Interest-only mortgage numbers go up

The number of interest-only mortgages being taken out has reached its highest for seven years. That number is more than a third of homebuyers who took out a mortgage in June. Figures from the Council of Mortgage Lenders (CML) show that 33,200 out of 101,900 who bought a property in June took an interest-only loan. The CML began compiling monthly statistics in 2002, and this is the highest number taking out such mortgages since then, and the highest average monthly total since 2000. Of those, 24,800 have not specified how they intend to pay off the loan.

Taking out an interest-only mortgage means that when their mortgage term ends they will still have to pay back the original loan. There is a fear that these people are giving themselves a potentially huge problem for the future, if they have made no provision to save to repay the loan.

The biggest increase in the number of borrowers taking out this kind of mortgage is in those people who have come to the end of two-year fixed rates. It seems they are switching to interest-only mortgages to keep their payments down as close to what they were before on the preferable rate. Otherwise they would suffer a huge increase as a result of the base rate having gone up 1.25% in the last year. It has been a fear in the industry as to what would happen to people coming off those good fixed rates. Now, it seems, we know.

The monthly repayments with an interest-only mortgage on a £130,000 loan are nearly £200 cheaper than with a repayment loan, based on an example 5.69% two-year fixed rate with a £899 fee from Cheshire Building Society. If, however, it then reverts to Cheshire’s standard variable rate (7.79%), the total cost of the mortgage over 25 years would be £378,965, which works out as £89,104 more than a repayment mortgage would cost.

If your repayment budget with only stretch to an interest-only loan, then you should try to pay off your debt when you can; most lenders allow you to overpay by 10%. For example, you could put your first £3,000 of savings each tax year in a cash ISA, as long as it earns you more interest than that charged on your loan. Another option is to treat interest-only as a short-term solution and to switch to a repayment mortgage as soon as possible.

Commercial mortgages and their uses

Commercial property relates to warehouses, factories, farms, retail premises, pubs, hotels, offices, investment property, nursing and care homes, and others.

Commercial mortgages are really no different to buy-to-let mortgages on residential property. You, as the landlord, would typically have to find a deposit of 20-25% of the purchase price, and get a 20-year mortgage for the rest.

As with regular buy-to-lets, repayments are made from the rental income, and mortgages are granted on the viability of the tenant, and not on your income or assets.

There are different lending criteria for different categories. Warehouses, factories, offices and business units usually mean that the lender will seek confirmation that profits from the business will be enough to meet monthly payments.

For retail premises that are owner-occupied, lenders will require evidence of the business having successful trading in the past, and a positive current cash flow.

For retail premises that are being used for investment purposes, the lender may vary the terms of the loan depending upon the quality of the tenants.

Commercial mortgages tend to have slightly higher rates than homebuyer mortgages – maybe 0.3% higher – but that is changing as the market becomes more competitive.

Arrangement fees of up to 1% are typical for commercial mortgages, and personal guarantees on the part of directors may be required.

When you are considering this type of borrowing it is probably best to approach your own business bank first (or personal bank if you’re not yet set up as a business) as they will already have details of your incomes, assets and expenditures and credit worthiness, or those of your business. You may also wish to approach a specialist commercial mortgage broker to see if they can find a lender that can better the offer from your bank.

You will probably also have to present a business plan to your bank as the lender will want to understand how you plan to use the premises and make money from them.

Quite a bit of commercial property is bought at auction, and you can get fast-track loans for these, but they usually come with a higher arrangement fee.

Student debt falls in 2007

Debts for older people are increasing, but research by NatWest has shown that the average student debt at the time of graduation has come down for the first time in seven years.

It may go against popular thinking to see that older generations are struggling with debt than youngsters (aren’t parents supposed to be lending to their children to help them through university?) – NatWest’s figures show an improving situation for graduates.

According to the research, the average student debt this year is £12,263, and that’s a fall of £886 or 6% on 2006. One surmised reason is that more students are getting jobs during term time to help with the expenses of life at university. Around 50% work to help pay for their studies and more than four out of five due to start university this September say they will look for paid employment.

Nevertheless, however encouraging the figures appear, student debt remains high. Recently a report has shown that the average debt is £7,500 with a third of students having debts of over £10,000 – in student loans, credit cards and overdrafts. Top-up fees introduced in 2006 are now £3,000, and these will see that student debt will rise again when students graduate in 2009. The estimated figure for that year is £22,000.

The result of that is that young graduates will be paying off loans for more than a decade after they’ve completed their education, and undoubtedly more will be forced into bankruptcy.

Many students try to cover their debts by working while at university, but of course they are trying to study as well. It can mean their weekends are taken up behind check-out desks in local supermarkets, or behind the bar in the local pub. Debt has become a way of life for students and graduates, and the increased fees will mean that future generations of students will be worse off, with credit cards and loans helping them to manage.

Housebuilders regain confidence

Housebuilders in the UK have confidence in their market in spite of rising interest rates, a forecast of a slowdown in the housing market and recent stock market turbulence.

Chief executive of Britain’s second largest homebuilder, Persimmon, Mike Farley, said that families were still prepared to take out mortgages to buy their homes in some of the most expensive parts of the country, like the South East and the Home Counties, despite the rising cost of buying a home. He said: “Mortgage funds are readily available. There may be some slight tightening but I believe generally there is plenty of money available for mortgages. We see no sign of this changing.”

