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Will the housing market avoid a slump?

Will the housing market avoid a slump?

When the Coronavirus hit, the housing market was forcibly brought to a halt. Now that restrictions are being lifted, it is starting to come back to life. This raises the question of whether it’s going to bounce back or whether there is going to be a housing market slump. This week’s Stamp Duty announcement will certainly play a large part in how the market develops.

Where now for the UK’s economy

Unless you can afford to pay cash for a property, your ability to buy one will depend on your ability to get a mortgage. If you want a mortgage, you will need to show your lender how you intend to repay it.

Unless you have a reliable income from sources other than work, this effectively means that your lender has to be happy that you have a decent chance of earning a living over the mortgage term. This starts with you having a decent chance of earning a living over the immediate future.

In short, therefore, the health of the UK’s housing market is likely to be closely tied to the overall health of the UK’s economy.

The economic impact of COVID19

On the one hand, it’s hard to describe the economic havoc wrought by COVID19. According to the Bank of England, the UK came close to insolvency. Some of the businesses which closed their doors to lockdown will never reopen them again. Admittedly, some of these closures might have happened regardless of the lockdown, but some of them might have survived.

It’s anyone’s guess how many more businesses will close and whether or not they would have survived if it hadn’t been for lockdown. Even if businesses do survive, they may be forced to cut back on their workforce. This will not necessarily mean redundancies. It could also mean steps such as cutting back on hiring, eliminating overtime or reducing hours for zero-hours workers or increasing the workload on in-house staff instead of hiring freelancers.

On the other hand, COVID19 has seen stories not just of businesses adapting to survive, but even succeeding in adverse circumstances. For example, according to research from Tamebay, UK SMEs actually increased their exports during the lockdown.

Non-essential businesses are starting to reopen and, where necessary, they are making adaptations to their business to ensure that staff and customers are protected from COVID19. Hopefully, these measures will not only prevent a resurgence of the virus but also serve as a form of protection against future pandemics.

Hopefully, therefore, the worst is now over and the UK can focus on moving down the path to economic recovery. If this is the case, then it is good news for the housing market.

The economic impact of Brexit

Only time will tell what impact Brexit will have on the UK’s economy. In this instance, however, businesses (and the public) have been given plenty of notice regarding the fact that it is going to happen (arguably four years worth of notice).

They also have at least some idea of the worst-case scenario, i.e. the UK leaves without a deal. This means that they have at least some opportunity to prepare for it, even if they are not happy about it. Hopefully, this means that any “transitional bumps” will be minor and short-term, at least in the general scale of the UK’s economy.

If this is the case, then the final arrival of Brexit may actually be a relief for the property market. Right now, people cannot know where Brexit will leave them. This means that they may not be confident committing to a major purchase, such as a new home. Getting clarity on what Brexit actually means in practice may put at least some people in a better position to make informed decisions on whether or not they are in a position to buy in the near future.

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

COVID19 and the mortgage market

COVID19 and the mortgage market

The UK has been in some form of lockdown since 23rd March. It’s impossible to know for sure what impact that had on the spread of the Coronavirus. It is, however, very clear that it has had a significant impact on people’s finances. The challenge now is to transition back into “business as usual” while still supporting those who need a bit of extra help.

The economic impact of COVID19 (so far)

Over 10 million people have received financial assistance through the Coronavirus Job Retention Scheme (about 8 million) or Self-Employed Income Support Scheme. The CJRS was due to close at the end of July but has now been extended until the end of October. That said, the nature of the scheme is due to change slightly.

At present, the government is paying 80% of salaries up to £2500 per month and employers may (or may not) top this up to the full amount. Employers cannot ask furloughed employees to do any work for them, but employees can take second jobs and/or freelance. From August, employers will start to have to make contributions towards the scheme, but they can also start bringing employees back to work on a part-time basis. Alternatively, they could make them redundant.

Only time will tell, but, at present, it is impossible to rule out the possibility that the requiring employers to contribute directly to the furlough scheme (as opposed to indirectly through taxes) will lead to businesses reassessing their staffing needs and potentially deciding to cut back. This means that lenders may need to be prepared for more borrowers getting into difficulty, if only temporarily.

FCA measures to protect mortgage holders

Since March, both residential and buy-to-let mortgage-holders have been able to request mortgage holidays (provided that they were up-to-date with payments). Initially, these were for up to three months. In June, the FCA extended the respite period to the end of October.

Although payments are stopped, interest continues to accrue (unless the lender agrees to waive it which they are not obligated to do).

