surviving the recession

The Financial Services Authority has drawn up proposals that may restrict how much people can borrow on mortgages - they plan to ban 100% mortgages (i.e. mortgages with no deposits) and to cap the multiples of income you can borrow (they will probably cap this at 4 times income).

All of this will affect those who wish to buy for the first time, and will affect thsoe who wish to re-mortgage, especially as house prices are falling, which is raising the loan to value. If you are a first-time buyer, the only answer is to save ferociously. the more you can deposit, the lower the loan you will have to take out and the better the rate you will get. For re-mortgagees, the only answer is to overpay their mortgage as much as possible to reduce the loan to value, and also the multiple of income that you wish to remortgage at.

It’s a race against time for remortgagees. Low interest rates should last till about 2010, but house prices are continuing to fall. Therefore they must overpay their mortgages faster than house prices are falling, so that they can remortgage in 2010 to lock in low fixed rates before bank base rates rise. There is a silver lining: you have to repay your loan at some point, so overpaying now will save you thousands in interest payments in the future. If people make the most of current conditions, they could end up in future in a sweet situation where their loans and thus their repayments are negligible amounts.

Estate agents are reporting that there has been increased interest in property recently - not surprising as a lot of pent-up demand built up in the last year, and many buyers feel that with the drop in property prices and interest rates, now is their chance.

Should you buy a property in the current conditions? Only if you can answer yes to the following questions:

1. Is your income secure? Of course no-one is immune to losing their job, but some professions are more secure than others. If you are in finance or manufacturing, then lay-offs may be on the cards. If you are self-employed or freelance, be warned that work may dry up and you may wish to sit things out till the economy improves.

2. Can I afford the mortgage. No sense mortgaging yourself up to the hilt. If you can’t comfortably afford a mortgage now, think of the difficulty you will have if interest rates rise.

3. Can you cope if bank base rates rose back to 5% (the rate they were just 4 months ago)? That involves an interest rate rise of 4% on your mortgage. If you won’t be able to cope, then wait until you can before plunging into buying a property. Don’t ignore this point - when interest rates start rising again, they will go up fast. Many people seem to think current conditions will last a decade - but that is unlikely.

4. If propery prices slump further, can you afford to wait things out for another five to seven years till the prices rise again? If you are moving to accomodate a growing family, chances are you will still be living in the property in seven years time, so go ahead - no sense making yourself uncomfortable in a smaller house just trying to time the market (which is impossible). If you are just investing or may have to move house because of job moves, then wait till the market improves.

If you’ve replied Yes to the above questions, then the next thing to do is see how much cash you need to raise. Lenders only want to lend a maximum of 85% of the property value as they are scared that further property falls will mean the loan is greater than the value of the home. Therefore, you will need a good £20,000 to £30,000 to put down as a deposit if you are buying a property of average value of £133,000 to £200,000. Then on top of that you will need to budget for stamp duty (1% of the property value for properties over £175,000), solicitors fees, surveyors costs, estate agents fees if you are also selling your current home, and possibly the arrangement fee on the mortgage as well. It all adds up to several thousand pounds.

Then be aware that the lender will take account of your existing debts, especially if they are fixed loans (though they may ignore these if they have less than 6 months to go), and your credit record (a single missed payment may damage you). Due to new information sharing rules, lenders now have access to details of all the debts you have, and if your credit card debts are high they may refuse you on those grounds.

Therefore buying a home in the current conditions is only worth doing if you are in a position to raise a deposit and clear your existing debts. If you are nowhere close, take heart. The current conditions will last at least another year, so you have time to tackle your problems if you start now. 

In the 1950’s, 1960’s and 1970’s it was common for Brits to get a mortgage from their local authority, rather than a bank or building society. In return, the authority made a little profit on behalf of the taxpayer.

Well, it looks like the local authority mortgage might be back. The communities and Local government department has cut the standard national rate at which local authorities are allowed to lend from 5.07% to 3.93%.

Some councils are keener than others to lend to homeowners. The authorities that have expressed interest are Portsmouth, Manchester, Bristol, Hackney and Lambeth - but phone your local council and see what they have on offer.

The beauty of a local authority mortgage is that they might be willing to lend with a smaller deposit than those demanded by banks and building societies.

If you are a British mortgage holder, you should always aim to have your mortgage less than the value of your home - if your loan is more than the value of the house (a negative equity situation) and you have to sell the house in a hurry, you will be liable under UK law for the difference in what the sale of your house realises and the mortgage.

Therefore one of the safest things you can do in these times of property price falls is to overpay your mortgage if your contract allows it, to ensure that you always have at least 10% equity in the property. That way, if you lose your job and have to sell in a hurry, or if you simply need to remortgage, you can do so.

But how do you tell if you are in a negative equity situation? You can always get an estate agent to value your house, or you can use this calculator from the Financial Times - FT equity calculator - to check if you have equity in your property. It won’t be exact, but should be a good rough guide as to what your situation is.

Property prices are falling fast, but if you buy at an auction, chances are that you’ll get a better bargain, as most of the properties for sale at auction are repossessions, and the lenders who now own them usually want a quick sale. In addition, very few members of the public actually buy property in auctions, your only competition will be property developers, who will not be eager to bid prices up.

How do you go about it?  First of all, make sure you have your mortgage in place. If you buy via auction, you have to pay your 10% deposit on the day of auction, and complete the sale within 28 days. So apply for your mortgage well in advance so that you know you’ve passed all the credit checks and have the mortgage offer in hand.

Also try and visit the property listed before you buy and make a visual inspection to ensure it is sound and will pass the structural survey. Be very careful with older property, particularly those built in Victorian times. Newer properties should be a better bet, and properties built within the last ten years should still have their NHBC certificate, which provides a guarantee as to structural faults.

You can find out what the property sold for previously at NetHouseprices.com, which collates all information on purchase prices registered at the land registry since 2001. Once you have found what the previous owner paid for it, try to work out how much the property is worth now, and how much the price has fallen by. If you are struggling with this, ask your mortgage lender to help you - they usually have software that allows them to estimate how much properties have fallen in price. They will be happy to help - it’s in their interest as well as yours, that you don’t overpay.

Finally, before you plunge in, go to some auctions to see how they work, and read everything you can about them, including all the legal work that buying the auction involves. Only start bidding for a property when you feel you know what you are doing.