Surveying just over 3,000 mortgage holders, the Money Advice Service discovered that:
- 28% don’t know what interest rate they are currently paying
- 47% would struggle to cover an increase of up to £150 each month
- 19% would struggle to cover any increase at all

If applied to the UK as a whole, this 19% would account for 2.1 million mortgages (3).

This is of course a cause for concern for the MPC, and a chief reason for their caution. Research into household debt and spending, published recently by the bank of England, concluded that increased household indebtedness dampens consumer spending and leads to longer and deeper recession (4).

However, some members of the MPC believe that waiting too long to increase interest rates could lead to sharper increases in the future (5). This is evidently a tricky balance to maintain, and the central bank faces a difficult decision.

“Gradual and limited”

When the base rate does begin to rise, it is expected to do so by no more than 0.25% per quarter (6). Homeowners should therefore be aware that, whilst it is important to account for an imminent increase, they shouldn’t panic.

As observed by the Council of Mortgage Lenders, for the average mortgage – which, as of the end of 2013, amounted to just under £115,000 (7), (8)– the £150 increase that nearly one half of households would struggle to cover represents a 2.0% interest rate increase (9). If the Bank of England’s assurances are to be believed, this would not happen for a full two years.

If you are a mortgage holder, you should consider taking the following practical steps:

1. Check your mortgage documentation or contact your lender to confirm what interest rate you are currently paying. Find out whether the rate is a fixed or variable rate, when the initial deal period ends, whether any early repayment charges (ERCs) will apply for switching out and when they apply until.
2. Use a mortgage calculator (such as the one on the TurnKey Mortgages website, linked at the top of this article) to find out how much a 0.25% increase in your interest rate would increase your monthly repayments by. Repeat this test for larger increases; 0.5%, 1.0% and so on.
3. If you believe you would struggle, strongly consider whether you could reduce any of your household spending to accommodate the increase. Companies such as the Money Advice Service and National Debtline offer free calculators and planners to help you with your day-to-day budget.

Finally, contact a professional mortgage advisor to see if switching your mortgage could save you money each month. Factors such as ERCs and mortgage fees will make it difficult to say exactly whether a new mortgage will be cheaper overall than your current deal; however, a professional advisor will take all of your personal circumstances into account and help you to find out if there is a more suitable product out there for you.

Sources
[1] https://www.moneyadviceservice.org.uk/en/static/interest-rates
[2] http://www.bankofengland.co.uk/monetarypolicy/pages/decisions.aspx
[3] https://www.gov.uk/government/statistical-data-sets/live-tables-on-repossession-activity
[4] http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q304.pdf
[5] http://www.ft.com/cms/s/0/04b464a2-e679-11e3-9a20-00144feabdc0.html#axzz3F5pKvco4
[6] ibid
[7] https://www.gov.uk/government/statistical-data-sets/live-tables-on-repossession-activity
[8] http://www.bankofengland.co.uk/statistics/documents/mc/2013/dec/moneyandcredit.pdf
[9] http://www.cml.org.uk/cml/media/press/4021

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35 question to ask when buying a home

By Ben Gosling of TurnKey Mortgages

By Ben Gosling of TurnKey Mortgages

Did you buy or sell a three- or four-bedroom house in the short period surrounding the turn of the decade?

If so, you may remember the Home Information Pack. Introduced for larger homes between August and September 2007, HIPs were sets of documents relating to a property, including title documents, local authority searches, property information sheets and the only surviving remnant, Energy Performance Certificates.

The HIP was introduced to reduce the number of ‘fall-throughs’, or aborted transactions, that occurred as a result of issues with the property that could have been identified at an earlier stage in the process. But the added administration and cost was a burden too far for many sellers, and some argued that HIPs were even worsening the housing crisis 1. HIPs were finally abandoned in January 2012.

So the problems with obtaining property information remain unresolved, and recent research shows that, today, as many as two fifths of transactions may fall through due to flaws in the conveyancing process 2.
As a buyer, you will want to make sure that you know as much as possible about the property you are buying. With this in mind, here are 35 important questions you should consider asking the seller:

1. How long has the property been on the market?

If the property has been on the market for a long time, ask if there is a reason for the lack of interest. What constitutes ‘a long time’ depends on location and market conditions; the average house currently (according to figures for August 2014) stays on the market for just over six weeks 3.

2. Has the property been on the market before?

If the property has changed hands a number of times, there could be an underlying problem driving out each new owner.

3. What is included in the sale?

Who owns what on a plot might not always be clear, particularly in the case of apartments with shared facilities. Be sure to ask about sheds, gardens and parking spaces, and find out exactly where the boundaries lie. Ask whether any services, such as drainage, are shared. Also find out what fixtures and fittings will be included with the sale.