Provided that borrowers follow the correct procedure (i.e. agree the holiday with their lender rather than just cancelling payments), the payment break will be ignored by the credit-scoring agencies.

At the end of the holiday period, the borrower and the lender have to agree on a way forward. In particular, they need to establish whether the borrower can afford to go back on a standard repayment plan. If so, they need to determine how the borrower will make up the missed payments (e.g. by adding them to their regular payments or by extending the mortgage term). If not, they need to work out what potential solutions are available.

A cautious note of optimism

Although the post-Coronavirus environment could be a challenging one for lenders to navigate, it does not have to be a disaster. There are grounds for at least cautious optimism. For example, according to statistics from the Bank of England, during April, consumers paid back a record £7.4 billion in consumer credit and also increased deposits in banks and building societies by £37.3 billion.

The fact that people were able to make these payments shows that some people at least had some level of income over and above what they needed to cover their basic necessities.

There are still people in work and as more businesses reopen more people should be able to get back into earning money through active employment (as opposed to through support schemes). Even where jobs are lost, the employees in question may have savings and/or insurance to help tide them over. They may also receive redundancy payments to ease the transition.

Your property may be repossessed if you do not keep up repayments on your mortgage.

The FCA does not regulate some forms of buy to let mortgages.

 The FCA does not regulate letting agents and we act as introducers for them.

 

Is the mortgage time-bomb still ticking?

Is the mortgage time-bomb still ticking?

Back in 2013, the FCA identified three residential interest-only mortgage maturity peaks. The first peak was back in 2018 and there are two more predicted for 2027-2028 and 2032.  What’s more, interest-only mortgages are very much still available in the residential-mortgage market.  In fact, the number of residential interest-only mortgage products available almost doubled between 2013 and 2019.

This raises the question of whether or not the “mortgage timebomb” can be diffused over the next decade or so or if it could tick on for longer. Of course with recent events and the raised interest in this product, the question is now very important.

A brief explanation of interest-only mortgages

With an interest-only mortgage, the borrower makes interest repayments over the course of the term and then repays the capital at the end of the term.  On the one hand, this makes monthly repayments more affordable than they would be for a repayment mortgage for the same amount.  On the other hand, it means that interest is always charged on the amount originally borrowed, rather than over an amount which is continually decreasing.  It also means that the only equity borrowers build up in their home is via house-price inflation.

The challenge of paying back the principal

 

Mortgages, by definition, are secured loans.  Specifically, they are loans secured against your home, which means that your home is always at risk if you are unable to make repayments as you should.

With repayment mortgages, however, you are, again by definition, repaying some of the loan principal each month.  With interest-only mortgages, however, you have to find an alternative method of paying back the capital and the harsh reality is that even selling the property may not be enough to do so.

The issue of equity

As previously mentioned with an interest-only mortgage, the only equity you accumulated is through house-price inflation.  This means that you would only be able to repay the loan capital purely through the sale of your home if you achieved a net profit at least equal to the amount you originally borrowed.

While this is certainly not out of the question at all, it depends both on the state of the housing market at the time and on the tax regime in force.  For example, if the government does implement the suggestion of levying stamp duty on sellers rather than buyers, you would need to make enough profit to cover that.

Similar comments apply to using equity release.  Even though equity release products do not typically require the borrower to make any repayments during their lifetime (unless they move into permanent care), there is still an expectation that the loan will be repaid, with interest, after their death (or move into permanent care), hence the loan-to-value ratio has to make that feasible.

Alternative repayment vehicles

Of course, selling the property is not necessarily the only way to repay an interest-only mortgage.  You could use savings, investments or the proceeds from a pension pot, in fact, in theory you could use anything you wanted as long as it covered the cost.  The challenge is that in a low-interest-rate environment, returns on cash deposits are uninspiring.  It is, of course, possible for mortgage-holders to put their savings into higher-interest bonds, but the challenge would be to find bonds with high interest but low risks.

Similarly, investment returns are not guaranteed, which means that if the size of pension pot is dependent on investment returns, it is not guaranteed either.

The future of residential interest-only mortgages

In theory, the emphasis on affordability criteria, including having a realistic plan for paying back the loan principal, should protect both borrowers and lenders going forward.  In practice, only time will tell if this is the case or if interest-only mortgages really need to be relegated to financial history.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.

For equity release, savings, investment and pension products we act as introducer only

 

 

We’re Borrowing How Much?

We’re Borrowing How Much?

