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The Bleak Truth about Mortgages

We the mortgage situation was bad, especially for first time buyers, but we didn’t know quite how bad. There is an increasing gap between those who have a property (and property insurance)and those who haven’t and are aspiring. Getting a mortgage 5 years ago was easy. Now, not so, and not only do you need to prove you have a steady income, but you also need a hefty deposit to secure anything (decent or not), especially in London. The number of new mortgages sold has dropped by 50% since 2007.

The situation

For those who have a good income and a house which hasn’t plummeted in value, there are a good portion of cheap mortgages available. For the young, first time buyers but also ‘second-steppers’, the situation is pretty bleak. Before, when you could purchase interest only mortgages with a modest income, the 2008 crisis has changed all that. The sale of mortgages pre-2008 to impoverished Americans who simply couldn’t afford them prompted the original crisis, thus explaining the regulations imposed by the banks today.

Tough luck for first time buyers

The problem is however, that banks have capitalized on this, meaning that first time buyers are very hard hit. Banks prefer to lend to those regarded as ‘low-risk’ and with a high credit rating. To be regarded as low-risk you have to have a 25% or ideally, 40% lump sum. Having a small deposit will mean that your interest rate is very high (around 6-7%) so you’ll effectively be throwing your money away with every paycheque you receive. On top of this, you need to have a good credit rating – having no credit rating is just as bad as having a terrible one. Those who have invested a large deposit will typically see their interest rates placed much lower (around 3-4%).

Second-steppers

First time buyers aren’t the only ones affected. Those who are stepping from their first property up to their second are suffering due to the housing prices plummeting post crisis. Those who initially put down a deposit for their house and seen its value decrease have effectively had their deposits erased. Second-steppers are also finding it very difficult to sell, as there are few first time buyers to sell property to. In London, the situation has been exacerbated by foreign investors who are often buying up properties without mortgages, thus elevating prices. Indeed London has been described as having a population of renters.

There may be a little light at the end of the tunnel though as the Bank of England is prompting banks to lend more by releasing billions into a lending fund. 2013 may therefore be a slightly better year for first time buyers, but we are unlikely to get it as good as we did in the early 2000’s.

Tapping Pensions For Deposits

There’s been a lot of hot air this week: Yes, you guessed it, its Party conference season. Politicians have taken the week off to engage in their respective annual conferences and as per usual, there have been some crackers. Yesterday, Nick Clegg announced at the Liberal Democrat conference in Brighton of his audacious strategy to give the young a rung on the property ladder.

Rising costs

With the soaring price of property deposits and the average age of first-time-buyers rising to 35, Clegg has advocated releasing parent and grandparent pension funds. By liquidating a portion of their pensions, parents could provide a cash deposit for their children’s mortgage. Clegg claimed that already, the number of young people asking for help from relatives to get onto the property ladder had doubled. If you take into account costs such as property insurance and rising utility bills, it is little wonder that we are facing such a social quandary.

Justifiable scepticism

Concerns have been voiced however over pension pot security. Joanne Segars, Chief executive of the National Association for Pension Funds stated that “A pension can only be spent once, and this policy could end up leaving retirees out of pocket.” Others have pointed out that although the average fund is £40,000, the actual average contribution fund is £30,000 leaving only £7500 to go towards a deposit.

What does this mean in practice?

With the proliferation of pension pessimism it is doubtful that this controversial proposal will be implemented. Its risky nature and operational feasibility are likely to raise eyebrows among many, even if necessary safeguards are put in place. Were it to be implemented, it is estimated that only around 12,500 would take part so we would be unlikely to see any substantial shift in the rent-ownership balance. Indeed it seems more likely that landlord rent rates are set to rise, with some predicting the first-time-buyer age to rise to 40 by 2020.

Why Landlords Should Aim for Quality

There is much scrutiny on the UK property market at the moment, and much concern that first-time-buyers are unable to get on to the property ladder. With social housing only available to those on the lowest incomes, many who would have bought a home in the recent past are now renting. They are likely to continue to do so for the foreseeable future, too.

