Wednesday, 24 July 2013

The Bank Could Seize Your House Within 10 Years

As a nation, it seems as though we're doomed to repeat our past failures. It feels as though we're living in 2005 all over again as the Government has decided to try and artificially pump up the housing bubble again! Just in case you weren't aware, one of the main reasons for the 2008 Melt Down was because the US and UK Governments were inflating the 'Sub-Prime’ market. This basically means that they were giving pretty much anyone a mortgage whether the borrower could afford the mortgage or not.

So fast forward to 2013, the UK has got into bed with the US again with another stinking policy and is now offering 95% mortgages. This may be great news for the 1 million renting young couples (18-35 years old) in the UK who have been refused a mortgage within the last 5 years, but when you really investigate things, it has shockingly awful consequences for the new home owners, the future housing market and the Government.

Reports show that this 95% mortgage scheme has received great interest from the public. This isn’t surprising considering that we in the UK and US are literally obsessed with owning a home due to the Thatcher-Reagan era starting the theme that everyone should be a homeowner. This isn’t the case with other countries around the world. Even on our doorstep, France and Germany are predominantly renters. Most people I speak to on this subject all follow the same thinking - ‘Rent money is throwing money down the drain when it could be used to pay off a mortgage’. I don’t exactly agree with this mentality (but that’s another topic). So now these 1 million couples are rushing in to buy a new house, what does this mean? What is likely to happen? Why is this bad for all parties?
-         Bad for the new home owners. The majority of the homes which come with a 95% mortgage are new builds. Although attractive on the face of it all, these new home owners are moving into houses which are rushed into construction, composed with the cheapest materials and built with shoddy tradesmanship. Due to targets and deadlines, a large percentage of these houses experience teething problems down the line.  Just speak to any builder or tradesman and they’ll tell you how crud these houses are and that within 2-10 years, serious work will be needed on them. Also on top of all that, the new homeowners are instantly 20% down at the very least. In order for these building contractors like Bovis etc to make a profit out of this, they have hiked up the premiums for each house. So you’re using extreme financial leverage to buy an overpriced shoddy house which will require on-going repairs down the line and you’re already in negative equity.

-          Bad for the housing market. It’s likely that the UK housing market will temporarily boom in prices due to this Government scheme. Eventually the letting side of the property market will wane as all of these renters become home owners which will make rents slide (good for renters I guess). However just like we’ve seen multiple times already, in order to curb this rapid growth in house prices, the Bank of England will be forced to raise rates. This is another bad thing for these new home owners.

-          Bad for the Government. Due to the raising of rates, the UK will end up more in debt as the interest on our £1.2 Trillion debt will increase greatly, mortgage repayments will go up and those on a Standard Variable Rate or tracker mortgage will get severely burned! The UK will be a repo nation.
Most people fail to stress test their property portfolio or mortgage repayments properly so here's my quick rule of thumb to see whether you will be able to keep the Bank from repossessing your house or not:

1.) On a £100k house, for every % rates go up, your monthly mortgage repayments go up by £83. So on a £200k mortgage, if rates went up by 1%, you'll have to fork out an extra £166 per month if you don't have a fixed rate mortgage.

2.) UK average rates are between 7-9%,  so at the very least, let's work to 7%. So if you have a £200k mortgage and rates rise by 7% (which I can GUARANTEE it will happen), can you afford to pay an extra £1162 per month for your mortgage?! In fact, where would the UK find an extra £301 Billion to service this increased interest? – Fancy new taxes…

If the answer is no to that last question, please have a serious rethink with your IFA or mortgage advisor. I don’t give advice (and never will), but a straight forward solution to this pending problem would be to fix your rates for as long as possible. Definitely longer than 5 years! Rates are at rock bottom now and they can't go any lower. But one thing is for sure, rates will go up to historic averages at the very least and when this happens, people will lose their homes so please make sure you spread the word and to just question your current situation…

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