4. Have any major works been completed, and are there any planning restrictions?

If so, ask to see copies of the relevant paperwork. Just as important are permissions that were not granted – this could cause problems down the line.

5. How old is the property?

Older buildings can be more expensive to maintain. If a particularly old building was built with unusual materials or using outmoded construction methods, making structural repairs could also be more difficult.

6. Is the property listed, or in a conservation area?

In either case, what you can do to the property’s exterior (and sometimes even the interior) will be limited. Furthermore, if the previous owner made any changes a listed building without Listed Building Consent, it may be your responsibility to fix them.

7. What is the area like?

Local shops, schools and entertainment are easy enough to check online. What a quick search won’t tell you is what the area is like at rush hour, or when the local pubs and clubs close. Spend time walking around the area to get a feel for it – after all, it might soon be your own neighbourhood!

8. How are the neighbours?

If the sellers have ever made an official complaint against their neighbours, their agent will be obligated to tell you. Persistently antisocial neighbours can do untold damage to a neighbourhood, so get as honest an opinion as you can.

9. How is the energy performance?

You will have an Energy Performance Certificate, with a rating between A and G, to use as a point of reference. If the energy performance is lacking, find out why. How old is the boiler, and when was it last serviced? Is there loft or cavity wall insulation, and if so, how old is it?

10. Have there been any problems with damp or subsidence?

Subsidence – the gradual sinking of land – and damp can both cause major structural issues if left untreated, and you should find out if the property has any current or historical issues with either.

Quick-fire questions: the exterior brickwork

11. How old is it?
12. What condition is it in?
13. Is there a render or specific finish?

The windows

14. Are they double- or triple-glazed?
15. Are the frames secure?

The roof

16. How old are the drains and guttering?
17. What condition are they in?
18. Are any tiles missing or insecure?
19. Does the roof leak?

Plumbing and electricals

20. Do all the taps work?
21. Are there any internal leaks?
22. Is all metal plumbing work earth-bonded (particularly in an electric shower)?
23. How quickly does hot water come through?
24. Do all the light switches work?
25. Are any electrical circuits prone to strain or overload?
26. When was the fuse box last checked?

Security
27. Do all the windows and doors lock sufficiently? Are they double-locked?
28. If there is an alarm system, is it in good working order?

General questions

29. Is there any damp, mould or condensation?
30. Are there any cracks or exposed wires?
31. Are any of the rooms exposed to the neighbours?
32. Is any private garden or courtyard exposed to the neighbours?
33. Is there sufficient storage?
34. Is there loft access?
35. Is the property smoke alarmed?

Many surveyors offer property condition reports for upwards of £300. Concise reports will detail needed repairs (distinguishing between moderate and urgent issues, and whether ongoing maintenance will be needed), construction defects, and other matters that could allow you to renegotiate the price.

If you want to have a property condition report done, feel free, but bear the following in mind:

• Your mortgage lender will not accept this as a survey or valuation, and you may need to pay for a separate valuation in order to satisfy your lender’s requirements
• Make sure that the surveyor you instruct is accredited by an official trade body, such as the Royal Institute of Chartered Surveyors (RICS)

Sources

[1] http://www.telegraph.co.uk/news/politics/conservative/2054003/Home-Information-Packs-are-adding-to-the-housing-crisis-Conservatives-warn.html

[2] http://www.financialreporter.co.uk/view.asp?ID=16057

[3]http://www.hometrack.co.uk/hpsurvey/documents/HTSurveyJune2014_26062014164135.pdf

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Buying a dilapidated property: three funding options for renovation

That the UK has a housing shortage is no secret. Legislators, housebuilders and developers all have their work cut out for them in addressing the supply imbalance that is seeing the cost of both buying and renting a home shooting upwards.

By Ben Gosling of Commercial Trust

By Ben Gosling of Commercial Trust

The explosion of the buy-to-let sector has at least gone some way to stabilising rents, with the average national rent having recently increased below the level of CPI (Consumer Price Index) inflation for the thirteenth consecutive month 1. Throughout this period, the number of buy-to-let mortgages issued for new purchase has shot up by over a third 2.

Investors’ reliance on mortgage finance can lead to the occasional obstacle, however, particularly where ‘unconventional’ purchases are concerned. As important as it is to build new homes, it is equally vital to bring back into circulation the circa 630,000 empty properties 3 that have fallen into disrepair and become unusable.

Many investors are attracted to these properties because of their low cost. However, they require renovation to bring them up to a habitable standard, and very few mortgage lenders will advance loans for properties that are in need of major work.

A Catch-22 situation

Lenders will normally grant mortgages for uninhabitable properties on a ‘full retention’ basis. This means that they will agree to the mortgage, but will not release the funds until the works have been completed to a prescribed standard.