Responsibility

This presents an opportunity for landlords, but also a responsibility. When renting was seen mainly as a short-term stop-gap for young people while they saved enough for a deposit, tenants were probably more likely to have been happy with short-term tenancies and less willing to complain about unresponsive landlords. Older people with professional jobs and higher incomes make more demanding tenants, and most need the security of long-term tenancies and landlords who approach their work professionally. For those with children, this is particularly true.

Government

The government is looking to encourage more institutional landlords into the private rented sector, but small landlords should be more than capable of providing the kind of professional service that today’s tenants are increasingly demanding. There is a perception among many people that landlords are money-grabbing chancers looking only to make a quick buck from tenants and caring little for their safety. Making sure that as a landlord you work with your tenants to keep the property in good repair and give them longer secure tenancies will help improve landlords’ public image. Making sure you have landlords insurance in place and that you don’t overstretch yourself to buy are part of this: not having insurance and not taking into account upkeep costs when you take out a buy-to-let mortgage can mean being unable to finance repairs.

Tenants

This is important, as tenants who are happy with their home and landlord are more likely to respect their property and pay their rent on time. Better landlords generally have better tenants. Increasingly, poor landlords who fail to provide decent homes for their tenants are being targeted by local authorities. Accreditation and registration schemes are becoming more common, as some landlords look to take advantage of increasing demand for rental property by letting sub-standard homes. A recent survey in Liverpool, for example, showed that 43% of the city’s homes fell below the ‘decent homes’ standards.

When you become a landlord, you are taking on a responsibility as well as making an investment. Landlords are likely to come under greater scrutiny as more and more people rent rather than buy, and it is in the interests of both them and their tenants to approach their work professionally. There’s nothing wrong with making money out of buy-to-let, but it doesn’t hurt to make friends along the way.

Second Steppers are Struggling in Scotland

For most of us, we only expect to need to borrow a deposit for a property the first time we buy. However, for many, they have to ask their parents for more money when buying their second home. “Second steppers” in Scotland have to ask for even more money the second time they want to move because getting a loan for a property is becoming even tougher to get.

Nearly one in six of these second steppers are having to ask for a contribution as the property most want to buy (a three bedroom house) has almost doubled over the last 10 years.

When buying property getting on the infamous ladder is hard enough, but what happens when you want/need a bigger property and still can’t get a loan? A recent report from the Bank of Scotland has shown that 65 per cent of these second steppers have wanted to move within the last year but haven’t been able to, due to a number of difficulties.

The report showed that 46 per cent of people wanting to buy their first homes borrowed money and 90 per cent of them asked for support from their parents.

What Has Happened?

In Scotland, on average, first time buyers asked for £13,000 and will be asking again for a further £10,000 for the deposit on their next property and step up the ladder.

Currently two thirds of first time buyers are living in flats or terraced housing that have an average value of £106,587. Half of first time buyers hope that their next property will be a three bedroom house which on average has a value of £125,029. As a result many face a premium of 17 per cent just to trade up, as well as this there will be the cost of moving or maybe equity shortfall in their current property. As well as this, there are many additional costs once they have moved, more furniture, higher bills and of course property insurance.

What Will Happen?

Laurence Mann who is the head of mortgages for the Bank of Scotland said, “We already know that second steppers in Scotland face a number of tough challenges, and in many ways have been the hardest hit by the subdues housing market, so it is unsurprising that they are struggling to fund the gap needed to trade up to their preferred second home.

“Parents have long been helping to fund their children’s first home, but many are now having to provide further support as they move up the ladder. This indicates that these customers still need attention and support. To achieve a sustainable housing market we need to see movement throughout the market. If second steppers get stuck on the first rung, movement at the bottom half of the ladder comes to a standstill.”

