esmart property issue 14

esmartproperty

PLUS: Swap Rates >> Zero Carbon Homes >> Delivering Customer Satifaction

The digital property magazine

The mortgage interest rate maze

What will you choose?

Landlords buying more properties

Quarterly survey revealed a "bounce back" in the buy-

to-let market

Mortgage Payment Protection InsuranceCovering your monthly mortgage payments for a specified period

Outlook for mortgage and housing markets

Investing in property

Small signs of housing market recoveryIncrease in new buyer enquiries reported

Make sure your figures add up

July / August / September 2009

Prediction for the number of mortgage possessions lowered

Planning your remortgage.Isn’t it time you talked to us about saving money?We’re passionate about making sure you’ll obtain the best mortgage deal available. Contact us to discuss your current situation, and we’ll help you find the best deal that's right for you.

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Greater protection for tenantsNotice period for tenants must be consistent with the lender’s other contractual obligations

New regulation of sale-and-leaseback firmsLenders welcome the decision to introduce an interim regime

Outlook for mortgage and housing marketsPrediction for the number of mortgage possessions lowered

Mortgage repaymentsProtecting against the unexpected

Zero carbon homesProviding homebuilders with greater clarity

Homeowners Mortgage Support schemeUnderwriting a proportion of the lender's ultimate risk of loss

Swap ratesNot the only influence on mortgage pricing

Fewer possessions expected in 2009Measures taken by the authorities have stabilised the economy

Lending criteriaWhat the numbers show

Local authorities and housing associationsThe problems caused for lenders by imposing planning restrictions

Delivering customer satisfactionOver three quarters of new home owners would recommend their builder

Lender defends the launch of its new 125 per cent mortgageSocially responsible and prudent solution to people in negative equity

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

In this issueSmall signs of housing market recoveryIncrease in new buyer enquiries reported

'Kickstart' initiativeMaintaining housing provision

The mortgage interest rate mazeWhat will you choose?

Government mortgage schemesMixed reaction to the latest statistics

Experiencing mortgage repayment problems?It’s essential to talk

Residential developmentLand values stabilise across most UK regions

Housing private finance initiativeGovernment allocates £1.7bn for new homes

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Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. The FSA does not regulate commercial lending and some forms of buy-to-let mortgages. Your property may be repossessed if you do not keep up repayments on your mortgage.

Home Information Packs"Stunting market recovery"

Renting a propertyMake your move go as smoothly as possible

Checklist for investing landlordsA range of issues to consider before entering the residential lettings market

Mortgage Payment Protection InsuranceCovering your monthly mortgage payments for a specified period

Investing in propertyMake sure your figures add up

Landlords buying more propertiesQuarterly survey revealed a "bounce back" in the buy-to-let market

Welcome to the latest of our property magazine. Inside this issue we look at expectations that house prices are set to rise, having increased for the first time since May 2007 because of the low number of properties on the market and increased interest from potential buyers, according to the latest housing market survey. Turn to page 15 to read the full article. There are plenty of interest rate options available to the homebuyer when taking out or switching mortgages and this is often the area that causes the most confusion, all of which have their advantages and disadvantages depending on your circumstances. It can be confusing understanding all the features of the different products and knowing which one to choose. Find out more on page 16. Landlords have been buying more properties in the last quarter according to a recent survey. The Association of Residential Letting Agents (ARLA) quarterly survey revealed a "bounce back" in the buy-to-let market. Turn to page 30.

If you fall behind with your mortgage repayments and cannot catch up again, you could eventually lose your home. But you can take steps to protect yourself against this risk by taking out Mortgage Payment Protection Insurance. Read the full article on page 26. At the time of publication, the property market and economic events are changing very rapidly, and some further changes are likely to have occurred by the time you read this issue. A full content listing appears on pages 3 and 4.

To discuss your financial planning requirements or to obtain further information, please contact us.

In this issue

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NEED MORE INFORMATION?PLEASE CONTACT US WITH YOUR ENQUIRY.

We believe, however, that it is important to distinguish between cases where the tenancy is recognised by the lender (because the landlord has a buy-to-let mortgage) and instances where a tenancy is not recognised and probably not even known to the lender. This can occur if the borrower has a residential mortgage but is letting out the property to a tenant without the consent of the lender and in breach of the terms of the mortgage.

Most tenants will have landlords with buy-to-let mortgages, and will therefore have tenancies that are recognised by the lender. Those tenants are already protected and will have their tenancies honoured by the lender as long as they are not in breach of their tenancy agreement.

Lenders are sympathetic to tenants who are paying their rent and acting responsibly in cases where the landlord has failed to get permission to let the property. But the legal position is complicated because the lender has a

contractual obligation to the borrower, even though they are in breach of their mortgage terms. Potentially, there are also legal constraints on the ability of lenders to collect rent from tenants in this position.

The government is expected to consult on proposals over the summer and legislate by 2010.

Most tenants will have landlords with

buy-to-let mortgages, and will therefore have tenancies that are recognised by the lender.

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Lenders welcome the decision to introduce an interim regime

News

Firms offering sale-and-leaseback have only until the end of July to submit applications for interim authorisation from the FSA. If they fail to do so, they will be unable to offer sale-and-leaseback during the period of interim regulation of the market, lasting until the end of June next year. Firms that want to offer sale-and-leaseback and are already authorised by the FSA for other activities still have to apply for an interim variation of permission.

Lenders have been urging the government to regulate the sale-and-leaseback sector as soon as possible. With mortgage arrears already rising and expected to continue to do so, a growing number of borrowers in difficulty may already have been tempted to consider sale-and-leaseback as a solution to their problems.

Regulation is needed to address a range of potential consumer concerns, including, for example, property valuation and the security of tenure for owners who opt to become tenants. Concerns about consumers are exacerbated given their vulnerability relative to the firms they are dealing with.

Announcing the start of the interim regulatory regime, the FSA said: “Consumers should be aware of the risks involved in sale-and-rent-back schemes. Normally, they will be paid less than the full market value for their home and may not be able to stay as a tenant in the home in the long term.”

The government commissioned a market study of sale-and-leaseback by the Office of Fair Trading, published last year. But because full regulation requires a consultation exercise and publication of the final rules, the government has said it cannot be introduced before the end of June next year.

New regulation of sale-and-leaseback firms

Greater protection for tenantsThe Housing Minister John Healey has announced a proposed change to the law to guarantee at least two months’ notice for tenants if they are required to leave their home because a lender has taken possession of the property.

In this issue

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The CMLs new forecast is for net lending to fall by around £5 billion in 2009. This represents a significant improvement on the £25 billion contraction in the market that had originally been anticipated, and partly reflects the extensive fiscal, monetary and credit support measures that have been put in place.

Despite these encouraging developments, the CML believe that it is too early to predict a robust recovery in the housing market. They will not publish forecasts for 2010 until later in the year, partly because there is still considerable uncertainty about a range of factors that will affect the underlying strength of mortgage and housing markets next year and beyond.

In the short term, the housing market is likely to be heavily influenced by unemployment – now rising strongly – as well as the number of hours worked by people who stay in their jobs, trends in earnings and the impact of negative equity on property transactions.

The outlook for mortgage and housing markets will also depend partly on the efforts households make to reduce their levels of mortgage debt.

Mortgage repaymentsThe Bank of England publishes monthly data on mortgage repayments split between:

payments on redemption; that is, where payment clears the outstanding debt completely and discharges the mortgage; regular repayments arising from capital-and-interest mortgages, where each monthly payment covers not only the interest on the loan but a slice of the principal, with payments of capital increasing as the mortgage matures; and ad hoc lump sum payments that reduce but do not clear the outstanding balance.

Capital repayments are dominated by payments on redemption and these are closely linked to house sales and remortgaging activity. Typically, however, such transactions will be matched (or exceeded) by gross new lending to the borrower. As such, they are unlikely to tell us much about exposure to debt, despite the fact that both house sales and remortgaging have fallen sharply over the last year or so.

