In the past ten years Britain has experienced a property boom, a property crash and a dramatic change in the housing market, making it harder for many people to get on the first rung of the property ladder.
The days of the widely available low cost mortgage might not be with us any more, but that doesn’t mean owning property is impossible.
This blog is a short guide for prospective first time buyers who are looking to invest in bricks and mortar.
Saving a deposit
Early this year there was some sobering news for house buyers, when it was stated that an average deposit was now over £70,000.
This staggering sum is due to the introduction of the stringent new lending rules imposed by the Treasury, to ensure that borrowers can repay their loans.
If you live in Wales the situation is not quite as dire, with the average house price (calculated in April 2015) at £117,000, and a deposit of 30 percent coming to a total of £35,100.
If you are single, this will mean saving from one income. Couples, with two incomes, obviously have something of an advantage. You may be looking for answers to the question ‘How do I reduce my mortgage payments or at least spread the cost?’
This has led some groups of friends saving for properties together, and has also resulted in more people living with relatives for longer in order to afford a deposit.
You will need to take into account all the additional costs and charges that are incurred during the purchase of a house, from stamp duty to solicitors fees.
Stamp duty is a tax payable on all residential properties with a value of £125,001 or more.
The amount of stamp duty due is calculated as a percentage of the property’s value, and there are several thresholds, depending on the value of the property.
Between £125,001 and £250,000 stamp duty is two percent of the property’s value. Property value from £250,001 to £925,000 has 5% stamp duty, £925,001 to £1.5 million has 10%, over £1.5 million its 12% stamp duty.
Often mortgage lenders will include the cost of solicitors fees for conveyancing (the legal process of purchasing a property) into the mortgage itself. You should calculate the cost of this over the life of the mortgage and decide whether it is cheaper to pay the solicitors fees yourself. Another cost that often gets rolled into the mortgage is the surveyor’s fee.
Without a survey of the property, most lenders will not consider offering a mortgage, they need to know that the house is not going to start falling apart days after you move in.
Again, make sure you calculate over the long term how much this will really cost you and then make your decision accordingly.
Help to Buy
The best news for first time buyers facing exorbitant costs is the government’s Help To Buy scheme. Help to buy is not just limited to first time buyers, but they can access it to purchase any property up to the value of £600,000.
The scheme works as follows. Buyers are expected to put down five percent of the property price, so on a £200,000 house that would mean a deposit of £10,000.
This would be matched by a loan from the government of 20 percent or in this example £40,000, for which borrowers will not be charged for the first five years.
Thereafter they will pay a fee of 1.75 percent of the loan’s value. There will be a variable fee based on the rate of interest in subsequent years.
The more you pay off the actual capital of the loan, the lower the annual charges will be.
Banks may look more favourably on borrowers if they are backed up by a relative offering to stand as a guarantor.
This means that if the borrower defaults, the guarantor agrees to take on the loan repayments. Parents with equity in their own homes may well be the best people to offer this kind of guarantee.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
They say that when China sneezes, the rest of the world catches a cold. So when China suffered the financial equivalent of a massive heart attack at the beginning of the week, the world’s financial markets duly went into full-scale panic mode. But what does this mean for your investments?
Black Monday, as it was quickly dubbed, was the day when the myth of China’s invincibility crumbled. By the time trading was done, stocks were down 8.5% the biggest single day loss in eight years.
The reverberations were felt all around the world. The Nikkei fell by over 4% and the Dow opened more than 1,000 points down. Oil hit a six and a half-year low as commodities took a tumble. Approximately 73.74bn was wiped off the FTSE Index. China reacted by cutting interest rates in an attempt to boost the economy but to no avail. Stocks continued to fall as investors got rid of anything that had any connection with China.
The question is: how worried should we be and how will this affect your own investments? Investors panicked around the world because their confidence in the underlying health of the international economy was shaken. A slowdown in one of the largest consumer economies in the world could be a signal of bad times ahead for the rest of us.
But it’s not all doom and gloom. Around the world the general prognosis for the world economy is pretty good. In the UK, growth is predicted to be 2.8% in 2015. Against all predictions, the Greek economy did not collapse, but was recently reported to have shown some growth. China itself may no longer be delivering double digit growth, but for an economy of its size, growth is still healthy. In April to June it reported 7% growth and while its figures are often greeted with scepticism, its overall economic condition is a long way from collapse.
So, the short answer is that there is no need for anyone in the UK to panic. Daily values may fall, but in the long term you shouldn’t feel the effects as long as you follow the basic rules of diversification within the portfolio – namely don’t over expose yourself to any single market, and don’t invest in only equities (stocks and shares). As long as you have bonds and cash within the portfolio these should cushion the blow.
