Offset mortgages make headway

In these days when credit is getting harder to come buy, homebuyers are keen to keep their costs as low as possible. In that case they should consider an offset mortgage. This type of mortgage offsets interest charges on debt with returns from balances on their own savings. Offset mortgages can be very tax efficient.

The range of mortgage products on the market can be truly baffling – there are well over 8,000 products currently out there, but offset mortgages are fairly new inventions.

They are proving popular. In 2006, 170,000 offset mortgages were taken out, worth a combined total of more than £23.9bn – that’s 7% of all new mortgage money, and 8% of total mortgage market share. On top of that the growth year-on-year to March 2007 was 49% - over three times higher than growth for other types of mortgage.

These mortgages work by combining a person’s savings account (and may also include current accounts and ISAs, depending on the provider) together with their mortgage balance, while still allowing each type of account to be managed separately. It means that effectively the amount of savings are taken from the mortgage balance to calculate interest payments. They will, of course, not receive any interest on their savings.

The benefits accrue in a number of ways. Firstly, the reduced interest payments result in a lower total mortgage payment overall, and the mortgage term can be reduced. Increased flexibility also enables a borrower to make overpayments without penalty. Under-payments and payment holidays are also possible. That enables borrowers to work around the vagaries of day to day life. Another key benefit is that the interest they do not receive on savings – but which goes to reduce their mortgage repayments – is not subject to tax.

The take-up of these mortgages appears to demonstrate that borrowers are becoming more financially astute, as they are using their money more wisely. The number of providers has gone up by 400% in the last ten years, and there are now 250 offset products on the market.

Deposits go up on mortgages

Mortgage lenders are beginning to ask for larger deposits from first-time buyers as the credit crunch continues to take victims. Many lenders have withdrawn deals that enabled borrowers to take out a mortgage with only a small deposit – or none at all. Experts see this as the start of a process of providers tightening their lending conditions – and other building societies and banks are expected to follow suit.

Products that lent 95% or 100% of the property values have been scrapped by the Norwich & Peterborough Building Society (N&P). Their maximum loan-to-value is now 90%. For a £200,000 property, that means the borrower has to find £20,000 for the deposit – in addition to other fees and costs, such as stamp duty (which on a £200,000 property would be £6,000). Accord Mortgages, part of Yorkshire Building Society, has also done away with 100% lending. Alliance & Leicester has stripped back its 95% lending to only a few products, and Leeds Building Society requires a 100% loan to have a guarantor.

In particular, first-time buyers will suffer at the loss of these deals, as the less a deposit is, the easier they can get on the property ladder.

The credit crunch and accusations of less than responsible lending is causing providers to re-examine their lending criteria. In addition to the cut back in products, those that offer 90% lending usually have high fees attached. Alliance & Leicester, Halifax and RBS/NatWest all have a higher lending charge for borrowing at 90% or more. They claim that it covers the increased risk associated with higher lending. The charges often amount fort more than £3,000 on a typical mortgage.

Barclays, Bradford & Bingley, Lloyds TSB, HSBC and Nationwide, by contrast, do not charge more in these circumstances.

It is best to get as large a deposit as possible when taking out a mortgage, to get a lower fee, and a better interest rate.

Post Office now offering mortgages

The Post Office has joined the mortgage market. Borrowers can now get a mortgage over the post office counter, including a three-year fixed rate of 6.09%, with a competitive fee of £399.

For the three years, on a £130,000 mortgage, the repayments and fee would cost £31,080. You can get the post office mortgage over the counter at branches in the North East, or online or over the phone.

The deal appears to be a good one, although it is not at the top of the market. A three-year fixed deal is on offer from Stroud and Swindon at 5.7% and a fee of £799, totalling £30,100 over the three years for a £130,000 mortgage.

The Post Office is offering a range of mortgages, including fixed rate buy-to-let mortgages and mortgages for people who cannot prove their income – those who fall into the now well-known sub-prime category.

Across the mortgage market some good fixed-rate deals are appearing. Despite the credit crunch and the increasing Libor (inter-bank) rate, the money for fixed deals is based on the swap rate, which has come down recently. Woolwich has cut some of its fixed rates by 0.5%. Skipton Building Society has a 5.79% two-year fixed deal to November 2009, plus a £599 fee. For a £130,000 mortgage that would amount to £20,302 for the two years.

Trackers and variable rates are based on the Libor, and these are on the way up. The variable rate on ING Direct’s variable mortgage for customers will go up by 0.25% from the beginning of October, despite the stability of the Bank of England base rate since July. Both new and existing customers will be hit as the rate moves from 5.99% to 6.24%, adding £24 a month to repayments on a £130,000 mortgage. Since ING introduced its mortgage base rates have gone up by 1%, but its mortgage rate has gone up by 1.1%. In the mean time it has only passed on two of the last three interest rate rises to its savers.

