To Firstbuy or not to Firstbuy

The government recently announced its backing of a mortgage indemnity scheme that will allow higher loan to value lending for buyers of new build properties.

The full details of the scheme won’t be finalised until the spring, but we have compared the new scheme with Firstbuy, the government backed shared equity scheme announced in this year’s Budget.

We believe borrowers looking at the new build indemnity scheme will share similar characteristics with those for whom Firstbuy was aimed at, in that they do not have a big enough deposit to borrow on the open market.

Here are the facts -

• With the indemnity scheme, the builder puts in 3.5% of the value of the property
• With Firstbuy, they put in 10%.
• This means the indemnity scheme will enable a builder to support around three times as many properties with the same sum of capital than with Firstbuy.
• For borrowers, it will not reduce monthly costs as a shared equity loan does, but it does not require the borrower to find a large cash sum at a future date.
• Borrowers with Firstbuy have to repay the equity loan in the future.
• The indemnity scheme will only be available to borrowers taking out a repayment mortgage. So, if in seven years house prices are roughly the same, those who borrowed with a 5% deposit today will be sitting on equity of over 20%, worked out using a notional interest rate of 5%. So anyone using the indemnity scheme to buy a property should be easily able to remortgage onto any product once their equity has increased sufficiently.

The main point to make though is that from a customer’s point of view, this scheme should re-open access to higher Loan to value lending, and many may find that preferable to share equity.

But, borrowers need to recognise that taking out one of these loans is no different to taking out any other 95% Loan to value mortgage, and they have to weigh up the level of risk with their desire to be home owners.

Bank of England - interest rates to rise in 2012

The Bank of England has said that mortgage interest rates could increase next year, as lenders pass on the increased costs of wholesale funding.

Its Financial Stability Report, published today, said that, since 2009, the profitability of new mortgage lending has reduced, because lenders have failed to keep rates in line with higher wholesale funding and other costs.

With costs continuing to rise, the Bank warned that lenders may start to pass this cost on to borrowers by increasing mortgage rates in order to maintain their profit margins.

The report said: "At the beginning of the financial crisis, when funding costs rose sharply, banks were relatively slow in updating the price of new mortgages and the residual remained negative for around a year.

"This suggests it may be during 2012 that any significant increase in banks' lending rates occurs."

The report added: "While credit availability was reported to have increased slightly in 2011 Q3, particularly for high LTV mortgages, subsequent market intelligence suggests that, as with corporate lending, some banks may be starting to pass on higher funding costs to mortgage customers through higher prices."

If you have concerns about how a rise in mortgage rates could affect you and would like to give consideration as to how best to protect yourself against such a rise, please feel free to get in touch.

As always , thanks for your attention.

Mark (mark@themortgagemonkey.co.uk) 

Taxman going online to look for holiday home owners

Overseas property owners have been urged to inform HMRC if no disclosure on tax has been made already.

Tax specialists are warning advisers to notify their foreign property owning clients of a new investigation team established by HMRC to track down people who own land and property abroad by ‘data mining' publicly available records.

One tax consultant and former Inland Revenue inspector, says this latest development is one of a number of trends conspiring to catch out those who have undisclosed assets.

“At one time it would be easy to buy a home overseas and no-one would be any the wiser,” he explains. “Nowadays there is increasing transparency as land registry records and other public information is readily available on the internet. 

“At the same time we are seeing greater international collaboration between tax authorities. The treaties in place between the UK and most other European countries mean that HMRC can follow up lines of enquiry through its counterparts overseas.” 

He further warns that under the terms of a European treaty, tax due in the UK can now be collected in other countries. Taking Spain as an example the authorities have the right to empty a person’s Spanish bank account without a court order and may even seize property. 

It is projected that long-term trends suggests it will be increasingly difficult to hide overseas assets. People who have property they haven’t disclosed should consider putting their affairs in order now.

If people do come forward, HMRC is likely to accept their disclosure without further investigation. It’s better to resolve the position now and retain some degree of control than wait to be found out further down the line and face a much tougher penalty.

A golden gate for the already empty stable ?

The latest FSA rules will cost the City up to £1.4bn a year from now on, according to the regulator's figures.

Regulations consulted on and introduced over the past 12 months by the FSA will create compliance costs of £1.1bn to £1.4bn annually, according to figures compiled by Hargreaves Lansdown.

The figures are taken from FSA consultation papers from October 2010 to October 2011, which show the costs the UK's financial sector will have meet every year from now on.

Cost benefit analyses included in the papers also show the industry will have to pay total one off costs ranging from £253.2m to £323m.

Hargreaves Lansdown said the FSA has launched 18 separate consultations on changes to the law since last October.

The new measures cover areas such as capital requirements, data collection, the handling of consumer complaints and financial crime.

Not all the consultations will cost the industry money, but the wide range of costs have prompted fears smaller City businesses will be hit.