The crash may also have been alarming, but it is nothing truly out of the ordinary. Stock markets are cyclical with crashes such as these happening every seven to ten years. There have been big falls on the stock market before and there will be again. As long as you keep your head, the long term value of your investments should hold.
In summary, then, the message is this: don’t panic. Although it’s easy to be swept up in the hysteria, as long as you stay true to basic common sense principles such as diversification, you should be fine.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
The UK has now experienced deflation for the first time since records began in 1996. The Office for National Statistics believes that the last time the UK experienced deflation was in the 1960s.
This was so long ago that you may well be asking yourself “What exactly is deflation and what does deflation mean for our economy?”.
Inflation v Deflation – What’s The Difference?
In very simple terms, inflation is when the overall cost of living goes up and deflation is when the cost of living goes down. The word overall is important because prices of different items can go up and down at different times.
How Is The Overall Cost Of Living Measured?
There are two main measures used for determining changes in the cost of living. The older method is called the Retail Price Index (RPI). This was introduced in June 1947. The newer method is called the Consumer Price Index (CPI) and was introduced in 1996.
Both systems use an “average basket of goods” to keep track of how much “average consumers” are spending. In other words, they select a range of items which they think most people need (or want) to buy. They then track the prices of these items.
There are, however, important differences in what they track. For example, the RPI includes the cost of housing (including the impact of Council Tax) but the CPI doesn’t. They also use different methods for calculating the average.
Summing all this up in a nutshell, the CPI is almost always lower than the RPI.
Can Inflation Be Managed?
It’s the Bank of England’s job to try. The BoE runs the Monetary Policy Committee. This has the job of achieving exactly 2% inflation per annum.
Of course, that’s a difficult job so the Bank gets a bit of breathing space. The government accepts inflation of between 1% and 3% per year.
If, however, inflation goes either higher or lower, the BoE is called upon to explain itself. The Governor of the Bank of England, must provide a public, written explanation of why it missed its target.
It must also advise the government what it intends to do to get back on target. The BoE’s main tool for managing inflation is the use of interest rates. In very basic terms, raising interest rates encourages people to save. Lowering interest rates encourages people to spend.
Why Does The Bank Of England Try To Keep The Cost Of Living Going Up?
In very simple terms, deflation has much the same effect as waiting for the January sales to buy Christmas presents.
Customers assume (rightly or wrongly) that the item(s) they want will be cheaper after Christmas so they wait until then to buy them.
Extended periods of deflation can essentially become a time of Mexican standoff. Buyers get used to seeing prices dropping so they put off making purchases to get lower prices.
Unfortunately this can put producers (and retailers) out of business. Over the long term, this reduces supply and can stimulate inflation. In the short term, however, it can lead to painful redundancies.
Right now, for example, low oil prices are leading to layoffs in the oil industry.
So Is Deflation Automatically Always Bad?
That is an interesting question. It’s possible that some deflation on essential items such as food and utilities might actually be helpful. It would give hard-pressed families a respite.
It might even be enough to free up money for other purposes. For example, it might allow families to pay down debts. It might allow them to treat themselves to some non-essential purchases.
The question would be whether or not the end producers would be able to support deflation for any meaningful length of time. If not, then the pendulum could swing the other way towards high inflation – and cause a lot of pain in the process.
When you buy a house, you hear lots of unusual terms.
Here are our ‘dictionary’ definitions of terms used when buying a house to help you understand the convoluted world of property jargon.
As the name suggests, it is the fee that the mortgage lender charges for arranging the loan.
To be behind with ones mortgage payments.
The essential survey you must take out on the property, to assess its construction and condition, to make sure it doesn’t collapse the moment you open the front door.
A ‘chain’ of buyers and sellers i.e. the people you are buying the property from are in a ‘chain’ with sellers they are buying from, and you might also be in a chain with buyers of your property. At any given time this chain might, and frequently does, break down.
A payment made to an estate agent on completion of the house sale.
When contracts, keys and monies have changed hands between buyer and seller.
A legally binding agreement.
The complicated legal work your solicitor does to help you buy a property and make sure your rights are protected.
A legal agreement specifying the uses of the land or property.
An examination of your previous credit worthiness, debt repayments and defaults. A poor credit score can limit your chances of further borrowing
A document granting legal ownership to a person of a property.
A mortgage paid off by an endowment, which is an investment policy that pays out after a specific and fixed period of time or on the holder’s death.
Exchange of contracts
Where two people exchange contracts over a property.
