Mortgages Uncovered

John Charcol, the mortgage lender (sold previously by Bradford and Bingley Building Society), had to lay off a quarter of its workforce by shutting 3 of its offices in Manchester, Birmingham and Guildford on Monday 30th June. Thirty sales staff lost their jobs and the company has now 5 of its’ 8 offices left.

John Charcol, one of Britain’s largest mortgage brokers, announced that it had to downsize in preparation for further major contractions in the market and had to oust their chief executive, Ian Kennedy and financial director Nigel Ward.

The original founders of the company, Charles Wishart and John Garfield along with their investor Jon Moulton had to inject a large unpublished sum into the business for working capital following the original £1.5 million sum which the founders had to pump into the business in March just to keep the company afloat.

Garfield is to take the helm as executive chairman at John Charcol and stated that the sudden actions they had taken were fundamental to survival and long term profitability of the company.

John Charcol announced it would be laying off another 39 employees across all its’ divisions.

The Bank of England published figures on 30th June showing the number of new mortgages approved on properties had dropped by 28% in May to 42K, which is the lowest level since 1986.

The number of approved loans has now dropped 64% against last year’s figures. Loan approvals have now sunk way below levels which were seen at the worst point within the early 90’s housing market downturn.

On 4th July, Nationwide Building Society cut a number of home loan deals by over than a ¼%.
The building society announced its 2yr tracker rates would fall by up to 0.27%.

The UK’s biggest lender, Halifax, announced that it is to cut its tracker mortgages by an average 0.12 points. Halifax is to increase the cost of fixed rate mortgages by an average of 0.23 points, whilst

Nationwide said it would cut its 2-yr fixed rates fractionally. Nationwide’s largest cuts are reserved for those with a minimum of 25% equity.

People needing mortgage loans of up to 90% of their property’s value, previously denied the rate cuts will see lending costs fall by 0.07 points. Property owners with a 5% deposit have been completely denied any reduction. Adding nearly £1,000 for arrangement fees, for the lowest rate tracker deal Nationwide offer, borrowers are now required to pay £1,499 to take advantage of this.

Previously Halifax had increased its arrangement fees from £1,000 to £1,499.

The arrangement fees for mortgage deals have reached their highest following the credit crunch, with some financial institutes now charging £10K to set up mortgages of up to £500K.

The decision to cut their tracker rates at Nationwide has been copied by some other lenders as Abbey cut their tracker rates by 0.20% for anyone with 25% equity and Birmingham Midshires are expected to reduce some of their rates by 0.4%.

Intelligent Finance cut its offset tracker by 0.1 point after raising fixed rates by the same amount.

Adjustable rate Mortgages

These offer a homeowner a fixed rate for a specifically named period. It’s a good option for people who do not have brilliant credit scores when they may not qualify for a fixed rate mortgage.

The term for these adjustable is normally 1, 3 or 5 years. If you can get a 5 year adjustable deal you have a great deal. If you think you may sell your home within 5 years you could really reap the benefits. The rate on these types of mortgages adjusts with the market.

Adjustable rate mortgages can be a burden though. If the rate adjusts, the increase in monthly payments may be one that the borrower did not anticipate. Your payment could even increase over a hundred pounds from one month to the next.

When the agreed fixed period finishes, the loan could rise as much as 6% thereafter. A loan payment of 12% interest is a bit grim. Unless you look at refinancing the loan your monthly payments may literally go through your own roof.

Fixed Rate Mortgages

This is the mortgage you need to aim for.

Fixed rate mortgages will remain as the same monthly payment for the life of the loan. If you can get your deal in a good market (needless to say that would not be at the moment), a decent interest rate of 5.5% is brilliant and if interest rates go up over the years, you don’t have to worry. You are secure at the 5.5% at the beginning of your deal.

The downside of fixed rate mortgages are that if you catch an unfavorable interest rate you could be locked into an expensive mortgage rate for the duration of the loan. You could of course take advantage of a lower interest rate through refinancing when the market rates lower.

Although refinancing means some of the time associated with the initial mortgage process and will mean you have to part with a little more cash to sort this time-consuming exercise, long term it makes sense.

Over 4 million households over the past year are reported to have taken out either a credit card or a personal loan to pay their rental or mortgage costs shows a survey carried out by Moneysupermarket.

Many experts in the industry have commented already on how serious the situation is for people who have to revert to this type of borrowing for living costs especially when you consider that some credit card charges are over 15% apr.

20% of people in their 40’s have reported to resorted to high interest borrowing for mortgage or rental costs along with many younger homeowners.

There are around 1.4 million people whose short term fixed rate mortgage deals finish this year according to the CML, currently average standard variables are around 7.01% so increases to monthly outgoings will shoot up considerably for many.

Landlord Mortgages have stated that they expect rents to rise by over 20% over the course of the next 12 months not just because of the overall rise in mortgage payments but also as there are less buy to let properties being purchased and there is less rental accommodation now available which will keep rental costs high.