Leaving aside payments on redemption, however, Bank of England data shows that regular and lump sum capital repayments totalled £46 billion in 2008.

Interest ratesAs one might expect, the regular repayments associated with capital-and-interest mortgages have risen significantly since the end of 2008 alongside the very sharp reduction in interest rates. The maximum cumulative increase in regular repayments appears to have been around £400 million a month.

Broadly speaking, this is perhaps a little above what might have been expected as a result of the automatic tendency of regular capital repayments on capital-and-interest mortgages to rise when interest rates fall. So, it is at least plausible that a number of borrowers have decided to maintain their mortgage payments at the level they were before interest rates began to fall sharply, thereby accelerating their capital repayments still further.

Borrower behaviourThe CMLs calculations suggest that the household finances of variable rate borrowers have improved by around £20 billion a year as a result of the dramatic decrease in interest rates since the end of 2008. However, as much as £15 billion of this is not showing up in higher mortgage repayments.

Outlook for mortgage and housing marketsPrediction for the number of mortgage possessions loweredData form the Council of Mortgage Lenders (CML) confirms that lenders are showing forbearance to borrowers who fall into arrears, and that a range of government schemes is also providing help. They have also lowered their prediction for the number of mortgage possessions this year from 75,000 to 65,000.

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Sometimes, however, the unexpected happens. For example, you might lose your job through redundancy, or find yourself unable to work due to long-term sickness. By law, an employer must pay most employees statutory sick pay for up to 28 weeks though this will probably be a lot less than full earnings. After that, you would probably have to fall back on State benefits. These are limited and means-tested, which may mean you won't

qualify. If you are self-employed, you have no employer to help, so you would have to turn to the State.

This is when insurance to protect you or your family's income or borrowing can be useful. Listed below are some examples of products and why you might find them useful.

Type of insurance What's it for? What do you need to know?

Critical illness (CI) Pays out a lump sum if you're diagnosed with a You need to read your insurer's terms carefully, critical illness, such as cancer, a stroke, MS, a major not just for the range of illnesses they cover but also organ transplant, coronary artery bypass, heart attack their type. For example, while a heart attack may be or kidney failure. You can use the payout to pay for medical covered, a cardiac condition such as angina may not. treatment, pay off your mortgage or anything else. Also not all types and stages of cancer are covered. For a claim to be successful, you normally have to survive a month following the diagnosis.

Mortgage payment protection A typical policy will start to pay your mortgage repayments You are not required to have this type of cover at all,(MPPI) – also called accident, one month after your income stops due to redundancy, unless it's a condition of your loan and yousickness and unemployment accident or illness, and continues to pay for 12 months. don't have to buy it from your own lender.insurance Check if any medical problems you may have had in the past would be excluded if they occured again.

Payment protection insurance To help you keep up your loan repayments, for A typical policy will start to pay an agreed amount(PPI) – also called accident, sickness example on a loan or credit card, in the event you one month after your income stops due toand unemployment insurance can't work because of redundancy, accident or illness. redundancy, accident or illness, and continue to pay for a set time, usually 12 or 24 months. You don't have to have this type of cover at all, unless it's a condition of your loan and you usually don't have to buy it from your own lender. If you do buy it, look at the conditions carefully. For example, what if you wanted to cancel the cover after a few months? And if a medical problem you've had before reoccurs again, will they still pay out? Also check whether you'll have to pay interest on your single premium. This happens where the single premium is added to your loan, which means you will be charged interest on it as well.

Life insurance Pays out a lump sum if you die. With some types of cover, called Pension Term Assurance (PTA), you used to get tax relief on the premiums paid into it. This may no longer be available on policies taken out after December 2006.

Mortgage protection life Pays off the mortgage loan if you die. Endowment mortgages automatically include life cover. (term insurance) cover. If you have a repayment mortgage (so the amount you owe gets smaller over the years), you can buy cover that reduces as the debt reduces.

Income protection (or Permanent Replaces part of your income if you are unable to work It continues to pay out until you can return toHealth Insurance – PHI) for a long period of time because of illness or disability. some kind of paid work or reach retirement, whichever is sooner.

Mortgage repaymentsProtecting against the unexpectedOnce you take out any kind of mortgage, it's very important that you make all the repayments in full, and on time. If you fail to do so you could lose your home and it could also affect your credit rating.

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The government has recognised the point HBF has frequently made that there are major technical, cost and consumer challenges involved. The government's acceptance that zero carbon cannot in most cases be delivered solely on the site of new developments is a step in the right direction.

Clarity is vital if the industry and the supply chain are to be able to invest in and test mainstream ways of achieving the standard that meet customers' requirements and can be rolled out from 2016.

However, it remains clear that the challenge of delivering a zero carbon

standard from 2016 is enormous. HBF Executive Chairman, Stewart Baseley, commented:

"We will continue to work with the government, but in pursuing the ambition set out in the document the government must support the industry wherever necessary on research funding, mitigating cost and other commercial issues. It must also be prepared to take into account the lessons we are bound to learn along the way in rolling out the policy. Unless these issues are taken on board we will not succeed in pursuing zero carbon while also meeting the equally important need to increase the supply of new homes.

"Companies are still working on how to achieve the proposed changes in building regulations on energy efficiency in 2010 and 2013 which are equivalent to the energy requirements of Levels 3 and 4 of the Code for Sustainable Homes respectively. The government's ambition for a 70 per cent improvement on current standards delivered on-site using renewable energy technology from 2016 would be a further major step beyond that.

The Home Builders Federation (HBF) commented recently that the announcement by the government on zero carbon homes is necessary in providing homebuilders with greater clarity on the definition of zero carbon.

Zero carbon homesProviding homebuilders with greater clarity

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It is important in this that the government has recognised the point HBF has frequently made that there are major technical, cost and consumer challenges involved.

Not the only influence on mortgage pricing

News

The Council of Mortgage Lenders (CML) is concerned that some recent coverage of fixed-rate mortgage pricing fails to reflect the complex array of influences on lenders' pricing strategies at present.

The CML is now seeking to shed more light on these factors, and explains that:

Swap rates are commonly cited as "the cost to lenders of fixed rate funds", but the real picture is more complex. The recent decline in swap rates is not necessarily a clear indication that the cost of raising fixed term funding has fallen.

A swap rate is the notional cost of exchanging a Libor-level floating income stream for a fixed stream. But simply looking at the swap rate does not account for the fact that not all lenders will be able to raise funds at interbank rates (Libor), especially in the current environment.

It is relevant to take account of the cost of the underlying variable rate funding, as well as the swap rate. And some funding is raised directly at a fixed rate (two year commercial bank rate, for example), where recent spreads against a two year fixed mortgage rate have narrowed markedly, telling a very different story to swap rates.

In sharp contrast to the early 1990s, lenders have very limited discretion to vary rates on their existing loans or "back book", with half of all mortgage lending on a fixed rate basis, a further significant tranche contractually tied to bank rate, and political pressure to reduce standard variable rates. While lenders need to treat all their customers fairly, both new and existing, there are very real pricing pressures that the lack of discretion on "back book" rates creates for the sustainable pricing of new business.

Lenders are facing a range of higher costs, including the costs of showing increasing forbearance to more borrowers, the increased costs of holding more liquid assets and more capital as required by the FSA, the relatively higher funding costs incurred as a result of the competition for savings business, scarce and expensive wholesale funding, the high cost of funds that the authorities made available through the Credit Guarantee Scheme, and the reduced returns to lenders necessarily arising from a very low interest rate environment.

Swap rates

The government has launched a Homeowners Mortgage Support scheme (HMS). This scheme enables eligible borrowers to defer a proportion of their interest payments for up to two years, with the government underwriting a proportion of the lender's ultimate risk of loss.

The implementation of the new government measure is designed to reinforce lenders' policies of forbearance for borrowers facing temporary and resolvable mortgage repayment problems, to minimise repossessions.