Fixed rate mortgage
Where the interest rate on a mortgage is fixed for a period of time, normally in anticipation of a future rate rise.
The land beneath the property. Ownership of this is particularly important if you are buying a flat.
The rather dubious practice of offering a higher bid on a property to secure it, after it has been offered to somebody else.
The practice of demanding a lower price on a property at a crucial moment in the sale in the hope that the vendor will agree to prevent the sale from falling through.
Policies that pay out compensation to the holder in the event of accident, damage or ill health.
Interest only mortgage
A mortgage where the actual balance of the loan is not repaid, only the interest payments on the loan.
A document that verifies the ownership of a piece of land.
The recording of ones ownership of a particular piece of land.
Land registry fee
The cost of the previous entry.
The ownership of a property for a fixed period of time, normally relating to flats. The leasehold ultimately belongs to the freeholder (see Freehold above).
Loan to value (LTV)
The ratio between the amount borrowed in a mortgage and the value of the property.
Local authority search
A search on a property carried out by your solicitor to find out who legally owns it and who has owned it in the past.
A property loan, typically 25 years in length.
The document that aforementioned loan agreement is contained within.
Mortgage indemnity guarantee
An insurance policy taken out by the lender to guarantee against the borrower from defaulting on their mortgage payments.
How much the bank will lend you.
A nominal amount, normally £1, needed to satisfy the criteria for the creation of a legal contract.
A mortgage where the borrower repays both the interest and the capital of the loan.
A compulsory tax due on all properties over the value of £125,000, calculated as a percentage of the property’s overall value.
A general term to cover three different types of survey, the condition report, the homebuyer’s report and the building survey (see above Building Survey).
Subject to contract
The seller of a property has accepted an offer on the home but the deal is not complete until contracts are exchanged.
The professional who carries out the survey.
A document detailing the ownership of a property.
A property where an offer has been accepted and paperwork is pending (see Subject To Contract).
The person(s) selling the property.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
However it is eventually phrased on the ballot paper, the underlying question is essentially the same. “Should Britain stay in the EU?”
Sometime between now and the end of 2017, the great British public will be required to answer it. So, is the grass really greener on the other side of the EU fence? What would happen if the UK actually did leave the EU? Let’s look at some of the key points of EU membership and see how the UK might be affected in the event of a “Brexit”.
Free Movement Of Citizens
The free movement of citizens is a key part of the Maastricht Treaty and therefore of the EU. It is what enables Polish workers to come to the UK. It is also what enables British retirees to make their homes in sunnier climates. Polish workers compete against local job seekers. British retirees may need to make use of their host-country’s medical facilities. There are economic pros and cons to many aspects of EU membership.
There are also security issues to consider. The recent “I am an Immigrant” campaign stressed the positive contribution immigrants make to the UK. At the same time, British teenager Alice Gross is believed to have been murdered by Latvian builder Arnis Zalkalns. He already had a conviction for murder in his home country. The EU’s open-borders policy, however, allowed him to come to the UK regardless.
There have also been issues with Polish criminals organizing sham marriages with people who want UK residency.
Likewise, there are ongoing issues with the Eurotunnel being targeting by refugees living in France.
Free Movement of Goods, Capital And Services (AKA The Common Market)
Much has been made of the UK’s access to the single/common market. This allows the UK to export goods to the EU without import duties being paid by the recipient. Of course, it also allows other EU countries to export goods to the UK without paying import duties.
In fact it allows people from the UK to go on shopping sprees in the EU and bring their purchases back to the UK without paying customs duty. In the early days of the EU this led to the infamous “booze cruises”. These were trips made, usually to France, specifically to buy alcohol more affordably.
Small and light, cigarettes are also easily brought back from other EU countries where the purchase price is lower. Of course, this has implications for the NHS and its funding.
Like the free movement of citizens, there are pros and cons to the single market. It is also worth noting that the UK already trades on a global basis in any case. This demonstrates that it is quite possible to import and export without a free-trade agreement being in place.
The Single Currency
During the negotiations for the Maastricht Treaty, the basis for the modern EU, the UK opted out of the single currency.
It did, however, sign up to a clause in the treaty which requires EU members to aim for “ever closer union”. This is not just a statement of ideals. It is a legally-binding requirement. In very simple terms, the UK’s decision to keep the pound is directly contradictory to the principle of “ever closer union”.
This raises significant legal questions over the feasibility of the UK keeping the pound in the long term. David Cameron has stated that he aims to negotiate and opt-out to this requirement. The price of him achieving this may be giving up the UK’s veto in the EU. The price of him not achieving this may be the UK’s giving up the pound and adopting the Euro.