It really is time for all of us to start prioritizing our expenditure, it’s well worth while to shop around and look at price comparison sites for heating, insurance, electricity and other household utilities you may surprise yourself at how much you could save.

The beginning of July heralds the launch of the MarketGuard, a new product that enables homeowners to insure themselves against the ever increasing rises in monthly mortgage payments. A fantastic idea but if you are considering it do try and look a little closer, it’s rather expensive.

There is a strong likelihood that we could see more rate raises in the near future and Bank of England knows it is at risk of damaging the economy if it does raise the base rate to combat these rising prices.

Here comes MarketGuard, a brand new company covered by Financial Services Compensation Scheme and based in Gibraltar.

Let’s have a look at how it works then, well it’s similar to many insurance products where you pay a monthly premium which is to protect you against a rise in your mortgage rate. Should your mortgage go up the insurance company will give you a pay out, however, much like a car insurance policy there is an excess, therefore, you receive a payout only if your mortgage goes up by a certain amount.
For instance, if your mortgage was £100K repayment with 20 years left, 1% excess would be £42 a month and 1.5% £27 a month etc. Insurance cover for interest only mortgages is as you’d expect more expensive and this would be 1% excess at £57, 1.5% at £37.

The MarketGuard policy would not cover you for rises in payments after the end of your fixed-rate deal ending and you moving to a standard variable rate. However, if you have a tracker or variable mortgage or a fixed-rate deal due to end in 3 months you can use MarketGuard.

MarketGuard will only cover interest rate rises directly caused by increases in the base rate.
The most notable clause of this policy is that it only runs for 2 years at which time you can apply for a renewal but it will be based upon a reset interest rate for which you get protection for future interest rate rises and not the previous 2 year’s rises.

Using the previous example of a £100K repayment mortgage with 20 years left at an interest rate of 7 percent and monthly repayments are £707, if you opt for 1% excess with MarketGuard costing you £42 a month over 2 years (this will come to a total cost of £1,008). If after one year your mortgage rate increases hugely from 2-9% staying at 9% for the whole of the 2nd year with MarketGuard monthly payments you would be paying £761 in the 2nd year and without the protection you would pay £816 a month.

This means you save £55 a month a total of £660 over the year which is over £300 less than you have paid on your insurance premiums so you would be worse off with MarketGuard.
Additionally, interest rates would need to have risen by 2.5% or over in the 2nd year for you to save money overall with the plan.

I would be interested to see if MarketGuard becomes a more long term attractive solution in the near future, personally it would not be beneficial for me as it stands at the moment.

Home Purchase Plans (HPPs) came under the FSA’s regulation as of 2007 so people with these plans do get the same protection as those who have a more conventional mortgage, it should also be said that these plans are actually open to everyone and not just Muslims.

Both HSBC (through its Islamic arm Amanah) and Lloyds TSB (Alburaq, provided by the Arab Banking Corporation and underwritten by Bristol & West), offer Sharia compliant home finance products.

HPPs are also available in the UK through the United National Bank, Ahli United Bank and Britain’s first Islamic bank; the Islamic Bank of Britain.

Due to HPP’s being based on profit but not interest payments, when choosing the right HPP plan there are no interest rates for comparison when choosing between the Islamic mortgages available on the market.

Nader Kamel at HSBC has advised that the best things to look for from your Islamic Mortgage in deciding whether it is suitable for your needs are; flexibility, the cost of taking the financing, fees, property rental options, the rent chargeable by the bank and whether you would be able to make larger lump sums during the payment period.

HSBC Amanah originally offered Ijara plans (where the bank owns the property and then transfers it to the customer at the end of the payment term) but they found that customers were too uncertain about the bank owning the property and found that the Musharaka plan was far more popular. Nader Kamel at HSBC seems to think that this is because customers feel far more confident being the co-owner of their property sharing any risks with the bank and far happier in the knowledge that each month they own an increasing share of their property.

There are some Islamic financial experts who think that these type of HPP’s work out more expensive than the more conventional mortgage, although more often there is not very much difference between them.

For example, if you bought your property for £250k with a diminishing Musharaka from HSBC Amanah with you putting down a 10% deposit meaning the bank was to buy 90% of the property, you would currently look to pay £1,553 a month.

Comparably, should you buy the same property with a conventional 2-year fixed rate mortgage with HSBC (with a 6.29% and £799 arrangement fee) you would look to pay roughly £1,655 monthly for 25 years. Should you wish to look at the HPP options make sure you are clear on any administration fees and how much the lender would charge for rental as part of the new plan.

UK Islamic finance lenders use the Libor index to benchmark the rental payments and all rates tend to be reviewed half yearly so rental % charges are actually the same regardless of the value, size and location of the property.

Understandably you will not see Islamic banks investing in organisations involved in gambling, alcohol, tobacco or pornography.

Sharia compliant financial products have been available within the UK market for a number of years. Making money by charging interest is deemed unfair in Islam and strictly not permitted. So let’s have a look at the three types of HHPs, Home Purchase Plans. Depending upon the type of HHP the basic idea is that the lender will add profit to the amount you have paid back rather than charging interest and will actually levy rent.