Problems in buy-to-let market

Being a buy-to-let investor is becoming a tougher proposition in the current financial climate. Buy-to-let investing has become very popular in the last few years. As savings rates fell and pensions reduced in value people began to look for a better way to invest their money. As property prices seemed to be going up relentlessly and as mortgage rates were low, investing in property as a buy-to-let landlord seemed a great way to boots a financial portfolio.

Experts now warn that there are no more easy pickings. It is not a ‘get rich quick’ scheme. In 2006 330,000 buy-to-let mortgages were taken out, worth a total of £38.4bn, according to the Council of Mortgage Lenders. Now mortgage rates are higher, the price of property is higher, and there is no guarantee that the property you buy will increase substantially in value or that you will be able to command the rental income you need to cover your mortgage interest payments and other costs. The market is tougher, and those looking to get into the market should be wary of easy buy-to-let deals, and still mark off against a strict checklist, or dreams of property riches may turn into financial disaster.

Worse news has also arrived, of possibly fraudulent buy-to-let borrowing. According to surveyors and lenders underhand borrowing exists on an unknown scale on the books of mortgage banks. Problems are coming to light because lenders are checking through their risks following the US sub-prime crisis, the credit crunch and the funding problems that have caused the crisis at Northern Rock. The problem areas appear to be with buy-to-let deals on new-build flats in cities where tenant demand has fallen and values are going down. The main concerns are where property prices have been inflated by the developer, and loans are taken out against those values. Actual prices paid were lower. In Thamesmead, south-east London, this sort of fraud is already being investigated by police.

“This could,” said Nationwide director Matthew Wyles, “be the tip of the iceberg. Lenders told valuers to seek out all hidden deals between buyers and developers, but were whistling in the wind. Off-contract transactions took place where not even solicitors knew of arrangements.”

Stamp duty for Londoners

The Treasury is getting a boom of its own from property as first-time buyers in London now have to fork out a staggering £7,898 on average for stamp duty. Property search engine Zoomf.com reports that the price of a one-bedroom flat in central London now averages £263,253. The stamp duty bill on that amount is 3%, nearly £8,000, meaning it has gone up by an average of 807% since 1997. On such a property a would-be buyer would be advised to pay a deposit of 5%, or £13,162, taking the total required by first-time buyers to over £21,000, and that ignores legal fees, costs of moving, furnishings and appliances.

Ten years ago the average price of a London flat was a mere £87,088, and stamp duty on the property would have been £871. On Zoomf.com there are tens of thousands of properties for sale, but only four of them in central London come under the base threshold for stamp duty of £125,000. Of these, three are studio flats in Kennington in an ex-local authority block, and they’re all over £120,000, and the fourth property is a houseboat.

Co-founder of Zoomf, Mike Carter said: “Stamp duty is an unfair levy on many, presenting yet another barrier onto the housing market for first-time buyers.” There have been calls for stamp duty to be changed so that only the amount above a threshold has that percentage of tax added to it.

Figures from the Council of Mortgage Lenders show that of all new buyers, 60% are paying stamp duty, adding to the problems of the worst affordability of houses for 15 years. The figure for all house buyers is that a record 86% now have to pay stamp duty.

CML figures show that first-time buyers are borrowing more than they have ever done, with loan levels at 3.37 times their average income. In June mortgage interest payments represented 19.1% of income. These were both up from the April figures of 3.33 times income and 18.7% of income.

Housing market heads for correction

The problems Northern Rock have experienced in the last couple of weeks represent the first run on a British bank since the 19th century. The queues that followed the news that the bank had gone to the Bank of England to ask for more money were unprecedented – although they were very orderly and good humoured, in British fashion. The confusion and panic in the silver-haired ranks spelt big trouble for Northern Rock form which they are unlikely to recover. Despite brave words from the top and a slight recovery in the share price on Friday the truth is that the bank will need a buyer to end their misery.

Despite the bad news coming from the United States in the months leading up to this, it is unlikely that any could foresee this dramatic turn of events. The situation has lurched from one crisis event to another and it really has been a down turning spiral, culminating in Northern Rock’s predicament. As the queues to the banks around the country were shown on the evening news, you could almost see consumer confidence evaporating.

As news also comes through that property prices are down in many areas, there can be few doubters now that the housing boom is over in the UK. The figures suggest the boom is over and so the experts. Alan Greenspan, former chairman of the US Federal Reserve, says that the UK housing market has “got to turn”.

As consumer confidence begins to shred it is likely that the buy-to-let market will suffer as speculators shy away from an increasingly risky investment. People who were thinking that they might move house will sit tight for now. Property prices are bound to fall, but it’s not all because of the recent credit crunch. Over the past decade the UK housing market has seen record growth. Comments came that house prices were 10, 20, 30% overvalued; the market looked unsustainable as the affordable lack grew – especially for first-time buyers. Recent events have triggered a reality check that has been overdue.

The number of enquiries for homes has fallen in the last couple of months, so buyers may find some bargains out there, making offers below asking price and expecting to have them accepted. However, it’s not the market to make a quick profit. If you buy cheap now, you won’t be able to sell for much more for some time.

