Simply Home Finance, Summer 2017
HOW THE HOUSING MARKET MUST CHANGE TO MEET NEW NEEDS
The arrival of the summer months is usually a busy time for estate agents. However, it seems that the market is being held back by a lack of supply.
In their April survey, the Royal Institution of Chartered Surveyors reports that there is a marked lack of property for sale, with each estate agent having on average just 43 properties on their books. Market stagnation is blamed on inflated asking prices, tougher lending rules, rises in stamp duty and economic uncertainty in the face of Brexit, meaning that more people decide to renovate their homes rather than move.
THE HOUSING WHITE PAPER
February’s housing white paper which the government aptly entitled “Fixing our broken housing market”, looked at several ways in which the supply of new housing can be increased to meet the growing shortfall. In 2016, just 168,000 new-build properties came onto the market, way below the 250,000 needed every year to keep pace with demand.
To broaden housing options, the white paper proposes a shift away from an almost exclusive focus on home ownership to, and increased emphasis on, multi-tenure house building, and the construction of more rental property. Family-friendly tenancies which are two to three years long are to be actively encouraged.
GREEN BELT ISSUES AND HOUSING STARTS
Under its proposals, councils will be required to produce a realistic plan for local housing demand and review it every five years. Preservation of the Green Belt concept is confirmed and councils will only be allowed to alter Green Belt boundaries in exceptional circumstances.
Councils and developers are expected to consider higher density, especially in areas which have good transport links. The proposed strategy also includes giving councils powers to pressurise developers to start building on land they own. They will be expected to start building within two years of receiving planning permission, as opposed to the current three-year deadline.
Currently 60% of new homes are built by just ten companies, so the government will offer support to small independent builders through a £3bn Home Building Fund.
To free up more family homes, the government plans to prioritise the building of retirement housing, enabling older people to downsize from properties that are too big for their needs to affordable property designed and tailored to their later life needs.
WHY BEING BAD AT MATHS COULD COST YOU MONEY
Getting your numbers wrong when working out how much home insurance cover you need could prove to be a costly mistake that could have serious consequences. If you don’t check your home contents sum insured on a regular basis, then you could find that if you need to make a claim you are underinsured. If you’ve had the same level of cover in place for a few years, then it may no longer reflect the up-to-date value of all your possessions.
If you don’t have the right level of cover in place and you need to make a claim, you could find that your insurance company reduces the value of your claim substantially, even if your claim is for less than the total amount of your sum insured.
If for example, you have possessions worth £50,000 but only insure them for £25,000, and you make a claim for £10,000, your insurer may reduce the amount they pay out to £5,000 because you are underinsured.
So, make sure you check the value of your home contents when renewing your policy.
WITH 11 BUYERS FOR EVERY HOME, HOW CAN YOU GET AHEAD IN THE RACE?
Figures from the National Association of Estate Agents confirm that housing demand remains extremely high, with an astonishing 11 buyers chasing every property on the market.
Whether you’re a first-time buyer, second-stepper or a last-time mover looking for a property, with a shortage of houses for sale you’re likely to face some stiff competition. So how do you give yourself the best chance of getting your offer accepted?
DON’T HANG AROUND
If you like the look of a property listed on a website, acting swiftly makes sense. Contact the agent and book a viewing as soon as you can. Make sure the agent knows your circumstances and that you’re a serious buyer.
If you’re a first-time buyer with a mortgage offer in place, you are in a better position than someone further up the housing ladder who will need to sell their existing property. If your seller is keen to move quickly, your offer may be more appealing than one at a higher price.
BUILD RAPPORT WITH THE SELLER
Getting to know more about your seller’s situation and their moving plans can help you demonstrate that you’re a suitable buyer. Letting them know what you like about the property and reassuring them that you’ll take good care of it, could help them to warm to your offer. Having a good relationship with the seller can also help you find out valuable information about the neighbourhood and the property in a way that the agent’s details can’t do.
BE PREPARED TO BE FLEXIBLE
If you can help the seller by accommodating their moving dates, then they may see you as the most suitable buyer. For instance, they might appreciate a delayed completion to give them more time to find their next property, so it’s worth asking how you can help them with their plans.
HALF OF UK FAMILIES COULDN’T SURVIVE A MONTH ON THEIR SAVINGS IF ILL HEALTH STRUCK
A recent report from Aviva1 shows that 24% of UK families would have no savings to fall back on if ill health were to strike and almost half couldn’t survive financially for a month.
It’s a sad fact of life that a major illness can strike at any time. Figures for the UK show more than 800 people a day receive a diagnosis of cancer and every six minutes someone suffers a heart attack. Only 18% of people surveyed had a protection policy in place that would provide for them financially if this were to happen to them.
Critical illness insurance means that if you were to be diagnosed with a serious medical condition, you would receive a tax-free lump sum payment. At a time like this, no-one would want their loved ones to be burdened with financial worries, so having this type of cover in place can provide valuable reassurance for you and your family.
There are core conditions that most policies cover. These include cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke. Permanent disability resulting from an illness or injury is usually included too. You can take out cover for a set number of years, whilst your family is growing up and your financial commitments are often at their greatest, or for life. There’s a variety of policies on the market covering various medical conditions, so taking expert advice will help ensure you make the right choice and get the cover you need.
Many people buy a policy when they take on a major financial commitment such as a mortgage, buying a combined life and critical illness policy. It certainly pays to start a policy at a young age, rather than leaving it until later in life when the cost of cover starts to rise, as does the risk of developing a critical illness.
INTEREST-ONLY MORTGAGES UNDER INVESTIGATION BY THE FCA
The Financial Conduct Authority (FCA) has announced that it will investigate mortgage lenders with borrowers on their books who have interest-only mortgages to ensure that they are being treated fairly.