Repossession is a last resort. Lenders already show significant forbearance to

borrowers facing temporary difficulties, to enable them to keep their homes where this is possible. This core principle is already underpinned by regulatory rules and industry guidance. HMS is a helpful additional tool and the scheme is aimed at borrowers who expect to be able to resolve their difficulties and resume full mortgage payments within a year or two.

Some lenders have confirmed their participation in the home-owner mortgage support scheme (HMS). Other lenders have concluded that, while they support the principle of reasonable forbearance, they would prefer to help their borrowers outside the scheme and without calling on government financial support. It is important that if you are having difficulty paying your mortgage, you talk to your lender.

Homeowners Mortgage Support schemeUnderwriting a proportion of the lender's ultimate risk of loss

Repossession is a last resort. Lenders

already show significant forbearance to borrowers facing temporary difficulties, to enable them to keep their homes where this is possible.

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Conditions in housing and mortgage markets remain challenging but a combination of lower interest rates, measures to reinforce the forbearance shown by lenders to borrowers in difficulty and improved government support for home-owners has led the CML to reduce their forecast for the number of possessions this year from 75,000 to 65,000.

In publishing the CMLs revised forecasts for 2009, they confirmed that they now expect around 360,000 loans to be in arrears of 2.5 per cent or more of the mortgage balance by the end of this year. That is still higher than the 183,000 we saw at the end of 2008. But it is 15 per cent fewer than they had originally anticipated.

The CML is leaving unchanged their forecasts for the number of housing transactions and the volume of gross mortgage lending in 2009, at 700,000 and £145 billion respectively. But the outlook for net lending they have confirmed looks less negative than previously forecast. The CML only expect net lending to fall by £5 billion this year, compared to the £25 billion previously predicted.

A raft of measures taken by the authorities have stabilised the economy and will help bring about recovery over time. But the

improvement is still likely to be slow and drawn out, especially as the extensive range of fiscal, monetary and credit support measures that have been introduced are gradually scaled back.

Lower interest rates not only give borrowers a better chance of keeping up with their payments if they suffer a temporary fall in income, but also ensure that arrears build up more slowly if customers are not able to maintain all their payments in full. Despite some recent encouraging signs in the housing market, however, the CML still believe it is too early to be sure that this indicates that we are at the beginning of a robust recovery.

Some of the measures implemented by the authorities have reduced the decline in available mortgage funding, but lenders still face considerable challenges in increasing the supply of mortgage credit. So, lending commitments

made by some large players are unlikely to offset fully the effects of a reduced capacity to lend by other firms. And given the weak economic backdrop, which will lead to an increase in unemployment this year, the number of housing transactions is likely to remain subdued for some time.

Remortgaging activity has had a significant effect on overall volumes of gross lending in recent years. However, tighter lending criteria and falling house prices have affected the ability of some home-owners to remortgage, while the ability to revert to an attractive standard rate has reduced the incentive to re-finance for others.

The CML expect interest rates to remain low for some time, and no immediate recovery in house prices, so it appears unlikely that lending criteria will relax to any significant extent in the short term. That will help ensure remortgaging activity remains subdued.

Fewer possessions expected in 2009Measures taken by the authorities have stabilised the economyThe Council of Mortgage Lenders (CML) have announced that due to the large cut in interest rates they predict there will be fewer households falling behind with their mortgage payments this year, as well as a reduction in the number of homes taken into possession.

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NEED MORE INFORMATION? Please email or contact us with your enquiry. If you would like us to email a copy of our digital property magazine to someone you know, please email us with their details and we’ll send them a copy.

Home movers typically borrowed 67 per cent of the value of the property in May, unchanged from April, and borrowed 2.68 times their income, up from 2.63 in April.

A modest easing in these measures is expected over the summer, as some higher loan-to-value products came on to the market in recent months and lenders reported that they intend to increase lending at higher loan-to-value ratios in the Bank of England’s recent Credit Conditions Survey.

The number of loans for house purchase edged up 4 per cent from April to 37,400 (worth £4.7 billion), but this is 28 per cent lower than the number of loans in May 2008. House purchase lending is still depressed by historical standards: in the last seven years the May average was 96,000 house purchase loans.

Remortgaging volumes remain extremely weak with 29,000 loans

in May, a 9 per cent fall from April and a 63 per cent decline from a year earlier. Demand for remortgage is falling as many borrowers exiting fixed rate periods find themselves reverting to relatively attractive standard variable rates. In addition, lower house prices and tighter loan-to-value constraints continue to limit access to the better priced remortgage products.

First-time buyer numbers were little changed with 14,000 loans worth £1.5 billion in May, compared with 13,700 loans worth £1.5 billion in April.

But that doesn't mean the challenges for first-time buyers are over. Newly updated analysis suggests that around 80 per cent of first-time buyers aged under 30 are likely to be receiving help from parents as they are unlikely to have been able to build up the deposits needed to enter the market from their own resources.

Fixed rate deals continued to take an increasing proportion of new business as borrowers may be seeking certainty over future payments at a time of wider economic uncertainty. Fixed rate products accounted for 74 per cent of all loans in the month, the highest share since August 2007, while 16 per cent of new loans were tracker products.

Lending still remains at very low levels, with the modest increase in house purchase activity off-set by a fall in remortgaging. The trend of tightening lending criteria seems to have subsided and their may be a modest easing in these measures over the summer, which will help some borrowers. But overall, access to mortgage finance is expected to be constrained by the diminished number of active lenders and shortage of funding available to them.

Source: Council of Mortgage Lenders

Lending criteria What the numbers showEstimates suggest that a higher proportion of young first-time buyers than ever before are getting help from parents to enter the market. But, the latest data shows signs that lending criteria stopped tightening in May. Since reaching a record 25 per cent in February, the average first-time buyer deposit has remained unchanged. And the typical first-time buyer income multiple has held at 2.97 from April.

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Data

Loans for house purchase and remortgage

Number of house Value of house Number of Value of remortgage purchase loans purchase loans £m remortgage loans loans £m

May 2009 37,400 4,700 29,000 3,300

Change from April 2009 +4% +2% -9% -8%

Change from May 2008 -28% -39% -63% -68%

First-time buyers, lending and affordability

Number of Value of Average loan Average income Proportion of income loans loans to value multiple spent on interest payments

May 2009 14,000 1,500 75% 2.97 14.9%

Change from April 2009 2% +1% 75% 2.97 15%

Change from May 2008 -29% -42% 89% 3.35 19.7%

Home movers, lending and affordability

Number Value Average loan Average income Proportion of income spent of loans of loans to value multiple on interest payments

May 2009 23,500 3,300 67% 2.68 11.3%

Change from April 2009 +5% +6% 67% 2.63 11.3%

Change from May 2008 -27% -37% 72% 2.97 17.1%

Assessing your mortgage options.Are you looking for the best mortgage solution?

If you’re unsure about how to navigate the mortgage market during these challenging economic times, let us help you - don’t leave it to chance. Contact us to discuss your requirements, and we’ll help you make a well informed decision.

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Over three quarters of new home owners would recommend their builder

News

The vast majority of Britain’s new home buyers would recommend their home builder to a friend, according to the Home Builders Federation’s (HBF’s) fourth annual Customer Satisfaction Survey.

The survey also showed that over three quarters (76 per cent) of purchasers questioned in the 12 months from October 2007 to September 2008 were satisfied with the overall quality of their home.

Stewart Baseley, Executive Chairman of HBF says:

"Ensuring that customers are happy with their new homes is of crucial importance to homebuilders, especially in the current market.

”Whilst being ever conscious that more needs to be done, we are pleased that our survey results show consistently high levels of achievement across all areas. When the results are looked at alongside other such surveys, they demonstrate that builders are building what customers want and doing it in a way that ensures satisfaction in the product. ”

Question responses included the following results (2008 results in brackets):

n 77 per cent (76) said they were satisfied with the quality of their new home

n 76 per cent (75) would recommend their builder to a friend

n 76 per cent (77) were very or fairly satisfied with the service during the buying process

n 70 per cent (72) regarded their builder as very or fairly good in relation to completing their home on time

n 73 per cent (72) of buyers were satisfied with the condition of their home on move-in day

n 65 per cent (64) were very or fairly satisfied with the homebuilders’ service after purchasers moved in

With house prices now significantly lower than 12 months ago, now could be an ideal time to purchase a new build home. As well as being built to higher environmental standards than existing homes, and so saving over £500 a year of fuel bills, new build customers get a range of options in terms of their type of home and its interior design.

