If it wasn't a bank, how many businesses could charge £4.88 for something that was worth £3.40 when it arrived on your doorstep?
By Jeremy Gates
If it wasn't a bank, how many businesses could charge £4.88 for something that was worth £3.40 when it arrived on your doorstep?
That's how it happened this week for me when HBOS (Halifax Bank of Scotland) sent shares, instead of cash, as my latest dividend. Its dramatic share price plunge meant my £154 dividend bought shares now worth barely £100.
Even HBOS is getting a bit embarrassed by all this.
In its £4bn rights issue on June 21, some 2m small investors will be able to use a free dealing service to dispose of their rights, if they don't want the extra shares on offer.
Now my own holding has crept past the 500 mark, I will buy the extra 200 which will be offered to me. Bank shares have fallen so far that I believe their eventual recovery is more likely than financial Armageddon.
I am even bracing myself to buy even rockier Bradford & Bingley shares coming my way. If 55p sounded the right price to a Texan private equity team for a 23% stake in the wreckage, it might do nicely for me - one day.
All this makes me a high-risk player in the eyes of Nick Raynor at The Share Centre.
"For those who are gamblers and already holding free Bradford & Bingley shares, it might be worth having a go," he says, warily.
"But this is strictly for the adventurous and the brave - don't buy B&B shares with money needed for food or petrol."
As for beleaguered HBOS, Raynor says The Share Centre can't make a call amidst the current chaos.
"We advise investors to have some spare money set aside for the rights issue, and will look at it then on a week-by-week basis," he says.
The plunge in both B&B and HBOS has been accelerated by fears that the Buy-to-Let sector will throw up more bad debts among failing landlords.
If landlords eventually turn out to be better at balancing their books than owner occupiers in the mainstream mortgage market, both B&B and HBOS will be stronger business than they currently appear. Only time will tell.
INFORMATION: Share Centre (0800 800 00008); Norwich & Peterborough Building Society offers commission-free dealing through June and July for customers who open nominee share dealing accounts.
:: ONLY SELL YOUR HOME AS A LAST RESORT
Most experts seem to agree that house prices will fall in 2008 and 2009 - and there's a growing consensus the fall could match the 16% drop in the United States since 2006.
It's a serious blow for many who see bricks and mortar as a better financial lifebelt than a pension.
Older homeowners near the end of their mortgages have a cushion of comfort: the Prudential Equity Release Index reckons retired homeowners in England and Wales held £734bn of equity in their homes in February, £150bn of that in London alone.
Younger homeowners with little or no equity in their homes face stiffer pressure - especially those who needed expensive sub-prime loans to get on the home ownership ladder at all. They may face loan rates of 10%-plus when fixes expire.
House prices are falling while mortgage repayments, energy bills, motoring costs and home repair bills all go in the opposite direction.
No wonder growing numbers of homeowners see sale and rent back as the answer to their problems if they sell at a price below vacant possession value to an investor or a company, and remain as tenants in the same property - thereby raising cash to settle debts without moving home.
In the longer term, very few will benefit from this deal.
Most buyers in this troubled market use buy-to-let loans, allowing occupants to enjoy only an assured shorthold tenancy for a maximum one year. Long-term security of tenure is near impossible to achieve.
Michael Holt of financial advisor SYH Charterhouse says: "I am amazed by the speed at which sale and rent back is catching on. A surveyor told me he values 15-35 homes a week in Manchester and Liverpool, on for one buyer.
"The volume is huge. Typically sale and rent back applies to properties worth about £170,000, where owners have adverse credit histories. At the end of a fixed rate mortgage around 5%, their only option might be a Standard Variable Rate (SVR) loan costing 12%.
"If they don't sell, they will probably be repossessed."
Ray Boulger, at mortgage brokers Charcol, accepts the rising pressures on many owner-occupiers: "A year ago, you could get a maximum LTV ratio of 85% in the sub-prime mortgage sector, despite a heavy adverse credit rating. Now that is cut to 75%.
"Anybody who started with a maximum LTV probably wouldn't now be able to remortgage," he says.
At national and local level, companies and investors are moving strongly into sale and rent back - because property continues to be seen as an excellent long-term investment.
Says Steve Hilton at the National Landlords Association (NLA): "As many as 2,000 individual landlords, investors and property companies could be actively buying properties.
"It works for some people - but when it goes wrong, it goes wrong in a serious fashion.
"Let's be clear: no company can afford to pay 100% of the open market value of your home and let you stay for ever, particularly when prices are falling. In bad cases, it is alleged homes change hands for 50% of open market value- and tenants are told to quit after six months."
Dean Mirfin, at equity release specialist Key Retirement Solutions, maintains "this is targeted at vulnerable people with mortgage arrears or serious debts, often with the promise of resolving money problems in seven days.
"The worry is that people merely delay the inevitable. They get only 80% of what their home is actually worth, and once the cash has paid off debts, will they be able to pay rent any more easily than they paid the mortgage?
"Sale and rent back can simply replace one problem with another," he says.
Stuart Casteldine at intune, the financial services arm of Help the Aged, says: "Until sale and rent back is regulated by the Financial Services Authority (FSA) like equity release and home reversions, vulnerable people are likely to be ripped off.
"While reputable firms might allow tenants to stay for years with rent rises in line with RPI, other companies steadily put rents up. If you sell up at 59, what if you can't afford the rent at 70?"
With an Office of Fair Trading study of sale and rent back likely to report in the autumn, the 14,000 member National Landlords Association (NLA) wants to produce a Code of Practice later this year.
