Our columnist Mr Money Bags, who has decades of experience in Finance, an MBA, an advanced diploma in Financial Planning and not to mention his super business skills, is here to give you, our lovely readers some valuable tips and advice on money business matters. He is forthright and can sometimes be stern when it comes to your cash, but when it comes to finance he really is the expert. Read on for your business and finance advice…
I get many free magazines from finance providers which end up sitting in a pile with the best of intentions to be read – usually though if I’m honest this does not happen. This week however, I was looking at the front page of a magazine which detailed how buy to let investors are going to be hit hard with fee hikes; whereas Barclays have recently decided to bring back 100% mortgages.
It just got me thinking, who is the safer bet: someone who saves 25 or more percent deposit to buy a property or the person earning £50,000 who has no deposit?
Back in 2008-09 when the big lenders offered such mortgages, I always used to pose the same question to my customers: if you cannot afford to put down any money, then should you really be buying a house? This was my acid test to ask my customers if they have really thought about the purchase. Looking back I guess I asked the question because I wanted to be sure that the person sat in my office can afford the mortgage for the duration.
So let’s fast forward eight years. This particular mortgage deal is reliant on the parents or other family members stumping up 10% of the funds upfront. Personally, I think many family members might end up losing their money as if rates increase in the next few years, and the person has not adequately budgeted, then they are likely to fall behind.
A mortgage should never be taken lightly, and this mortgage allows someone to go up to 5.5 times annual income. This might be ok now, but what if income falls, or the persons affordability is stretched in the future i.e. Raising a family. These are all important questions to ask yourself before taking out a mortgage.
Now let’s look at the buy to let investor. My view is someone who can afford to put down 25% as a minimum should not be hammered with higher fees to pay for lenders undertaking stricter tests. Lenders should already be undertaking strict checks to make sure property yields are adequately covered just in case rates go up.
The Prudential Regulation Authority is rightfully worried that if rates go up, property investors might be unable to keep up payments; therefore increasing the amount of deposit to get a greater yield, as well as being able to remortgage in the future, makes sound sense. The issue though is those individuals who took on a mortgage when the margins were tight, and now due to newer more stringent tests, might have to find more funds from somewhere to get another rate after their initial deal ends. The individuals might end up locked into a deal paying far higher interest, and having to push up rent to pay for being in a bad mortgage situation.
Overall my view is that someone is buying their first home and they have no deposit saved up to pay upfront, then they should not be buying a house. This is because they might not fully realise and appreciate the commitment they are getting themselves into. A buy to let investor who takes out a new mortgage with a large deposit in my view is possibly going to be in a much more secure position for a lender.
The next few years are looking interesting for the property market, and I think more changes are to come. My view is that the changes will be to tighten the criteria further for both investors and those looking to buy or remortgage a property.