Delivering customer satisfaction

While the ongoing funding crisis continues to restrict mortgage lending, it is more important than ever that so-called section 106 agreements are applied as consistently and simply as possible by councils when agreeing planning permission.

The briefing note sets out the concerns of lenders and urges more consistent use of the model section 106 agreement developed with the government’s approval in 2006. This model agreement seeks to ensure that any restrictions in planning permission for low-cost home-ownership schemes do not restrict the ability to lend on properties.

Better awareness of the model agreement by planning and housing authorities, along with discussion with lenders while negotiating and agreeing a section 106 agreement, are important to help avoid creating barriers to lending.

The CML have been working recently to raise awareness of the types of

restrictions currently found in section 106 agreements that constrain mortgage lending. They are seeking the help of a range of organisations to ensure their briefing note is distributed and properly understood. The Homes & Communities Agency, Royal Town Planners Institute, Chartered Institute of Housing and National Housing Federation are all well placed to help bring lenders’ concerns to the attention of local authorities and housing associations.

The briefing note is just one part of the work the CML have been pursuing to highlight and lobby for improvements that will make low-cost home-ownership schemes more successful.

Local authorities and housing associationsThe problems caused for lenders by imposing planning restrictionsA new briefing note has just been published by the Council of Mortgage Lenders (CML) for local authorities and housing associations to highlight the problems they can cause for lenders by imposing planning restrictions under section 106 of the Town and Country Planning Act 1990.

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The "very niche" product is only available to existing Nationwide customers who need to move, but owe more on a mortgage than their property is worth.

Nationwide borrowers will be able to borrow up to 95 per cent of the value of their new home, with a five per cent deposit.

They will then be able to transfer the negative equity on their former home to the new property, as long as it does not exceed 30 per cent of the new home's value.

Borrowers will be offered a three-year fixed rate mortgage at 6.73 per cent or a five-year fixed rate mortgage at 7.48 per cent on the 95 per cent portion of the loan. Interest charged on the negative equity part of the loan rises to 7.23 per cent and 7.98 per cent respectively.

Mortgages that offered 125 per cent of the value of a property came in for significant criticism after the credit crunch and were blamed for the collapse of Northern Rock in September 2007. It had been thought that such mortgage products had been consigned to history but the return of the 125 per cent mortgage has arrived sooner than anticipated.

The number of mortgage products available has fallen to their lowest levels in years with a contraction in mortgage products of 90 per cent since 2007.

There were 27,962 mortgage products available to borrowers in July 2007 compared with just 2,282 mortgage products available now.

Until this changes, and more mortgages become available, house price growth is likely to remain

muted at best with further falls possible, and many borrowers may struggle to get a mortgage.

Lender defends the launch of its new 125 per cent mortgage Socially responsible and prudent solution to people in negative equity The Nationwide Building Society has introduced a mortgage allowing borrowers to take loans worth 125 per cent of the value of the home they are buying. The lender said the loans offered a "socially responsible and prudent" solution to people in negative equity.

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Mortgages


Expectations that house prices are set to rise have increased for the first time since May 2007 because of the low number of properties on the market and increased interest from potential buyers, according to the latest housing market survey.

The Royal Institution of Chartered Surveyors (RICS) regular monthly survey of its members shows activity in the housing market picked up last month and that surveyors appeared more optimistic about the prospects for the housing market generally.

The number of RICS members reporting an increase in new

buyer enquiries increased during June, with 67 per cent reporting a rise rather than a fall, the eighth consecutive monthly gain.

The survey also contains more definitive signs that the rebound in enquiries is now feeding thorough into increased property sales. According to RICS, the number of properties sold rose again in June, albeit from very depressed levels by comparison to two years ago.

The average number of properties sold over the past three months rose to 12.7, up from 11.7.

Meanwhile, newly agreed sales, measured on a net balance basis, increased sharply, reaching their highest level since August 1999.

Jeremy Leaf, a spokesperson for RICS, said: “Although the market is showing signs of improvement, it is unlikely that there will be a sustained upturn while mortgage lenders remain risk adverse.

"A lack of stock on the market is providing a platform for modest price increases. While supply remains tight, the market may continue to show tentative signs of firming but instructions are

starting to increase in some regions and this could dampen any meaningful recovery as long as economic conditions remain quite so uncertain.”

The Prime Minister recently announced the doubling of the number of new homes built as part of the 'Kickstart' initiative to open up mothballed sites. The reallocation of government money for housing is a clear and welcome recognition of the importance of the

need to maintain housing provision and of house building to the economy.

The announcement could be a real boost for potential home owners, the industry and the wider economy, however, ensuring the banks

restore some sensible levels of lending is paramount if any boost is to be sustainable.

The wider economic benefits of maintaining supply will equate to an estimated 1.5 jobs created for each unit built.

However, a sustainable recovery in house building that will see employment maintained is dependent upon a restoration of some sensible levels of mortgage lending, and some relaxation of mortgage terms such as loan to value ratios. The government must use the influence it now has with the banks to ensure lending returns quickly.

Maintaining housing provision

'Kickstart' initiative

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Housing market


Small signs of housing market recovery Increase in new buyer enquiries reported

16

Mortgages

Once you've decided on whether you are going to make payments on the capital or not, what you choose will depend largely on your current circumstances, such as whether you are first time buyer, close to the end of your term, or what you can afford.

Once you've decided on whether you are going to make payments on the capital or not, what you choose will depend largely on your current circumstances, such as whether you are a first time buyer, close to the end of your term, or what you can afford. Here are some of the options available.

Fixed rate mortgagesFixed rates are one of the most popular interest rate options for consumers, particularly in an environment of rising interest rates. With a fixed rate, you guarantee that your rate and therefore your monthly repayments remain constant every month for a set period of time, whatever the lender does with the standard variable rate, or what base rates do. The length of time the fixed rate can run for varies depending on the mortgage you choose.

The most common fixed rate periods range between 1 and 5 years, although there are now 25-year fixed rate mortgages on the market. After the fixed rate period expires, the rate reverts to the lender's standard variable rate, which will fluctuate along with base rates. If interest rates are rising, you remain protected against them, but should they fall, you'll miss out on any potential reduction in your repayments.

Be careful, as many lenders will charge you a penalty if you move your mortgage before the fixed term ends. Be sure to shop around for the best deal for you and make sure you read the small print.

Discounted rate mortgagesWith a discounted mortgage rate, you pay a set amount below the lender's standard variable rate for a fixed period of time. For example, if the lender's standard variable rate is 7 per cent and you choose a 2 per cent discount, the interest rate you will pay will be 5 per cent for the agreed term.

The terms can range between 6 months and 5 years. Generally speaking, if the term is short, the discount is likely to be greater, while for longer terms the discount is likely to be smaller. These mortgages are particularly helpful if you want to reduce your monthly payments at the outset and

are comfortable that you will be able to afford the payments after the discounted period.In some cases the discount can be 'stepped', which means the rate reduces in two or three stages.

Capped rate mortgagesA capped rate mortgage is like combining a fixed rate with a variable rate. For example, for a defined period of time, your interest rate is guaranteed not to rise above an agreed fixed rate, but you should retain the benefits of smaller repayments should the interest rate go down. The terms can range from between a few months to the duration of the mortgage in some cases. Capped rates tend be more popular in a rising interest rate environment.

However, capped rate mortgages tend to be more expensive than fixed rate mortgages. As with discounted and fixed rate mortgages, you may incur a charge if you move your mortgage before the end of the agreed period of the offer.