Difficulties ahead for UK home owners

Former US Federal Reserve chairman, Alan Greenspan, has spoken of ‘difficulties’ ahead for home owners in the UK, with rising interest rates likely to bring rising house prices to a halt.

According to Mr Greenspan the UK housing market is under more threat from the world ‘credit crunch’ than the US because of its higher number of adjustable-rate mortgages which are linked to interest rates.

Mr Greenspan, 81, said: “There are going to be some difficulties. You’re already beginning to see the mortgage rates are moving. A lot of the two-year fixes are beginning to unwind, and the teaser rates are going. It’s going to turn, it’s got to turn.”

Despite recent downward figures, he also warned that inflation soon could go up again and the Bank of England, which has raised interest rates in the past year from 4.5% to their current 5.75%, may have to take them into double figures to keep prices down.

The pessimistic comments come after recent figures suggest the UK housing market is slowing down, but Mr Greenspan still believes the UK economy is in a position to deal with any problems.

He said: “You haven’t had a taint of a recession for an extremely long period of time, and a good part of that is the flexibility that came out of the crush between Scargill and Thatcher. That was the defining moment, and to their credit Blair and Brown did not endeavour to unwind it. They recognised that there was something fundamentally good for British labour in having a flexible economy. It’s like tough love, as we call it. It’s unhappy-making, but in the end it works.”

Greenspan has been impressed by new PM Gordon Brown, and his commitment to ‘globalisation and free markets’ and the fact that he ‘did not seem interested in reversing much of what Margaret Thatcher had changed’.

In his book Age of Turbulence, Adventures in a New World, Greenspan, writes: “Britain’s evolution from one of the most ossified economies in the years following World War II to one of the most open economies in the world is reflected in the intellectual journey of Gordon Brown.”

Alliance & Leicester shares tumble

In the wake of Northern Rock’s problems, shares in other banks have been caught in the avalanche too. Alliance & Leicester shares have tumbled, with one third of its value wiped out as rumours grew that it was about to follow Northern Rock.

Alliance & Leicester is the UK’s seventh largest bank; Northern Rock is the fifth largest UK mortgage lender. Rumours had it that the Alliance was exposed to the same kind of problems that saw Northern Rock going to the Bank of England for emergency funding last week.

Alliance & Leicester has a share of the UK mortgage market at around 4%, and, like Northern Rock, relies strongly on the money markets to fund the home loans, but not as much as Northern. Alliance changed from a building society to a bank in 1997, and has been trading at a share premium for a while as it has been seen as a takeover target. Now, however, its share price has fallen dramatically.

Alliance & Leicester has not been the only bank to suffer following Northern Rock’s own crisis. Bradford & Bingley’s share price fell by 15% and HBOS saw its shares lose 5%. Barclays saw a more modest fall of 2.5%.

A spokeswoman for Alliance & Leicester said: “What has happened with our share price today has been driven by what is going on in the retail banking sector, where HBoS, Barclays and Bradford & Bingley have also been hit. The fall in share price has nothing to do with our profitability - it is just a knock on effect of what is happening with Northern Rock.”

On Monday of this week broker Merrill Lynch downgraded its recommendation on Alliance & Leicester from ‘neutral’ to ’sell’, as it believed a takeover is now unlikely, especially with cheaper UK assets available for an interested buyer.

Mortgage borrowing fell in July

Mortgage borrowing fell to its lowest level for three months during July, backing up claims that confidence is beginning to ebb from the property market.

Figures from the Council of Mortgage Lenders (CML) show that there was a drop in lending in July compared with June. The slip is not unlike similar falls in the summers of the past three years, but the CML said that confidence was waning due to high house prices, the five interest rate rises since last August and recent reports of a slowdown in house price inflation.

Michael Coogan, CML director-general, said: “A slight fall in lending between June and July has emerged for the third year in a row, so of course we cannot read too much into a single month’s figures. But the long-anticipated slowdown in the housing and mortgage markets may now be beginning to materialise. Last week’s Monetary Policy Committee decision to hold rates was exactly as expected. Both market conditions and sentiment are coming off the boil, and affordability is ever more stretched, but consumers should not expect any immediate easing in the financial pressures they face.”

The number of mortgages for homebuyers fell to 94,000 in July, down from 102,000 in June. At the same time the number of remortgages dropped from 96,000 to 92,000, from June to July.

First-time buyer mortgages fell by 7% from June to July, to 32,400, as would-be home owners continued to struggle with increasing problems with affordability. An average first-time buyer is now looking to borrow 3.39 times their salary, which is a record. It was 3.37 in June and 3.23 in July last year.

For those taking their first steps on the property ladder, the average salary of single or joint borrowers was up slightly in July, to £35,637, and the amount of that income buyers will need to pay their mortgage interest was up to 19.7%.

Despite recent rises, in July fixed rate loans were still the most popular type of mortgage, accounting for 79% of all loans.

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