The three types of HHP’s are:

Musharaka – ‘partnership’

Also referred to as ‘diminishing Musharaka’. This means that you jointly buy your property with the lender and then over a course of time buy the lender out of it. For instance if you put 20% forward off the price of the property the bank will pay the remaining 80%. On a monthly basis you pay your lender a rental amount whilst buying more shares in your property in order to eventually own your property outright at the end of the term. It follows that the more shares you buy the less rent you pay the lender, the cost of the shares you buy always stays on the basis of the original property price and not the current market value.

Ijara – ‘lease’

This is a lease to own where the lender purchases your property and leases it out to you. At the end of the lease term ownership of the property is transferred over to you.

Murabaha – ‘profit’

This is where the lender buys the property and then sells it to you for a profit during an immediate sale. Your monthly repayments are fixed on the price but with no interest to pay to the bank. So simply, the lender or bank will buy the property for e.g. £180,000 and will sell it back to you for e.g. £230,000 and you pay the fixed monthly payments on the sale price for the rest of the fixed term.

The Islamic Finance Advisory and Assurance Services, which is an independent consultancy state that it isn’t necessarily the issue of the bank making money under Islamic law it is the conditions in which they make the money that is important. Islamic Banks make money from profit / rent rather than through interest. It is a different type of financing structure.

These HPP options are not just available for Muslims, around 2% of HPP customers are non-Muslim choosing these options for non religious reasons but more for ethical reasons.

On Monday 30th June 2008 following the end of its’ Rate Matcher deal for their new customers HSBC launched 2 competitive discounted mortgages.

Head of press at HSBC personal finance, Tim Pie announced that the two new products would now be available from a more competitive rate starting from 5.49% coupled with a £999 arrangement fee.

Following the original launch of the HSBC Rate Matcher the bank saw an increased interest to their average range of mortgage products, 15% of the HSBC mortgage products sold were calculated as a Rate Matcher product.

Interest rates on the Rate Matcher account had stayed consistent even though HSBC increased the arrangement fee substantially just over a week ago.

For the lender’s customers who re-mortgaged at their 4.79% (which is the lowest rate available), had previously paid a fee of just under £5,000 before the account fee was raised steeply to £7699 recently.

Tim Pie had stated that none of their customers had yet paid the new increased fee and he suspected that no one would.

Pie continued to state that HSBC had attempted to keep the fee as low as possible for 9 weeks but the lender had been forced to raise it due to the increasing cost of funding, in order to ensure the bank did not make a loss they were forced to raise the fee. The interest rate on the account could not be raised because the bank had to match the existing rate.

So, until the end of August 2008, current HSBC customers can still take advantage of the Rate Matcher deal.

Many mortgage customers at Northern Rock are to face massive rises in monthly mortgage repayments because they are now trapped in deals with the building society.

Ron Sandler who was appointed chairman 4 months ago brought in business plans to scrap better rates and tighten lending criteria to discourage new customers and promote their existing customers to remortgage elsewhere.

However, about 200,000 Northern Rock customers took out the Together Mortgage which has meant that that they were allowed to borrow up to 125% against their property value. For these customers there is nowhere to turn as the number of lenders offering 95% of a property’s value are few and far between and it is impossible in the wake of the credit crunch to find a lender offering any more than this.

Northern Rock’s Together holders are forced to move to their standard 7.49% rate at the end of their fixed deals. In some cases customers could see their monthly repayment rates rise to over £185 a month and with rising petrol and food prices this is going to mean difficult times ahead for some households.

Northern Rock struck a deal with Lloyds TSB at the beginning of June 2008 in order to help its customers re-mortgage, however, it seems that Lloyds TSB will only consider those Northern Rock customers who have 20% equity or more in their homes and have been accused of cherry picking low risk customers.

Landlords who invested in well located houses with attractive tenant features, neutral decoration and close links to public transport having borrowed their money wisely are doing OK.

When the housing market started to slow down in 2007 the forecast of the demise of buy to let and many thousands of owners of rental flats taking on extra mortgage payments and possible repossession was on the cards.

These premonitions were based upon the collapse of the property market in the early nineties but it seems that we cannot assume every downturn detail in the market at the moment will be a reflection of previous cash problems.

Having said this, buy to let investors were fewer and far between in the nineties to now.

The typical landlord of today’s time is considered quite wealthy with a good job and good amount of equity in their home sensible enough not to commit funds to inner cities over supplied with new artpartments.
The typical landlord may not be too concerned in the current climate because he may not see an immediate financial strain. His rising mortgage repayments will be counteracted by his increase of rental income.
Rents have rise by an average of 11.7% across Britain and 29.2% in the South West as shown by statistics from Paragon. These figures which match research from the Royal Institution of Chartered Surveyors show that this could be quite a lucrative time for some landlords.

Some landlords who are now in the fortunate position of having spare cash have been enjoying the slash in property prices and snapping up bargains, however, this will start to slow down soon as mortgage approvals are becoming so tight.