Variable rate mortgagesThis is essentially the lender's standard variable rate. It will be higher than any introductory interest rate and your repayments will generally go up or down with base rate changes. Most borrowers will find themselves better off with an alternative special interest rate option, particularly if you switch when introductory offers come to an end. Be aware of any charges that might be incurred for switching mortgages before taking any action.

Tracker rate mortgagesTracker rates are relatively new mortgage options whereby the interest rate you pay is guaranteed to stay at a certain level above the base rate. The rate will then remain within that set level above the base rate, whether it goes up or down, usually for the term of the mortgage. For example, you might find a deal whereby you pay 1 per cent above the base rate, whatever it may be or change to. Although you pay more of the base rate rises, you will benefit from any reductions in the base rate over the term.

The mortgage interest rate mazeWhat will you choose?

There are plenty of interest rate options available to the homebuyer when taking out or switching mortgages and this is often the area that causes the most confusion, all of which have their advantages and disadvantages depending on your circumstances. It can be confusing understanding all the features of the different products and knowing which one to choose.

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Buy-to-let.We offer professional investor advice, essential when choosing the right mortgage deal. Providing investors with professional advice to make an informed choice is what we do best. Whether you’re a new or experienced investor, contact us to discuss your buy-to-let requirements.

There has been a mixed reaction to the latest statistics monitoring take-up of the government’s mortgage rescue scheme. Some reports have focused on the low number of households that have taken up an offer under the scheme. So far, only six households have done so, although more than 5,300 have embarked on the first stage of approaching a local authority to inquire about mortgage rescue.

Shelter criticised the low number of households taking up an offer under the scheme when the government published its latest statistics at the end of June. The homelessness charity called for a review of how successfully mortgage rescue was working. It said the scheme “has the potential to help many vulnerable home-owners to stay in their home, so it is very disappointing so few people have been accepted on to the scheme.”

Shelter continued: “Getting accepted into the mortgage rescue scheme is obviously taking considerably longer than we would want. The government needs to review the current eligibility process and tackle any issues that are preventing people from successfully taking up the scheme.”

Small scaleIt should not be forgotten, however, that the scheme was only ever intended to

operate on a fairly small scale, providing help for 6,000 households over two years. The circumstances of each individual case have to be carefully assessed and there are a number of stages of the process to work through, so it was always likely that progress from inquiring about the scheme to acceptance into it would take some time.

Mortgage rescue is, of course, also only one of the possible solutions available to households experiencing payment difficulty.

It is important that borrowers explore all the options, including the range of tools that lenders already have at their disposal like switching from a capital repayment to an interest-only mortgage, re-structuring their payments or extending the length of the term. And other government schemes, including help through income support for mortgage interest and the home-owner mortgage support scheme, might be more suitable for households in different circumstances.

Meanwhile, with cases of possession now rising more slowly than the number of borrowers falling into arrears, there is evidence that lenders are showing forbearance where they can and helping borrowers to work towards solving their problems, even if they do not end up in a government scheme.

Working with borrowersAlthough only a handful of home-owners have accepted an offer of mortgage rescue, the much larger number of inquiries about the scheme may indicate that an increasing number of home-owners in difficulty are taking action to address their problems at an earlier stage, including discussing them with their lender.

Sometimes, borrowers have not even been in touch with their lender, despite experiencing difficulty.

Ultimately, lenders can only help those borrowers who engage with them. So, the message to borrowers in difficulty remains unchanged, and it is a simple one, talk to your lender at the earliest opportunity, and preferably before missing a mortgage payment.

Government mortgage schemesMixed reaction to the latest statistics

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News


If you are having difficulty meeting your mortgage repayments or are worried it may become a problem in the future, here is some information which may help you.

What you should do if you are having trouble paying your mortgageIf you are in this situation there are three steps you should follow:

Tell your lender as soon as possible: your lender will be sympathetic and will provide as much assistance as possible. Get advice: there are organisations which offer free and independent money advice. Check the help available to you: your repayments may be covered by an insurance policy or you may be eligible for government benefits or schemes which could help you to stay in your home.

Inform your lenderIf you are having trouble paying your mortgage, or you think it will

be a problem in the near future, you should inform your lender immediately. Your lender will be fair and work with you to find a repayment solution.

Some lenders have telephone helplines or debt counselling facilities to assist making contact. The sooner you contact your lender the better, so that action can be taken to deal with the difficulty.

If you can’t afford your full mortgage repayments you should talk to your lender and still pay what you can afford. This shows your lender you are committed to solving the problem and makes it easier for them to help you. There are a number of options that your lender may be able to consider including:

n Reducing your monthly payments by lengthening the term of the loan.

n Moving a repayment mortgage onto an interest-only basis,

provided you understand you will not be paying anything off the actual mortgage.

n Adding arrears to the outstanding mortgage amount rather than seeking immediate payment.

n Accepting reduced payments for a short period of time until you are able to resume full payments and repay any arrears that build up as a result.

n Changing the way you make your payments, or the date you make them.

The earlier you make contact, the more options there are available to resolve the problem. However, these are short-term solutions and in the long-term a repayment problem will have to be resolved. Your lender will wish to stay in regular contact with you to keep up to date with any changes in your circumstances.

Each lender has a policy setting out how they will treat borrowers when

their mortgage is in arrears. Your lender should provide you with information explaining how you can expect to be treated by them.

Get adviceThere are a number of organisations and counsellors that can help you assess your financial problems and advise the best course of action to solve them. If you are worried about approaching your lender direct - or if you have multiple debts – these debt advice agencies can help you. Lenders will work with these agencies if they are acting on your behalf. Debt advisers can also tell you about the government schemes to help homeowners and help you apply for them.

Check the options and help available to youIf you become unemployed, have an accident, or are too sick to be able to work, you should check whether you have a mortgage payment protection policy. This

Experiencing mortgage repayment problems?It’s essential to talk

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Consumer Advice

type of insurance would usually have been taken out at the same time as your mortgage and, if you have an eligible claim, will cover your mortgage repayments up to a period of 12 months or sometimes more.

The state benefits and schemes to help homeowners in difficulty have recently been strengthened. It is worthwhile seeking advice on whether you are eligible for any of the schemes or benefits listed below.

Government schemes to help with mortgage arrears

Income support for mortgage interestIncome Support for Mortgage Interest (ISMI) helps homeowners on benefits with their mortgage interest payments provided that the mortgage was used to purchase the home or for work to maintain the property's fitness for occupation. It is available to people claiming.

There is an upper limit of £200,000 on the size of mortgage which ISMI will cover. Restrictions can be imposed if your housing costs are considered to be excessive. You cannot claim if you work 16 hours or more per week, or your partner works 24 hours or more, or if you have savings of over £16,000.

In addition to interest payments, ISMI may also cover ground rent or certain service charges, but it will not cover the capital part of your mortgage payments or the premiums on an endowment policy.

The timing of the assistance will depend on when you took out your mortgage, but usually you will start receiving assistance 13 weeks after the start of a claim. ISMI is normally paid direct to your mortgage lender and credited to your mortgage account every four weeks in arrears.

The upper limit on the rate of interest paid is 6.08 per cent and there is a two year time limit in which you can claim IS for mortgage interest.

Homeowners mortgage support Under the homeowners mortgage support scheme borrowers who are facing possession because of a large but temporary reduction in their income can defer part of their interest payments for up to two years. This will reduce your monthly payments but the money isn’t written off, the deferred payments are added on to the outstanding mortgage balance. So you will pay it back eventually, with interest, however the scheme is only offered through some lenders.

Mortgage rescue Mortgage Rescue schemes are operated independently in England, Scotland, and Wales. To find out if you are eligible for mortgage rescue or another form of assistance you should contact your local authority or Citizens Advice Bureau.

Mortgage rescue in England Mortgage rescue schemes in England are aimed at vulnerable households facing possession (families with children, the elderly, those with a disability or pregnant women).

There are two forms:

Shared Equity – the housing association buys a stake of the equity in your property which reduces your monthly mortgage payments. You still remain the outright owner of the property; and

Mortgage to Rent – the housing association pays off your mortgage debt and you then become a tenant of the housing association, paying a rent you can afford.