John Hunter is chief executive of upmarket London developer Northacres. He believed there was no sign of a downturn in the global appeal of central London prime residential property. Despite the latest figures showing the merest drop in London prices in July, most experts predict that property prices in super-prime London – areas like Mayfair and Belgravia – will almost double over the next two or three years, with rich foreign buyers fuelling the demand.

Recent events, like the drop in inflation to 1.9%, and the turmoil in financial markets, have made a rise in interest rates to 6% less likely than it was a few weeks ago. Interest rates may, after all, have peaked. September is traditionally a month when buyers come back to the market after a quiet summer.

Persimmon saw a 9.8% rise in pre-tax profits to £281.1m for the first half of the year, just ahead of City expectations. Its completed sales fell from 8,226 in the first six months of 2006 to 8,002 for the same period in 2007. Average selling prices, however, went up from £188,427 to £189,225.

Northacre benefited from luxury developments in London and profits were up by 12% to the end of February.

Endowment mortgages still causing problems

Endowment mortgages continue to create ripples. The main selling period for endowment mortgages was in the late 1980s and early 1990s. A monthly investment into an insurance policy was supposed to earn enough to pay off a mortgage amount after 25 years of investment – and leave the investors with a handy cash sum left over to do with as they wished. The policies are now largely discredited and most will not achieve their original targets.

There are still more than 200,000 people who bought endowment policies who are owed compensation to a total of £200m as the marketing material of insurers did not make clear enough the impact of charges on future returns of their policies.

The September issue of Money Management magazine reports that the new controversy is set to entwine insurers such as Standard Life, Prudential-owned Scottish Amicable, and Resolution-controlled Scottish Mutual.

Endowment providers were allowed to use ‘standard’ charges when they gave illustrations of future maturity values to potential clients when endowment selling was at its peak between 1988 and 1995. These meant that the illustrations were exactly the same for all companies, but the charges applied were not; some were much higher than for other companies, and the result was that there was an immediate risk of a shortfall in policies as soon as they were taken out.

Insurance giant Standard Life, for instance, charged customers £36.24 a month on a 25 year endowment designed to repay a £25,000 mortgage. However, if it has used actual rather than ‘standard’ charges, its premium would have been £40.16. The result is a shortfall of 12% - £2,700 – which was built in from the start. Standard Life has decided not to pay compensation, saying that it ‘followed all the regulator’s requirements.’ HBoS owned Clerical Medical, by contrast, has decided to set aside £20m to meet the cost of claims.

Mortgage borrowing still on the rise

The Council of Mortgage Lenders has reported that £34.4bn was borrowed during July for mortgages. This is an increase of 13% on the £30.6bn borrowed in the same month in 2006. It may be that the fear of further interest rates continued to drive homeowners to search for the best mortgage rates last month.

The CML believes that lending is being energised by large numbers of people wanting to remortgage, as they have concerns that the cost of borrowing will soon be on the way up again after a brief respite in August when the base rate remained at 5.75%. Five rate rises in 12 months have left homeowners reeling, and taking any chance they can to find a good mortgage deal.

The rising rates and forecasts of a property market slowdown have not managed to tame the rise in mortgage loans which should reach a record for a year of around £360bn for 2007.

The British Bankers’ Association issued mortgage figures for July, saying they were surprisingly strong, with members reporting net mortgage lending up by £5.7bn, higher than June’s rise of £5.4bn. The strong figures for July were not expected on the back of the rate rises and the rickety housing market. Home ownership evidently remains the goal of most people and many were remortgaging in a relatively quiet period.

Building societies in the UK, however, have seen a fall in gross lending and a drop in mortgage approvals in July compared with 12 months ago. Net advances in July fell to £598m – a year ago they were £1,662m. The conclusion by the Building Societies’ Association was that household finances will continue to be squeezed by increasing mortgage payments, and even if interest rates have reached their peak, then consumers will have to consider all future outgoings very carefully.

Buy-to-let boom may not last for ever

It used to be that taking out a buy-to-let mortgage would cost you more than your mortgage on your own home, but you can now find a mortgage cheaper for a buy-to-let than for a regular residential home loan.

Given that interest rates have been on the rise, rental yields on the downward slope and there finally appears to be a slowdown in property prices, it is strange to read the figures from the Council of Mortgage Lenders showing that landlords took out buy-to-let loans in record numbers in the first half of the year.

Just one of the pieces of bad news might be enough to deter would-be buy-to-let investors, but even all three seem unable to put people off. Instead all up to date surveys and data show that landlords are unfazed, even though they need to subsidise their buy-to-let mortgages every month.

There may, however, be some sense behind the seeming madness. There is still a shortage of houses and will be for many years to come. House prices may have slowed, but are still going up, and many would-be first-time buyers can no longer afford to buy, so they rent. Most landlords accept that they may not may big profits day-to-day, but are looking for long-term capital growth. There are few predictions of a full-on housing price crash; just a gentle flattening of the curve, which will no doubt pick up again in a year or two.

Problems do exist on a local basis. Some places are seeing an oversupply of property, and landlords in such places do struggle to find tenants, particularly for new-build flats in some towns and cities. Auction houses have said that there has been an increase in repossessions of those type of properties.

The mood in the property market is still good, but it may not last for ever.

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