The Wealth and Assets Survey of Great Britain is conducted by the Office for National Statistics (ONS) every two years.  The latest survey covers the period April 2016 to March 2018.  Here is a quick review of some of its key findings along with a guide to its limitations and its real-world implications.

Overall property debt in the UK is on the rise

According to the Wealth and Assets Survey, total property debt in the UK is now £1.16trn.  This figure is a 3% rise as compared to the last survey.  The number of households with property debt also increased from 9.1M to 9.2M (approximately 1%) and the median household property debt increased by five per cent to £96,000.

NB: In the context of the Wealth and Assets Survey, the term “property debt” covers both mortgages and equity release secured on properties.  This is technically accurate since the “lifetime mortgage” format of equity release is a debt secured against a property.  It can, however, be different from most forms of debt in that there may be no repayments required during the borrower’s lifetime.

Property debt is concentrated in the middle wealth bands

The Wealth and Assets Survey placed each of its respondents into one of ten wealth bands.  The top band comprised the wealthiest 10% of households while the bottom band was the poorest 10%.  The survey found that in deciles four to seven, 45% to 54% of households carried property debt, whereas only two per cent of households in the lowest decile had property debt.  The lower deciles were more likely to have financial debt (non-property-related debt).

Total financial debt rose by 11% or £12bn to £119B.  This was mostly due to hire purchase and student loans.  It should be noted, however, that student loan repayments are adjusted depending on income which makes them somewhat different to other forms of debt.  In principle, it also means that repayments should always be manageable even if an individual’s financial circumstances change.

Four per cent of households were identified as having problem debt, although, perhaps surprisingly, this figure does not include mortgages in arrears.

The limitations of the Wealth and Assets Survey

The Wealth and Assets Survey does not split out equity release from mortgages, nor does it split out different kinds of mortgages e.g. investment versus residential or repayment versus interest-only.  Likewise, the survey only expresses the amount of debt held by any given household.  It does not express this data in comparison to the value of the property.

Last but by no means least, this Wealth and Assets Survey is a survey of UK households.  It, therefore, does not include property debt held by companies as this is, by definition, not owned by a private individual even if they are the sole owner of the company in question.  This means that it does not capture data relating to buy-to-let investors who work through a limited company.

Full details on the Wealth and Assets Survey and its methodology are available on the ONS website.

The practicalities of mortgage debt

While the Wealth and Assets Survey provides an interesting snapshot of property debt in the UK, it does not give any great degree of insight as to what it means in practical terms for each household.  For example, although it collects data on property debt for each wealth band, it does not collect data on the percentage of a household’s income which is used to service the debt (which, in some cases may be none, since the survey counts equity release as property debt), or how much equity they have in the property.

 

Your property may be repossessed if you do not keep up repayments on your mortgage

For equity release products we act as introducers only. Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration.

The FCA does not regulate some forms of buy to let mortgages

Interesting times lie ahead for lenders and borrowers

Interesting times lie ahead for lenders and borrowers

The (hopefully) short-term impact of the Coronavirus, although undeniably brutal, may turn out to be nothing compared to the long-term economic damage it could cause. Quite simply, people may find that their lives have been saved but their livelihoods have been lost. The government is clearly aware of this and is working hard to keep the UK’s economy moving insofar as it can – and it is placing the financial services industry to come on board with its plans.

Keeping the money flowing

The UK government has pledged to pay 80% of the salaries of all employees furloughed due to the Coronavirus.  Separately to this, it has pledged to provide government-backed loans to businesses.  When the loan scheme was initially announced it was overwhelmed with applications, but relatively few loans were issued.  This fact was blamed on the restrictive rules and the government is believed to be looking at revising the scheme.  It’s therefore advisable to keep an eye on the news for updates. The new “Bounce Back” loan has just been released aimed and small businesses, offering loans of a quarter of turnover up to £50,000 over 5 years with 0% interest on the first twelve months and no repayments for twelve months.

It has further pledged to help the self-employed or at least some of them. As has already been pointed out, there are significant cracks in this help. In particular, it does nothing for those who became self-employed during the 2019/2020 financial year nor for those people who are part employed and part self-employed but who earn less than 80% of their income from self-employment.

Theoretically, these people can fall back on the Universal Credit system.  Unfortunately, this has been plagued by problems and if reports are to be believed is struggling to cope with the sudden upsurge in applications. It’s also unclear how the minimum income floor will be assessed for people in non-standard situations, like the newly self-employed or the part-employed/part-self-employed.