This Catch-22 situation is familiar to many investors: you can’t buy the property because the works haven’t been completed, but you can’t complete the works because you haven’t bought the property.

This would ordinarily mean that you would need to finance the purchase and the works yourself – a significant cost that is outside the reach of many buyers, particularly those who are new to property investment. Fortunately, there are other ways of obtaining the funds you need.

1. Refurbishment mortgages

Some lenders offer ‘light refurb’ mortgages which are lent on a part retention basis. During the application, the lender will obtain a pre-works and a post-works valuation; then, before the works commence, they will forward a proportion of either the purchase price or the pre-works value. They will also retain some of the funds to be released once the works are complete.

These loans are subject to lower LTV (loan to value) requirements than other buy-to-let mortgages; typically, a lender will want to see at least a quarter of the purchase price up front.

Furthermore, these products tend to only be suitable for properties where minor refurbishments are required (those that would enhance the value and appeal of a slightly dilapidated property). Where major restorative works, planning permission and/or other forms of approval are needed, you are likely to need a commercial refurbishment loan, which on the whole are more expensive and require a slightly larger outlay (25–30% of the purchase price).

2. Bridging loans

Bridging loans were once the black sheep of the commercial finance market. This was probably down to lack of understanding about the product, their relative scarcity, and their high cost. Just three years ago, they were dismissed as a ‘last resort’ for ‘trapped’ home-movers 4.

Now, they are a vital tool in many an investor’s arsenal, and a booming marketplace has resulted in competitive interest rates and flexible terms.

Intended for very short terms of up to 18 months, bridging loans are so named for their use as a stop-gap between making a purchase and obtaining the main line of credit, such as a mortgage. Though some lenders have strict criteria, others will accept almost any type of property or land as security, and the funds can be raised for any legal purpose.

Bridging loans can be risky for borrowers without an exit strategy. These are known as ‘open’ bridging loans, and they often come with higher rates to reflect the added risk. Instead of ending when the longer-term finance is due, open loans run for a set period, after which the loan must be repaid – by the repossession of the asset, if necessary.

Also note that, whilst bridging loans can have terms as short as one day, many mortgage lenders will not finance a property that you have owned for less than six months.

3. Bridge-to-let loans

Some lenders will fund both the short- and long-term stages with a ‘bridge to let’ product, where the goal is to renovate the property to make it suitable for renting. Alternatively, it is possible to keep your options open by opting for short-term finance that allows you to ‘term out’ to a full mortgage.

This option has the advantage of having a clear exit strategy in place for the bridging portion of the loan, and having both products under one roof can make the transition easy and efficient. However, lenders will often charge a fee to borrowers terming out to the second stage of the loan.

 

Sources

[1]     http://www.lslps.co.uk/documents/buy_to_let_index_jun14.pdf

[2]     http://www.cml.org.uk/cml/media/press/3953

[3]     http://www.emptyhomes.com/statistics-2/empty-homes-statistice-201112/

[4]     http://www.thisismoney.co.uk/money/article-1378659/High-cost-bridging-loans-tempt-trapped-movers.html

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Some bridging loans, buy-to-let mortgages and commercial mortgages are not regulated by the FCA.

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Interest rates – what next for UK homeowners?

By Ben Gosling of TurnKey Mortgages

By Ben Gosling of TurnKey Mortgages

Interest rates have been at their lowest ever level now for half a decade. A deliberate economic policy designed to encourage people to spend and banks to lend, it means two simple things: good news for borrowers, and bad news for savers.

This may be about to change. The past few months have seen increasingly strong and frequent hints from the Bank of England that interest rates will soon begin to rise once again, and many homeowners and prospective buyers in the UK are concerned about when (and by how much) their cost of borrowing will increase.

Who is responsible for setting interest rates?

By and large, banks and other lenders set the interest rates for their own products, but these rates will be based upon the central rate set by the Bank of England.

Known as the Bank of England Base Rate (BBR), this benchmark rate is set by the Governor of the Bank of England and a committee of Bank of England policymakers.

Based on comments from the Bank of England over the past year, predictions as to when the Base Rate may eventually rise have varied. Following a speech on 11 June, markets briefly braced for a rise as early as autumn this year – before a seeming backpedal caused markets to revise their predictions once again.

The knowledge that any eventual increase in the base rate will be gradual and incremental should bring comfort to UK borrowers, but there could be an unpleasant side-effect to the mixed signals the Bank of England is giving. Faced with uncertainty as to the path of benchmark rates, lenders could begin to increase the ‘spread’ between the base rate and the rates they themselves charge 1. Simply put, mortgage costs could begin to rise prematurely.

The Office for Budget Responsibility (OBR) predicts that if interest rates were to rise by just 2.5%, nearly a quarter of the UK’s 11 million mortgage holders would be forced to “significantly” change their spending behaviour 2.

