It isn’t rocket science….

So spoke Martin Wheatley, currently managing director of the FSA (Financial Services Authority) and chief executive designate of the FCA (Financial Conduct Authority). This was a comment he made as part of an interview (one of several that he has given over the past few days) about a report published by the FSA that revealed that many people who took out interest-only mortgages may never be able to repay them.  The report by the FSA following an in-depth 3 year investigation of the whole mortgage market has revealed that up to one-in-three borrowers have ‘no reported repayment strategy’.  What exactly does this mean?

Let’s go back a little in history to the time when we as a country were in the midst of a credit binge.  Millions of people were approved loans that quite frankly, should never have been given.  To many, interest-only mortgages were the only way to take that first step onto the property ladder. With home-owners only having to repay the interest on the money borrowed as opposed to the actual loan, it seemed a cheap way of owning a property.  In theory, very true; in reality, many people borrowed far more than they could ever have hope of repaying.  The catch with an interest-only mortgage is that if you borrowed £125,000, you still owe £125,000 at the end of the mortgage term.  With the value of property falling in recent years, many people find themselves in negative equity – the size of their mortgage is larger than the value of their home.  Ironically, through borrowing and being allowed to borrow more than they could repay these first time ‘owners’ will never own their own home.

The nuclear fall out of the credit binge and subsequent credit crunch and accompanying recession led to reports such as the one conducted by the FSA.  The FSA itself is being split into two: one part being the Prudential Regulation Authority (it will deal with the operation of the financial system through regulation of all deposit-taking institutions) and the more publicly-minded Financial Conduct Authority that will deal with the regulation of the conduct of the retail element of the financial markets.  In layman’s terms it will regulate how financial products – such as mortgages –  are sold.  Very good, you may say, the greedy banks are finally having to get their houses in order.  Without a doubt this is true and much needed and over-due.  However, one should never forget that the ultimate responsibility for repaying a mortgage or the capital at the end of a loan term lies with the borrower, not the lender.  If you cannot afford to make the repayments, do not take out the loan, however much you want that property.  The FSA report announces that there will be strict new lending rules. Potential purchasers will only be able to take out an interest- only loan if they have an obvious way of making repayment  – and more importantly – can prove this to the bank. The reckless behaviour of the banks in recent years has created the nightmare situation that many people now find themselves in, but some responsibility has to be taken by the customer who chose to borrow the money in the first place.

It may well prove in the future more difficult to obtain a mortgage; but if you cannot prove that you have the means to meet your repayments, then you should not be attempting to kid yourself or the mortgage provider.  As Mr Wheatley said, “It isn’t rocket science”.


Old-fashioned deposits needed…

More and more schemes are being launched to stimulate the housing market many of which are proving to be controversial.  None more so than the “Shared Appreciation Mortgage”.  To explain what this is, let’s go back a bit: in the good old days when mum or dad would lend you the 5% deposit to buy your home, you owed mum or dad the amount that was lent to you eg. £5000. As history and family Christmases show, some paid it back and some didn’t.  Under the new Shared Appreciation Mortgage, a financial institution lends a first-time buyer a 5% deposit, but the small-print will tell you that you will always owe them 5% of the value of the property rather than the actual amount borrowed.  So, whenever you decide to sell the property, you will have to repay 5% of the sale value to the lender.  Over ten years, your initial £5000 loan may end up being £10,000 or more.  Whilst this may genuinely help people get on the property ladder, the moral of the story is still; work hard, save hard and remember your grandmother’s birthday,

Scared of becoming a landlord?

Direct Line Insurance recently posted a fantastic advert/article in many of the property sections of the national newspapers.  Their marketing team outdid themselves by highlighting not one, but fifteen “top tips for landlords” all of which were on the money.  However, as accurate as they were, some potential landlords could be put off renting for the first time because of the work and effort required in making sure that the job is done properly. As previous blogs will testify, I am the first person to emphasise the need for rentals to be set up and managed professionally, but this does not necessarily mean that it befits a ‘one size fits all’ policy. What I am saying is that as admirable as it may be for a landlord to contact an insurance company, the person at the call centre may never have rented a house in their life.  Like any company with a customer-facing, sales-based call centre, they are going to try and sell you as many products as possible, even if the said product is not suited to your particular situation or location. We have all experienced the scenario whereby we have rung a call centre on a number of occasions but have never spoken with the same person twice.  As a potential landlord, it is imperative that all your paperwork is in order and you fully understand what is required by law and what is simply advisable for your particular situation. Prospective landlords should always go and discuss their requirements with an experienced lettings agent who is more interested in forming a long-term business relationship than selling an insurance policy.

The end to mortgages?

According to a recent groundbreaking report by Hometrack many homeowners in Britain will not have a mortgage within 3 years.  With few young couples and prospective first time buyers able to take out a mortgage, the profile of homeowners has changed dramatically.  Young people who have typically bought with a large mortgage are now forced to rent, or live with their parents.  This is because as an example,  a property worth £ 400,000 now requires on average mortgage income multiple of 15 times the average full time salary.  This of course was the type of lending that got us into trouble in the first place.  So what does this actually mean for the housing market?  Typically, the price that a vendor can accept is based upon what he/she owes.  Now a person who owns a property mortgage-free can accept whatever they want to sell their property and can then attempt to pass the ‘loss’ on to the next property that they are buying.  If that property is owned mortgage-free then a similar dynamic applies.  What this actually means is that house prices could be forced down even further because people are in essence, cash buyers.  The positive side of this is when prices start to reach a level that are affordable ie. not 15 times your salary, first time buyers will be able to re-enter the market and the whole housing cycle will start all over again.