“Generation rent” draws ever closer

The prospects of the UK becoming a nation of renters instead of buyers seems to be becoming ever more a reality as yet another crop of figures show just how difficult it is for first time buyers to find an affordable mortgage. At the same time property investors with an interest in landlord insurance are being wooed by banks and other lenders as they target the buy-to-let market.

Big increase in buy to let figures

A collation of figures for the first quarter of 2011 shows that lending to landlords went up by 25% compared to 2010 levels, with the same period showing a decline of 17% for first time buyers purchasing a property to live in. Although there are still at least double the number of people buying homes to live in rather than rent out, the gap is closing all the time and experts believe the second quarter of 2011 will show an even greater rate of properties being purchased under buy-to-let arrangements.

Banks targeting investors

There is little doubt that lenders are currently looking to property investors to keep the market going. Not only are they cutting rates on buy-to –let mortgages, the number of products available seems to be growing on a daily basis. At the moment landlords have the choice of almost 500 mortgages designed to facilitate the buy-to-let investor, and not only that, more and more property insurance brokers are offering cheap property insurance to go with their property purchase. There is no doubt that 2011 is rapidly becoming the year of the landlord.

First time buyers given a poor choice

In contrast to the acceleration of products available to landlords looking to expand their portfolios, the poor old first time buyer is left with a much sparser choice of mortgage. Approximately 270 products are on offer to first time buyers with a 10% deposit and even then the terms are not good. It is only when first time buyers can stump up a 25% deposit that deals become similar to the ones that many established homeowners find themselves with.

Average deposit around £40,000

It is also worth remembering that a 25% deposit on the average priced home in the UK works out at £40,000, not exactly the kind of sum young couples can easily find. No wonder then that landlords are seeing rental yields hitting all time highs, and of course the cruel fact for many prospective buyers is they are paying record rents to a landlord who has bought the sort of house they wanted but could not afford.

Identify your costs

Although the overwhelming body of opinion in the private letting sector suggests the opportunities for those thinking about entering the market have never been better, those who have been persuaded to dangle their feet in the choppy waters of the landlord business would be well advised to think about exactly what they aim to get out of the business before they even arrange business property insurance.

Opportunity knocks

It may seem straightforward at the moment. Young couples looking to buy a home of their own can’t afford a mortgage, homeowners looking to sell their property are having to bring their prices down because of the paucity of prospective buyers out there and tenants looking for a decent place to live are saturating the market. It would seem that all one needs is a hefty deposit, although even that requirement is dropping slightly on buy to let loans, and a clear idea of what you want to achieve.

Rental yield not easy to understand

There are plenty of places where you can get advice and good financial advice is paramount. Any financial advisor will tell a landlord new to the business to work out his rental yield before he buys a property, but that is somewhat easier said than done and is a calculation that is susceptible to dramatic change. It is basically the amount of money you make from your property divided by the cost/value of the property.

It is the value of a property that often makes the rental yield figures susceptible to change. A property bought for £100,000 in today’s stagnant market will probably shift very little over the next 12 months however, in a volatile market the value can change quickly and dramatically. Landlords who bought property at the turn of the century were looking at vastly changed yields when their properties doubled in value by 2007.

Factor in costs

The other side of the equation is easier to understand, easier to manage but absolutely imperative to get right. You must take into account any costs you are likely to incur and offset them against the amount of rent you expect to achieve. Taking costs as a percentage of the rental income you expect to bring in, then first and foremost comes your mortgage and that may well be anything upwards of 70%. No landlord should be without residential property insurance which usually costs around 3% of the rental value. Take out 10% for the upkeep of the flat i.e. replacing damaged fixtures and fittings and factor in 8% for the void periods that no landlord wants but must allow for.

Forewarned is forearmed

Once you start adding these things up it soon becomes apparent the importance of keeping your finger on the pulse of your business and how susceptible it is to fluctuations in the housing market that you have little power over. Starting off with this knowledge though will help any prospective landlord understand the subtleties of the business and not to expect easy pickings without putting in the hard work.