The FCA says that 1.8 million UK home owners have this type of mortgage (excluding buy-to-let) and many loans are due to be repaid over the next couple of years. In some cases, borrowers don’t have adequate plans to repay them. The FCA acknowledges that these borrowers will need urgent help and support from their lender to find a workable solution.
Before the new stricter rules on mortgage eligibility came into force, interest-only mortgages were in widespread use. An interest-only mortgage is one where the monthly payment only covers the interest owed, meaning that at the end of the mortgage term the borrower must repay the original capital sum that they were lent.
THE SCALE OF THE PROBLEM
The average amount owed by those aged over 55 with interest-only mortgages is put at £91,000, with one in seven owing more than £150,000.
Many borrowers have yet to give proper consideration as to how they will repay the capital amount when it becomes due at the end of the mortgage term. They may have to resort to selling the property, downsizing, or using their savings or pension pots to clear the debt. If the money can’t be found, then the homeowner could, in extreme cases, face repossession.
Lenders are increasingly aware that some people with interest-only mortgages are likely to face difficulties in the future and are putting plans in place to avoid the risk of borrowers defaulting and the need to sell. Some are providing their interest-only borrowers with information on mainstream or lifetime mortgages (a form of equity release), for example.
If you could use some advice on your interest-only mortgage, please get in touch.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.
WILLS AND POWER OF ATTORNEY – DON’T LEAVE IT TOO LATE
Statistics from the Alzheimer’s Society show that there are around 850,000 people living with dementia and the number is expected to rise to over one million by 2025.
Charities that care for the elderly advise everyone to plan for a time when they might not have the mental capacity needed to handle their own financial affairs or deal with decisions about their care, and to make sure they make their Will.
A WILL IS IMPORTANT
Having a valid Will in place will ensure that after your death, your assets are distributed as you would wish. If you don’t leave a Will, then your estate will be distributed according to the rules of intestacy, and this could mean that those close to you who you would have wanted to benefit from your estate might receive nothing, while distant relatives you hardly know might benefit instead. You need to make your Will when you still have the mental capacity to make your wishes known.
PROTECTING YOUR INTERESTS
Lasting Powers of Attorney (LPA), or Continuing and Welfare Powers of Attorney in Scotland, are becoming much more widely used. They can be written to cover both financial matters and healthcare provision, and give you the satisfaction of knowing that you have nominated someone who can legally act on your behalf if you no longer have the capacity to deal with matters yourself.
Many people wrongly assume that their loved ones can automatically deal with banks and building societies or health authorities on their behalf. However, this isn’t how the law operates. If you lose mental capacity or become seriously ill and haven’t made an LPA, a family member wouldn’t have the legal authority to deal with matters on your behalf, and would need to apply to the Court of Protection to be appointed as your Deputy (Guardian in Scotland). This can be a lengthy and expensive process.
TO BUY OR RENT? WHAT YOU NEED TO CONSIDER
Buying your own home is a big financial decision and one you need to approach with your eyes wide open. There are many things to consider and you’ll need to weigh up the pros and cons carefully before opting to become a homeowner.
RENTING GIVES YOU FLEXIBILITY, BUT YOU PAY FOR IT
Renting your home gives you a roof over your head, the flexibility to move on pretty much when you choose and has the added benefit that you aren’t generally liable for any maintenance costs. However, the downside is that you aren’t building up valuable equity in your home. Buying gives you a growing stake in your property and means that if it increases in value you make a profit. You also have the satisfaction of knowing that when you’ve finally paid off your mortgage, you’ll own your home outright. Is buying a property right for you? Here are some questions that can help you decide.
IS IT CHEAPER TO RENT OR BUY?
In the short term, it can be a cheaper option to rent. The rent you pay could be cheaper than the cost of a mortgage. Also, the deposit for a rental property can often be much less than the deposit required to purchase a property. However, the mortgage market is currently very competitive and there are some good deals available. We can advise you on what type of deal might be available for someone in your financial circumstances.
WILL YOU BE ABLE TO AFFORD TO OWN?
Saving up for the deposit is only the first step. You and your mortgage lender will need to be certain that you can budget wisely and will be able to afford the monthly payments now and in the future. You will also need to have enough cash available for other home buying expenses like survey costs, legal fees, stamp duty (payable on properties with a purchase price of more than £125,000 in England and Wales, and LBTT above £145,000 in Scotland), plus moving costs. You’ll need to consider all the ongoing expenses that come with home ownership, like buying furniture, utility bills, insurance and maintenance costs.
WHAT ARE YOUR OTHER FINANCIAL GOALS?
Whilst buying a home is a major goal, it won’t be your only one. Everyone should have a financial plan in place that takes care of important things like saving for the future and making provision for retirement. For instance, if you’re thinking of setting up your own business or pursuing other interests or dreams, you might want to prioritise these goals over buying a home for now.
If you would like some professional advice, do get in touch.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.
NEWS IN BRIEF
New formula for Personal Injury compensation payments looks set to increase premiums
A new formula for calculating compensation payments for those who suffer long-term injuries has been introduced by the Ministry of Justice. The discount rate is used when arriving at the compensation to be awarded to claimants. It is intended to give claimants the ability to invest their money in such a way that they can live off their compensation for many years, in some cases for the rest of their lives. It is calculated in line with returns on low-risk investments such as index-linked gilt-edged government stocks. The sum payable is adjusted based on the amount of interest a claimant might receive if they invested the money. With interest rates at historically low levels, from 20 March 2017 the rate has been revised down from 2.5% to a negative figure, – 0.75%, meaning that insurance payouts will need to be much higher. Although the change has been welcomed by groups representing personal injury claimants, it will inevitably push insurers’ costs up, and could mean an increase of up to £75 in motor insurance premiums.
Note: it is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.