It wants transparency on pricing and fees payable, an independent disputes procedure and landlords entitled to seek possession of properties only if tenants break the terms of their tenancy agreement.
The NLA also suggests landlords breaching its Code of Practice could face 'significant' financial penalties - and a 'landlord lifebelt' scheme could enable fellow members to purchase a property if an original purchaser hits financial problems to avoid disrupting or evicting a tenant.
Many sale and rent back operators proclaim their respectability. But 'wide boys' avoid codes of conduct, voluntary or otherwise.
Says Michael Holt at SYH Charterhouse: "Emerging sale and rent back companies might purchase homes for 60-75% of market value and give no security beyond a 6-12 month tenancy.
"Only FSA-authorised and regulated firms offer a secure lifetime tenancy and real security for the future."
Ray Boulger says younger homeowners can negotiate with lenders to buy time; they might move from a repayment loan to interest-only, or extend the period of repayment. When they have minimal equity, the lender might lose money by forcing a sale.
Mortgage holidays are another possibility - but usually permitted only after previous over-payment on monthly repayments.
Lifetime leases to former owners are only really available to owners in home reversion schemes, in which they sell up to long-term investors. Home reversions account for 5% of all equity release plans sold to older homeowners.
The younger they are, the lower the percentage of vacant possession value owners are likely to get when they sell, but at least the problem of upkeep and maintenance for years ahead passes to the new owners.
One home reversion scheme from SYH Charterhouse is available to homeowners aged at least 50 years - with partners' aged at least 45. At this age, couples might receive less than 50% of open market value, although 70% of value might be available to older couples who will live in the property for a much shorter time.
In the harsher financial climate up to 2010, many owners may be tempted to sell up. Before they do so, they must seek professional and impartial advice.
INFORMATION: SYH Charterhouse (0800 169 5723 and www.syhcharterhouse.com) offers extensive coverage of sale and rent back on its website; Key Retirement Solutions (0800 531 6010 and www.keyrs.co.uk); Charcol Mortgages (0800 358 5560); National Landlords Association (0207 840 8900).
POUNDNOTES
:: Despite the credit crunch, card companies are chasing customers with deals, says Samantha Owens at Moneyfacts.co.uk. She says the Capital One card, with 0% deals to both purchases and transfers until September 1, 2009, is one of the longest 0% deals (nearly 15 months) offered for ages - and compares with the maximum 12-month period available a year ago.
However she warns cards with 0% deals are not a licence to spend. Nevertheless, those with a balance to transfer can benefit for up to 15 months with no interest to pay and only one balance transfer fee.
Those with an unavoidable purchase to make "who have the luxury of repaying over a much longer term with no additional cost" should be grateful, she says.
:: Savers are using the new £3,600 limit for Cash Mini-ISAs, according to Building Societies Association (BSA) figures which show £2.1bn flowing into tax-free savings accounts in April, against £1.77bn for April 2007.
As other accounts see rates chopped, bag your Cash Mini-ISA ASAP in this financial year.
:: The FSA website designed to teach teenagers about money - www.whataboutmoney.co.uk - is backed by Nationwide BS, which has already distributed copies of its "Teenagers' Guide to Money" to more than 5,000 schools and colleges.
Nationwide's Maxine Taylor says: "The FSA website is a really good tool helping teenagers cope with challenges of purchasing a house, going to university and managing household bills."
:: Coventry BS is upping the rate on its best buy 50 Plus eSave account to 6.25% (AER/gross pa), fixed for 12 months from the date of the account opening. The account for over-50s can be opened with £1, with unlimited penalty-free withdrawals. Go to www.thecoventry.co.uk to apply.
:: Online bank first direct has cut the cost of two-year fixed rate mortgages to 5.59% (APR 6.3%), with £499 booking fee and £999 arrangement fee. Borrowers who want lower fees pay 5.89% (6.2%) with £99 booking fee and £399 arrangement fee.
Loans revert to SVR - currently 6% - at end of fixed term.
Applications: 0800 244 824 and www.firstdirect.com.
:: HIGH FIVE SAVERS
Phone No Rate Account Period Deposit Interest paid
FirstSave www.firstsave.co.uk 7.10% (F) Fixed Rate Bond One, Two, Three Year Bonds £1,000 Yearly/ On maturity
Heritable Bank 0845 607 1212 6.50% 60 Day Notice Issue 1 60 Days (B) £1,000 Yly
Abbey www.abbey.com 6.50% Instant Access Saver Instant £1,000 Yly
Kaupthing Edge www.kaupthing-edge.co.uk 6.31% None £1,000 Mly
Chelsea BS 0800 272 505 6.31% 90 Day Notice 90 Days £250 Mly
:: TOP FIVE BORROWERS
Phone No Rate Period Max% Adv Fee Incentive
HSBC 0800 494999 5.63% (FTB) for two years 90% £249 Yes
Principality BS 0845 045 0006 5.58% to 30/06/18 75% £999 Yes
Mansfield BS 01623 676 345 5.65% for three years 75% £599 Yes
Skipton BS 0800 446 776 5.79% to 30/06/10 95% £799 Yes
HSBC 0800 494 999 5.89% to 31/08/13 90% £1,499 Yes
Code:
*F - Fixed
*P - Operated by Post
*B - Operated by Post/Telephone
*T- Operated by Telephone
*W- Operated by Internet
*H- Operated by Internet/Telephone
*S- Available only to those aged 50 or over
*R- Available to those aged 60 and over.
Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)