Mortgage rescue in ScotlandIf you are facing possession in Scotland you may be eligible for the mortgage to rent scheme, where the housing association buys your home and you to continue to live there as a tenant. To apply, you must first get advice about your financial situation from either Citizens

Advice, a debt advice service or other advice agency, a solicitor, or your local authority.

The Scottish Government has announced an expansion of the Mortgage to Rent Scheme and a new Shared Equity Scheme.

Mortgage rescue in WalesThe mortgage rescue scheme in Wales take two forms:

Shared Equity - the housing association buys a stake of the equity in your property which reduces your monthly mortgage payments. You still remain the outright owner of the property; and

Mortgage to Rent - the housing association pays off your mortgage debt and you then become a tenant of the housing association, paying a rent you can afford.

Priority is given to families and people who live in specially adapted housing.

What you should not doYou should never take out a loan at a higher rate of interest to pay your regular mortgage payments; this will only make the problem worse. Don’t ignore letters or telephone calls from your lender; if you are not sure what they mean ask your lender or a debt adviser. Don’t stop paying altogether if you can’t afford the full repayment: talk to your lender and pay what you can each month.

You may be thinking about abandoning your property or sending the keys to your lender. You should not do this without talking to your lender first and understanding the consequences.

You should be aware that:

You will still owe any outstanding debt/mortgage, including the interest building up on the loan, until the property is sold.

You will have to pay for the costs of selling the property and will still owe any shortfall between the sale price of the property and the outstanding debt.

Your lender may pursue you, through the courts, to recover the total amount owing.

You may be recorded on a register of people who have had their properties repossessed and may find it more difficult to obtain loan finance in future.

Sale and rent-back schemes Some companies offer to help you if you get into financial difficulties with your mortgage payments by buying your home and then renting it back to you for a fixed period of time (six months or more). These are sometimes called ‘mortgage rescue’, ‘rent-back’ or ‘sell-to-let’ schemes.

The Financial Services Authority’s (FSA) announced recently that they are introducing an interim regime for the regulation of sale-and-leaseback firms. They are not the same as ‘home reversion’ schemes which are for people who have paid off their mortgage and want to sell part or their entire home for cash and retain the right to live in it for a nominal rent.

They should also not be confused with the government mortgage rescue schemes.

Selling your home in this way may allow you to clear your mortgage debts and stay in your home. However, if you opt for such a scheme you will no longer own your home and could still be evicted if you fall behind with your new rental payments. In addition most of these firms will pay you less than the market value of your property, so think carefully before entering into such a scheme and make sure you understand the consequences.

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The value of residential development land has stabilised across most UK regions after five negative quarters according to Knight Frank’s Residential Land Index.

It shows that the average value of both urban and greenfield land rose by 2.1 per cent during the second quarter of 2009, having almost halved since 2007, reflecting greater activity and confidence among developers.

Housebuilders and residential developers now account for 16 per cent of purchasers, up from 8 per cent during the first quarter and are no longer the biggest group of vendors.

They have been overtaken by the public sector as the most important source of new sites. It said that the supply of sites remains highly constrained, with owners dissuaded by sharply lower values.

In the three months to June, average land values in every region outside London showed modest increases. According to Knight Frank after five quarters in which land values almost halved, it appears that the market is now beginning to recover, not just because of the stable pricing in many regions but also because housebuilders and developers are increasingly becoming acquisitive.

The Housing Minister John Healey recently announced £1.7bn funding to build 11,200 new homes and regenerate 10 of the most deprived areas of the country. Ten local authorities in six regions are to receive the cash under the housing private finance initiative (PFI) in order to allow them to deliver 4,500 new or improved council homes and 1,600 new affordable rented homes.

The investment is expected to create 20,000 jobs in the building industry.

The Minister also said that the Homes and Communities Agency (HCA) had released over £300m in the last month to 50 housing associations across 119 local authority areas, to build a further 5,100 affordable homes.

£35m will be spent to help regenerate almost 700 homes across 11 urban areas through the Housing Market Renewal Pathfinders programme.

This announcement followed Prime Minister Gordon Brown’s commitment to invest an extra £1.5bn towards building a total of 110,000 new affordable homes over the next two years.

The Minister also revealed that there have been more than 300 bids from developers for the government’s £1bn Kickstart fund to unlock stalled private sector developments.

The Minister said: ‘Building homes, creating jobs and lifting communities out of deprivation is a top priority for us in government. I’m determined to pull out all the stops to see new homes built to meet our need for more housing in Britain.

‘At a time when private house building has declined dramatically during the recession, government investment and action means more affordable homes are now being built more quickly and we are helping to keep the construction industry going.

'In fact we’ve doubled the investment in the homes we’re building through our affordable housing programme compared to this time last year.

‘The steps I’m announcing put real momentum behind the Prime Minister’s housing pledge and I want to see work start on sites across the country within months.’

Housing private finance initiative Government allocates £1.7bn for new homes

Residential developmentLand values stabilise across most UK regions

News

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The Home Information Pack (HIP) is being blamed for "stunting market recovery" according to estate agents. The National Association of Estate Agents (NAEA) in a recent survey reported that of its members, ten per cent of agents believed the number of sellers would double if HIPs were suspended.

The NAEA survey also discovered a fifth of all agents believed the number of sellers would increase by 20 to 25 per cent, with a huge 91 per cent "adamant that customers paid little or no attention to the controversial packs anyway".

The Royal Institute of Chartered Surveyors (RICS) found stock of homes was down, despite buyer interest picking up. RICS have also noted "anecdotal evidence" suggested HIPs were decreasing the number of buyers coming forward.

Peter Bolton King, chief executive of the NAEA, said: "The housing market has seen a number of positive signs in 2009, particularly an increased demand for property and more sales being completed.

"However this will be unsustainable without a steady supply of housing. HIPs are controversial and in the NAEA's opinion, relatively useless. That is bad enough, but these figures suggest that professional agents believe that they are actively harming the market."

In April the laws on HIPs were changed, so they were required to be completed before a home was advertised for sale. They also must now include additional information, including a Property Information Questionnaire (PIQ), and can cost the seller up to £400 to complete.

The NAEA figures suggest that in April, the average estate agent had 67 properties

available to sell, compared with 84 in April 2008 and 100 in December.

"The figures are significant because of fears that housing market recovery is being stunted because increased demand for property among buyers is not being matched by a supply of houses for sale.

"The government should look at scrapping these packs, at the very least until the market has recovered. At that stage they should be reviewed. The NAEA would be happy to offer its professional opinion as to the best way forward," Mr Bolton King added.

Home Information Packs"Stunting market recovery"

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HIPs

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There are a lot of costs involved in renting a home. Some may be quite obvious but some you may not have thought about. Here are some useful tips to help your move go as smoothly as possible.

You’ll need to pay a deposit (usually the equivalent of a month’s rent) and the first month’s rent before you move in. Think about what type of rental agreement you need and find out what other costs you’ll have to pay.

Find out how you can make savings on your day-to-day expenses as well as on your bigger bills (such as utilities and council tax).

If you’re renting in a block of flats, the landlord will usually pay for buildings insurance, but you’re responsible for insuring your own belongings.

Make sure you remember the small things, such as checking that your credit record shows your new address and returning post addressed to previous occupiers.

Find out what help is available if you get into difficulties with your rent or have problems with your landlord.

Most landlords will expect you to pay two months’ worth of rent in advance. One is held as the deposit in case of damage or other costs (so you’ll get it back when you

leave the property, minus any charges), and the other is your first month’s rental payment. Some landlords ask for a larger deposit to take account of unpaid bills. Make sure you have enough money before you start looking around to avoid disappointment.

Different savings accounts offer different interest rates and notice periods, so make sure you can access your money when you need it. Compare savings accounts to make sure you’ve got the right one for you.

If you are a student, are on a low income, your income is from benefits only, or you have a low credit score, you may be asked to provide a guarantor. They will have to sign a legally binding agreement to pay all rent and other charges due if you fail to do so.