‘Cooling’ the housing market

Setting interest rates is not the only power the Bank of England has over the mortgage market. Very recently, it was given powers to intervene if it felt that house prices were rising too quickly.

On 26 June, the Bank exercised these powers, recommending that lenders place limits on the amount of high-value lending they do. From 1 October 2014, no more than 15% of new loans issued by a mortgage lender should be worth more than 4.5 times the borrower’s income.

The cap should have the biggest impact in London, where nearly a fifth (19%) of loans are at a loan-to-income ratio of 4.5 or higher 3.

What this means for buyers and homeowners

First-time-buyers in London are likely to feel the effect of these measures the most. According to the most recent data, the median income in London is £30,480 4, making the maximum capped amount that a single applicant could borrow £137,160. This could fund the majority of a one-bed flat in one of London’s cheapest boroughs (such as Enfield, Surbiton or Chingfield), but buyers hoping for a starter flat in most areas will need a sizeable deposit 5.

Broadly speaking, the Bank of England’s governor hopes that the measures will help to calm the housing market without affecting the rest of the economy. In theory, this will enable the Bank to hold fire on increasing interest rates until the economy as a whole can withstand it.

Current and aspiring mortgage holders might be worried that their borrowing costs might start rising sooner, and may even be tempted to switch their mortgage early, even if it means incurring early redemption penalties.

As the future of interest rates is an unknown, it is impossible to say whether this course of action would be the most cost-effective; however, the most important thing is not to panic. If you have any concerns about the mortgage you are on, call your lender or mortgage adviser to discuss them.

Sources
[1] www.bbc.co.uk/news/business-28014230
[2] cdn.budgetresponsibility.org.uk/37839-OBR-Cm-8820-accessible-web-v2.pdf
[3]www.mortgageintroducer.com/mortgages/249989/5/Industry_in_depth/BoE_to_cap_mortgages.htm
[4] www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-328216
[5] www.londonpropertywatch.co.uk/avg_prices.html (as at 26 June 2014)

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Growth vs. yields – the bigger picture behind buy-to-let investment

By Ben Gosling of Commercial Trust

By Ben Gosling of Commercial Trust

While London might be widely considered the apex of property investment locations, some experts have recently advised investors to steer clear of it. This is almost certainly to do with the rental yields in the capital, which – due to the towering property prices there – are outshone elsewhere in the country 1, and therefore fail to justify the entry cost on their own.

This caveat is probably an unfair one. Buy-to-let has become a yield-focused investment in recent times; thanks to rock-bottom interest rates, many new investors have been enticed to the sector by the prospect of income in the short term and have given little thought to future gains.

However, real returns in London at the beginning of the year stood at 14.6%, compared to just 8.9% in other regions, thanks to those same accelerating property prices.

People invest in buy-to-let for different reasons, and there is every reason for someone to favour income over long-term capital gains if doing so fits their specific investment strategy. Most landlords hope to achieve a mixture of the two, however, and therefore investing purely on the strength of gross rental yields may be unwise.

The market elsewhere

The same reports that describe the lofty returns to be found in London paint an unappealing picture of the market elsewhere.

Take the East of England. So far in 2014, the East has been the worst-performing region in terms of year-on-year rental growth for three out of the four months reported; it has seen month-on-month falls in rental income for three out of four months; and yields each month have been around half a percentage point lower than in the same month in 2013.

Yet in those same months, the Eastern region has consistently been one of the best performers in terms of house price growth 2. Unable to buy in London, and faced with spiralling rental costs, more and more professionals are relocating to areas outside the capital where they either rent or buy; in more expensive areas outside the commuter belt, such as Brighton, Hampshire and Surrey, they are more likely to rent, while in cheaper areas, such as Cambridgeshire and Essex, they are more likely to buy. These individuals have a marked effect on both the rental and purchase markets throughout the South.

Because rental values fall in one region does not necessarily mean that house prices will adjust to compensate; however, this disparity does highlight the fact that there is a bigger picture beyond the black-and-white world of rental yields that landlords need to consider.

You can find a good deal anywhere

Ultimately, national, regional and even sub-regional figures show only a summary of the housing and rental markets in a particular area. They are useful tools for comparison and analysis, but on very local levels, patterns are far more mutable.

Investing for yields will help to ensure you have a steady flow of disposable income that you can spend, save, or reinvest in your business. But without the capital returns to back it up, you have little to safeguard your exit should local demand dry up. With the right information and enough planning and research, you can find a good deal anywhere in the country – irrespective of what the latest statistical releases might tell you.

Sources
[1]     http://www.lslps.co.uk/documents/news/market-intelligence
[2]     http://www.landregistry.gov.uk/public/house-prices-and-sales

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