Hargreaves said it recognises the regulator must balance consumer protection with giving the financial services industry room to flourish, but was "surprised" at the range of one off and ongoing costs facing the industry as a whole.

So , money well spent ?

Well , the FSA were regulating the financial industry when the financial crisis started a couple of years ago so one has a sense of buying a golden stable door when the horse is already charging off down the road.

……………..as a dear old friend once said to me….” If you ban one make of aircraft from flying you won’t stop plane crashes”.

Government reveals New Build Mortgage Indemnity Scheme lenders

The government has revealed the names of the lenders that have signed up to its indemnity scheme announced today as part of its housing strategy.

It says Barclays, HSBC, Lloyds Banking Group, Nationwide, Royal Bank of Scotland, Santander and Yorkshire and Clydesdale Banks have agreed in principle to participate in the scheme, which will see them lend up to 95% LTV on new-build property.

The government will underwrite part of the risk on the loans alongside house builders.

It has also confirmed that over 25 developers have agreed in principle to joining the scheme, including Barratt, Persimmon and Taylor Wimpey, the three largest builders in the UK.

It says it hopes that other lenders and builders will want to participate in the scheme.

The government has now released further details of how the scheme will work, revealing that the builder will contribute 3.5% of the value of each property sold under the scheme into an indemnity fund, with the government supporting the fund to a total of 9% of the property’s value.

The indemnity fund pays out to the lender if a property financed under the scheme is repossessed and there is a shortfall. Builders will take the first loss, with the government only being called upon to pay once the builder’s fund has been exhausted.

Lenders and builders will retain the right to decide which builders and lenders they wish to engage with. The government will establish a delivery group of lenders and builders to meet with on a regular basis to monitor the practical implementation of the scheme.

There will be a cap on the value of properties eligible for inclusion in the scheme.

The scheme will be delivered by the Department for Communities and Local Government and will be available in England only.

The government says it will conduct an evaluation of the scheme after two years, to ensure that there has been an appropriate and positive effect on the demand and supply of new build properties.

The Banking Crisis Explained

The Banking Crisis simply explained

John bought a donkey from a farmer for £100 and the farmer agreed to deliver the donkey the next day.  But the next day he drove up and said, “Sorry son, but I have some bad news.  The donkey’s died.”

John replied, “Well then just give me my money back.” 

The farmer said, “I can’t do that, I’ve already spent it.” 

John said, “OK then, just bring me the donkey.”

The farmer asked, “What are you going to do with him?” 

John said, “I’m going to raffle him off.” 

The farmer said, “You can’t raffle a dead donkey.” 

John said “Sure I can. Watch me. I just won’t tell anybody he’s dead.”

A month later, the farmer met up with John and asked “What happened with that dead donkey?”

John said, “I raffled him off.  I sold 500 tickets at £2 apiece and made a profit of £898.”  The farmer said, “Didn’t anyone complain?”  

John said, “Just the guy who won.  So I gave him his £2 back.”

Lloyds raise their Standard Variable Rate on Eurozone fears

Lloyds Banking Group has become the first big bank to raise Standard Variable Rates, prompting suggestions that the era of borrowing at rock-bottom rates is drawing to a close as the Eurozone crisis deepens.

The move will affect more than 175,000 borrowers who took out mortgages from Bank of Scotland and The Mortgage Business, who will see their rates rise from 4.84% to 4.95% on November 1.

Many will not be able to remortgage. Bank of Scotland, which closed its books to new business in 2009, specialised in self-cert mortgages and also those of more than £1m.

Mortgage Business closed to new business in 2008.

Another lender within the Lloyds Banking Group whose Standard Variable Rate now seems more than likely to be under review, is Cheltenham and Gloucester.

Other lenders are also likely to raise Standard Variable Rates in the near future because of a rise in the costs of funding mortgages caused by the Eurozone crisis.

According to Which?, about 40% of borrowers are on Standard Variable Rate, equating to about four million.

Three-month Libor, which reflects rates at which banks lend to each other, has been on the rise, climbing from 0.86% to 0.97% in the last two months.

Last week, Barclays, Santander and Northern Rock all raised the cost of their trackers for new customers, as well as fixed rate mortgages, which are linked to swap rates. Five-year swaps were 1.81% last week, a fall from 1.90% the previous week, but a rise from 1.63% two months ago.

For example, Barclays is raising the cost of its five-year fix at 70% LTV from 3.64% to 3.99%. Santander raised its fixed rate deals by 0.3% and Northern Rock raised the cost of its trackers by 0.2%.

Several building societies have already raised their Standard Variable Rates. For example, last year Skipton pushed up its rate from 3.5% to 4.95% – the same as Lloyds.

It appears that rates may have bottomed out and the tide is turning.

If you are on your lender’s variable rate and have concerns, please feel free to get in touch.