You can choose to rent from a private landlord, or you may be eligible for council or housing association accommodation. Make sure you have a tenancy agreement clearly stating the responsibilities of both the tenant and the landlord, and read it through thoroughly before signing.

It’s important that you are sure you can afford the rent and bills, so be honest with yourself and don’t

be tempted to overstretch your money to rent your dream home. If you go through a lettings agent, you may be charged a fee for them to draw up the tenancy agreement and get references. Be aware of any additional costs and include them in your moving budget.

You’ll also need to think about whether you need help moving your belongings, and whether you need to buy furniture or other household items, so make sure you plan your budget to take these into account.

Landlords and councils will often have insurance to protect their property and any furnishings that belong to them, but they are unlikely to insure your furniture or belongings. Speak to your landlord to find out exactly what is covered.

Work out what you think your belongings are worth. Then shop around for the most suitable insurance for you.

Make sure you change your address with your bank, credit-card and insurance companies, as well as other financial companies that you have arrangements with. It might be a good idea to put a three-month redirection on your old address to cover the transition period. This can also reduce your risk of identity fraud.

Your new address may have an impact on your credit score if previous occupiers have had bad credit. You can check your credit record at your new address using credit reference agencies. You can then ask the agency to change the information on your file if it is incorrect, or it includes details about people who have no financial connection with you.

Don't be tempted to keep or throw away mail addressed to a previous tenant/owner. Always return it to the sender if you don’t know their new address. You don't need a stamp, just mark it 'return to sender' and stick it in a post box. This should avoid you having to deal with any problems if they weren't up to date with their payments.

If you have problems with your landlord, or a dispute about the return of a deposit, there is plenty of advice and support to help you.

Renting a property Make your move go as smoothly as possible

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Renting


This checklist is an introduction to buy-to-let highlighting the types of questions you should be asking yourself before buying a property to let out. It is not intended as an exhaustive list, merely an introduction for new buy-to-let investors, to a range of issues they should consider before entering the residential lettings market for the first time.

You should consider the following points before making any financial commitments:

Making your investment

n Are you investing to generate an income or hoping to see your capital grow and are your expectations realistic?

n Do you have sufficient capital of your own to invest in a property?

n Are you prepared to tie-up your capital for a considerable period?

Will you have sufficient savings and other forms of capital after you have made this property investment?

Have you taken specialist tax advice about the implications of buying and selling a buy-to-let property, and the tax treatment of all income and expenditure from renting? Choosing and managing your property

It is equally important that the property you buy is appropriate for the purpose and is properly managed thereafter. You should consider the following points before deciding to proceed:

n Are you regarding this as a medium to long term project?

n Have you consulted a professional, qualified local letting agent before beginning your search for a property?

n Have you thought about the type of household which will want to rent your property?

n Have you considered that demand for this type of property may change from year to year?

n Have you made independent inquiries to confirm a likely rental figure?

n Is the location of the property attractive to tenants?

n Most lenders will require you to have an Assured Shorthold Tenancy agreement with your tenants. Are you aware of the legal implications of this?

n If you are thinking of buying a leasehold property, what is the length of the lease remaining and is sub-letting allowed?

n Have you consulted a solicitor about the legal implications of renting out your property?

n Have you investigated the running costs of the property (e.g. ground rent, service charges, repairs, letting and management fees, etc)?

n Have you allowed for furnishings and other start-up costs in your calculations?

n Have you considered how you will repay your mortgage if you have no tenants paying rent?

n Are you aware that your property could decrease, as well as increase, in value?

n Are you aware of all the safety regulations applying to rented property?

n Have you considered the likely costs of dealing with tenants who do not pay their rent or damage your property, including the costs of evicting a tenant in court?

n Have you considered using the services of an agent to let and manage your property on a day-to-day basis or will you be doing this yourself?

n If you are using a letting agent, have you assessed how much they will charge you for their services?

n Will the net rental yield i.e. the rent remaining after you have paid your running costs, be sufficient to meet your monthly mortgage payment?

Choosing your mortgage

If you are thinking of raising a mortgage to help fund the purchase of a property, you should consider the following:

n Have you considered what type of mortgage to buy your property with?

n Would you welcome assistance from a mortgage consultant?

n Have you considered the impact of any future rises in interest rates?

n Could you meet the monthly mortgage payment from your own resources, if the rent was not paid or the property was empty?

If you are unsure of any of your answers to the questions in this checklist, you should seriously consider taking appropriate professional advice. In particular, you may need to take specialist legal and tax advice from suitably qualified professionals.

Checklist for investing landlordsA range of issues to consider before entering the residential lettings market

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Buy-to-let


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Protection

If you fall behind with your mortgage repayments and cannot catch up again, you could eventually lose your home. But you can take steps to protect yourself against this risk by taking out Mortgage Payment Protection Insurance (MPPI).

Q. What is MPPI?A. Mortgage Payment Protection Insurance (MPPI) pays your monthly mortgage payments for a specified period if you suffer accident, sickness, or unemployment. Lenders and insurers have agreed to adopt certain minimum standards for MPPI, so you can be confident that the level of cover you will be offered meets or exceeds these.

Q. How does MPPI work?A. You pay a premium each month while the mortgage is running. If you become unemployed, or unable to work due to accident or sickness, the policy starts to pay out (usually direct to your lender) to pay your mortgage.

To keep the cost of the insurance down, there are some periods where you will not be covered (you should check the individual policy for exact details). The main ones are an "exclusion period" of up to 60 days when you first take out your policy, during which any claim for unemployment would not be met (although claims for accident or sickness would be paid). In addition, there is an "excess" or "waiting" period of up to 60 days

for each claim, during which no payments will be made.

So it makes sense to try to keep enough money in savings to cover two months worth of mortgage payments, even if you have MPPI. There are some circumstances when MPPI will not cover you - for example, unemployment caused by misconduct, or that you knew was impending at the time you took out the insurance, or sickness claims caused by certain pre-existing medical conditions.

Q. How does it work if I have a joint mortgage with someone else?A. The MPPI can be set up so that it covers both of you, usually by allocating a proportion of the MPPI to each person (e.g. 50/50 or 60/40). If one person needs to claim, then the amount of the benefit payment will be the proportion of the MPPI allocated to that person. It is also possible to allocate the MPPI on a 100/100 basis, so that 100 per cent of the MPPI is paid, even if only one of the joint borrowers loses their income. This type of arrangement will generally require higher premiums.

Q. What if I am self-employed or on a contract?A. You will generally be able to take out MPPI even if you are self-employed or on a contract. But make sure you check the details of

the circumstances in which you can make an unemployment claim.

Q. How do I buy MPPI?A. If you are taking out a new mortgage, you will probably be offered MPPI by your lender or the intermediary arranging your mortgage. Unless the MPPI is part of a mortgage "package", it is up to you whether you take the MPPI offered with the mortgage or to buy it from elsewhere. If you already have a mortgage, you may be able to buy MPPI from your lender, or through an insurance broker, or direct from an insurance company. MPPI is usually cheaper (and the terms may be more generous) if you take it out at the time you start your mortgage, rather than leaving it until you have had your mortgage running for a while.

Q. What happens if I need to claim?A. Your policy document will tell you how to claim. Usually, you need to obtain a claim form, complete it and send it to your insurer, together with some evidence (such as a redundancy notice) to support your claim. If you take a temporary job, then provided you let your insurer know beforehand, you can interrupt a claim without having to pass the 60 day excess period again when your temporary employment ends.

Q. What do you need?A. Most people should consider taking out full MPPI, covering the full amount of the mortgage payments following accident, sickness or

unemployment, and this is what you will generally be offered in the first instance. But if you already have other cover -such as accident or sickness cover from your employer, Income Protection or Critical Illness insurance or substantial levels of savings - you may decide that you do not need the full level of MPPI insurance.

