Accidental landlords
Most accidental landlords, the ALs, are simultaneously becoming tenants, installing themselves in the houses of other families who cannot sell. Often these changes of address mean an upgrade: one household I know has just swapped an Ikea kitchen for Bulthaup and a smarter road. This upwardly mobile manoeuvre was made possible by the new downward direction of rents, although this should be seen in the context of sharp rises this year, averaging 12%.Knight Frank, the estate agent, forecasts that much of this increase could be wiped out, with rents declining by as much as 10%. Tenants, spoilt for choice, are driving hard bargains, with the number of properties for let surging in most regions. The predicted reduction in rental income presents a dilemma for those ALs whose mortgages remain stubbornly high. How they act next will help to determine the next chapter of the housing market's history.
Will ALs receiving insufficient rent to cover their mortgage payments bow to the inevitable and cut the asking prices of houses, selling them to ALs who have made similar calculations? Will they then buy their next homes from other ALs who have participated in this mass reality check? Will there be a website where they swap experiences and property details? Or will some ALs find that they have acquired such a taste for the bohemian quality of the tenant lifestyle that they are happy to contemplate the new costs and duties soon to be faced by all landlords. Current responsibilities include the tenancy deposit scheme and regular gas appliance maintenance. But from October 1, all tenants will have to be given an energy performance certificate for the property. In addition, the Law Commission has recently set out sweeping reforms to improve the condition and management of rented accommodation.
If you know an accidental landlord, ask them what they think of this and keep asking questions over the next few months, for what your friend and all the other ALs decide to do matters to all of us.
Long-range weather forecasts
Commentators who were previously engaged in a contest to get all of the misery right in their forecasts for the housing market have now switched to a race to point to the time when recovery will begin.This switch of emphasis may itself be a significant moment, not least for those investors and first-time buyers keen to buy before they see the light at the end-of-the tunnel, a huge gamble but one that could bring the largest gains.
Earlier this year, Yolande Barnes, Savills' head of residential research, forecast that, if the credit crunch sticks around, prices could fall by 25% by the end of 2009. The timing of the turnaround will vary from region to region. However, its beginning is set to coincide with the next Olympics in 2012, so don't hold your breath.
This all supposes that it is the credit crunch that has thwarted the desire of buyers to pursue dream homes, not any permanent disaffection with property. This is probably a reliable assessment of the national mood, which is currently blue but unlikely to be permanently that way.
Avoiding a costly arrangement
Mortgages are now a major headache for many people but there is one additional problem, which some borrowers forget to build into a budget: the arrangement fee.In theory, this is levied to pay for administering and reserving money for a specific mortgage, and it applies to re-mortgaging as well as customers using a particular finance house for the first time.
Some lenders insist it is paid separately up front while others allow the borrower to 'roll it up' and add it to the total loan. The fee can be a flat sum or a percentage of the amount borrowed.
Most consumers understand the need for an administrative cost but these fees have soared in recent years. Industry analysts say many lenders now use the fee as a way of reducing the 'headline' interest rate to make a mortgage appear cheaper than a similar product offered by a rival company.
This means a borrower must carefully calculate the impact of an arrangement fee on a loan. For example, if you borrow £100,000 at an interest rate of 4.5% that would cost £4,500 a year in interest. If the borrower pays an arrangement fee of £1,000, that would be a total of £10,000 over two years.
If the same lender offers a deal with no arrangement fee but a slightly higher rate of 5%, then the borrower would pay £10,000 over two years - no difference overall but no £1,000 fee to be paid up front.
Arrangement fees have the most significant impact on small loans. Lenders often levy a flat charge (most are between £299 and £699) irrespective of the size of the loan. If you add £299 to a £100,000 loan it is under 0.3% but if you add it to a £25,000 loan it represents well over one percent of the amount to be repaid.
The duration of your repayment term is also important. For example, a recent product by one lender had two options - a rate of 4.78% with a £499 arrangement fee or a rate of 5.29% with no fee. If you had a 10 year £100,000 repayment mortgage and you chose the higher rate, you would pay an extra £3,573.20 over the 10 year term, a high price to avoid a £499 fee.
The lesson is clear. You have to:
(a) Know how long your mortgage term will be;
(b) Calculate the total repayments on a mortgage, if the fee is 'rolled up' against the total repayments or if you pay the fee 'up front.'
(c) Compare those figures with the total repayments on a mortgage without any fee at all. Failure to do that may cost you literally thousands of pounds – and these days, every penny counts.
By Graham Norwood
Buying overseas
Page: 1