It’s also worth noting that the impact of the loss of income experienced by these individuals has the potential to spread far beyond the individuals themselves, even if they aren’t breadwinners for a family. As a minimum, it has the potential to impact the income of landlords and companies which provide essential, basic services such as utilities. Under normal circumstances, non-payers might be evicted and/or have their utilities cut off but right now that would be politically-sensitive, to put it mildly.

Finding other ways to help

The government seems to be aware of this and looks to be trying to address the problem from both ends. In other words, if people are falling through the cracks of the income-support measures, then the government can still help them by reducing their expenses. It has to act with a little caution here, to avoid causing problems along essential supply chains. It can, however, certainly ask, or potentially force, certain industries to adapt their behaviour to contribute to the common good and the financial services industry is clearly in its sights.

At the end of March, for example, the Bank of England’s Prudential Regulation Authority contacted banks to make it clear that it expected them to cancel dividend payouts and bonuses to staff. It took a softer line with insurers, just advising them to “think carefully” before making payouts. Another regulator, the FCA has also been communicating with the banks to propose emergency measures to help struggling borrowers.

It has proposed that customers with arranged overdrafts should be allowed to use them interest-free for up to three months and that customers with loans and/or credit/store card debt should be granted a repayment freeze also for up to three months. As with many of these emergency measures, however, they answer some questions but raise others.

For example, if borrowers are in a situation where they are paying more in interest (fees and charges) than they are in capital repayments, taking a payment holiday could hurt them over the long term unless their lender also agreed, or was forced, to freeze interest on the debt. Some people might see this as a very reasonable action on their part given the help the industry received in 2008.

Your property may be repossessed if you do not keep up repayments on your mortgage.

How much is stamp duty?

How much is stamp duty?

Stamp duty may not be the most exciting topic in the housing market, but it can make quite a difference to how much you end up paying for your home.  Here’s a brief guide to what it is, how it works, what that means in practice and what the future might bring.

Stamp duty is actually a shorthand for different taxes

In England and Northern Ireland, Stamp Duty means Stamp Duty Land Tax and there is an online calculator here.  In Wales, it means Land Transaction Tax and there is an online calculator here.  In Scotland, it means Land and Buildings Transaction Tax and while this in no official calculator, you can find the current rates listed here.

Stamp duty works along essentially the same lines in all parts of the UK, but the bands are different (plus they are subject to change), hence you always need to check the rates in force at the time of your intended purchase and in the location of your intended purchase.

You should also be aware that different rates of tax may apply depending on what kind of purchase you are making, e.g. a first home, a main home (but not your first home) or an additional home.

How and when you pay stamp duty

From a buyer’s perspective, the process itself is actually quite easy.  You just send the money to your solicitor and they send it on to HMRC when the property completes.

What stamp duty means in practice

In simple terms, you need to work out if you are due to pay stamp duty (if you are a first-time buyer you may not be) and if you are then you need to work out how you are going to pay it.

Basically, the two approaches are either to add it to your mortgage or to pay it out of your cash savings.  In either case, you would need to meet the appropriate lending criteria regarding Loan To Value ratio (LTV) and affordability.  You would also have to accept the fact that either way you are going to impact your LTV ratio and this may impact your ability to get the very best deals.

Having said that, while mortgages are sold as long-term products, there is absolutely nothing to stop you re-mortgaging at a later date when you have built up equity in your home and this fact may be enough to prevent you from needing to as it may encourage your lender to agree to negotiate an improved rate in acknowledgement of your improved situation (re the LTV ratio and possibly increased income as well).

For the sake of completeness, the example of stamp duty is a good reminder to think about all the possible transaction costs involved in buying a home and the importance of making sure that you have funds to pay them.

The future of stamp duty

Interestingly, there are proposals to switch stamp duty to a tax paid by the seller.

The argument behind this change is that people who are moving from smaller homes to larger ones would pay stamp duty on the smaller home (they are selling) rather than the larger one they are buying, while people moving into smaller homes will be paying less for the property they are buying.

This may sound good in theory, however, it’s hard to see what would deter sellers of any description from simply incorporating the cost of the stamp duty into the sales price of the property.  If they did so, then, rather ironically, the buyer (who is the person ultimately paying for the property) might end up paying more as the property could be pushed into a higher stamp duty band, so you’d effectively be paying stamp duty on the stamp duty.

Your property may be repossessed if you do not keep up repayments on your mortgage.

On clicking the above links you will leave the regulated site of Coombes & Wright Mortgage Solutions Limited. Neither Coombes & Wright Mortgage Solutions Limited, nor Sesame Ltd, is responsible for the accuracy of the information contained within the linked site.

 

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