If so, you may decide to "top up" your existing cover (perhaps by taking out the unemployment-only element of MPPI), or you may decide that you do not wish to take out MPPI at all. But be very careful that you are not being over-optimistic about your ability to meet your mortgage and other commitments if you decide not to take out MPPI. If you decide not to take out MPPI cover, your lender or intermediary may ask you to sign your confirmation that this is the decision you have reached, after considering all the circumstances.

Signing this confirmation will not affect the willingness of your lender to try to help you if you do not take out MPPI and subsequently fall into arrears with your mortgage repayments at a later date. However, if you have MPPI or some other form of protection, both you and your lender will have greater scope for dealing with payment difficulties.

Mortgage Payment Protection InsuranceCovering your monthly mortgage payments for a specified period - your questions answered.


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Protection

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The British love affair with property investing has been very evident over the past decade and despite a tougher market, those looking to get into the market should beware of easy buy-to-let deals and still make sure their investment meets a strict checklist, or dreams of property riches may turn into financial disaster. Remember, buying a buy-to-let property is a business decision, and you must ensure the figures add up, no matter how desperate you are to invest in property. The 1988 Housing Act made investment in residential property more attractive to landlords when it introduced a new type of tenancy giving landlords more control over their properties. The increased availability of loans at attractive rates of interest for buy-to-let purchasers increased the appeal of owning rental property.

When you buy a property to let out, you are becoming a landlord. And owning investment property is not like owning your own home. Instead you are effectively running a small business.

Before you choose a property and arrange the finance to purchase it, there are a number of factors you should look into.

Choosing a property

Researching your marketYou should carefully research the market where you want to buy your property. You can either do this yourself or employ a specialist letting agent to help you find the area and property you are looking for. If you research the market yourself, you will need to gather information from estate agents, local papers, local employers and even

the local authority, about the demand for and supply of, rented housing.

Finding your tenantsYou will also want to think about the type of tenant you are aiming to attract. Are you hoping to attract single people, or families, as they will have different requirements. It is important to remember your property should have features that are attractive to would-be tenants, rather than would-be purchasers.

Choosing your locationYou should also look at how close the property is to local amenities such as shops, transport and schools, and are these the type of amenities that are important to your tenants? So, if you are aiming to let your property to say a family with school-age children, how close the nearest schools are, will be an important influence on where they choose to rent.

Choosing your property’s size and condition Equally, you should think carefully about buying a property whose size is attractive to households looking for rented accommodation in that location. As well as the size, type and location of your property, what about its condition? Have you assessed whether the property will require expensive maintenance? Generally speaking, older homes require more attention.

Choosing a property you can affordObviously, the size of mortgage you can afford will have a major influence on the size and location of your property. You also need to considers how much to spend on a property and should bear in mind that as well as increasing in value, your property can also fall in value.

Investing in propertyMake sure your figures add up

Buy-to-let

29

Managing your property

Your responsibilitiesWhen you have chosen a property, you will need to decide who will manage it for you. If you manage it yourself, you will be responsible for:

n finding tenants n checking tenants’ references n collecting the rent and

maintaining the property n and dealing with problems

Your legal responsibilitiesYou will also need to be aware of your legal responsibilities as a landlord such as: n carrying out repairs n ensuring the safety of gas and

electrical appliances n and ensuring that the furniture

and furnishings meet fire safety requirements

You should also consider familiarising yourself with landlord and tenant law, to understand your responsibilities as a landlord, and the rights your tenants enjoy. This is an area you may wish to take legal advice about. The Department of Communities and Local Government (DCLG) have published a useful free guide for landlords in England and Wales called "Assured and assured shorthold tenancies: a guide for landlords.” When your property is emptyYou should remember there may be periods when you are unable to find tenants for your property

and it will be empty, with no rental income coming in. Obviously you will still be expected to continue repaying your mortgage so you will need to think about how you will meet your mortgage repayments in these circumstances. This could particularly apply if you choose a property in an area where the supply of rental property exceeds demand from tenants.

Maintaining your propertyAs well as managing your property, you will be responsible for maintaining it. Besides repairs and regular maintenance, properties can benefit from routine improvements which maintain their attractiveness with would-be tenants. You may find that your property is in need of an overhaul after a tenancy finishes. Naturally, you will have to finance this yourself. What is more, your property is likely to be empty and you will not receive a rental income, while your property is being improved.

Using a managing agentGiven the number of different responsibilities you face as a landlord and the limitations on your own time, you may wish to use a managing agent to look after your property for you. This could cost you approximately 10 per cent to 15 per cent of your monthly rental income.

Choosing a mortgage

Paying for your property Obviously, when you choose a property, you will need to

ask yourself how much you can afford to pay, and how you will pay for it? If you take out a mortgage, you should work out what percentage of the value of the property you need to borrow. The size of the loan is usually linked to the expected rental income. As a guide, your lender will expect your monthly rental income to be 25 per cent to 50 per cent greater than your monthly mortgage payments.

Your choice of mortgageWhen you choose a mortgage, your choice will be between a repayment mortgage or an interest-only loan. With an interest only mortgage, some lenders may require you to have a suitable investment product. If you have a repayment mortgage, some lenders may also advise you to arrange life insurance alongside your loan. You may be able to choose between fixed rate and variable rate mortgages. Fixed rate loans will give you some certainty about your mortgage repayments whilst variable rate loans could move up or down. You should also remember that your mortgage payments could rise if interest rates rise, depending on the type of mortgage you have.

What will your costs be?As well as your mortgage payments, you will need to pay for: n buildings insurance n consider contents cover, if your

property is furnished n maintenance costs

n periods when you are receiving no rental income because the property is empty or the tenants have fallen behind with their payments

n mortgage repayment increases because of interest rate rises, which you may not be able to recover immediately from rent increases

Your tax liabilityBefore you can calculate what your income from your property will be after taking into account all necessary expenditure, you should recognise that the profits from renting property are taxable. However, you will be able to offset some of the costs you incur as a landlord against tax. You will have to pay the following taxes:

n Income tax n Stamp Duty when you buy your

property n Capital Gains Tax when you

sell it


Articles are copyright protected by Goldmine Publishing Limited 2008. Terms and conditions apply. Unauthorised duplication or distribution is strictly forbidden.

Content of the articles featured in this publication is for your general information and use only and is not intended to address your particular requirements or constitute a full and authoritative statement of the law. They should not be relied upon in their entirety and shall not be deemed to be, or constitute advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. The FSA does not regulate commercial lending and some forms of buy to let mortgages. Your property may be repossessed if you do not keep up repayments on your mortgage.

In the ARLA members' survey of the Private Rented Sector (PRS) for the second quarter of this year, nearly twice as many ARLA members reported landlords are buying more properties.

The Bank of England's decision to cut interest rates to historic lows over the past year has also helped struggling landlords, according to ARLA. Half of those surveyed said they thought the cuts are tempting investor landlords back to the market because of the minimal interest to savings rates.

Ian Potter, operations manager of ARLA, said: "Each quarter we glimpse a bit more activity as the bargains get snapped up and confidence is restored in buy-to-let as a viable long-term investment vehicle, particularly if the returns are rising too. "The government has started to look at the PRS a bit more closely, recognising just how important it is to the property market as a whole.

"Some initiatives, such as the interest rate cut, appear to be having an effect albeit indirectly but there's still a long way to go to. However it is fair to say that these signs are encouraging and I'm hopeful that this may mean that we're starting to see the bottoming out of the market."

The ARLA survey also indicated the rise in buy-to-let activity could be as a result of "increased average weighted rental returns". Houses had risen from 4.8 per cent to 5.1 per cent, with flats up from 4.9 per cent to 5.0 per cent. Returns for flats remained consistent throughout the UK.

However, optimism is muted in the buy-to-let market by the lack of buy-to-let mortgages on the market.

Landlords buying more propertiesQuarterly survey revealed a "bounce back" in the buy-to-let market

Landlords have been buying more properties in the last quarter according to a recent survey. The Association of Residential Letting Agents (ARLA) quarterly survey revealed a "bounce back" in the buy-to-let market.

Buy-to-let


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

esmart property issue 14

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