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from independent.co.uk
The credit crisis is hitting everyone from first-time buyers to buy-to-let investors – but do you understand exactly how it's affecting you? Helen Monks provides answers to the big questions we are all asking
Are people who remortgage in for a shock? What are the best deals?
Those who took their last mortgage out a few years ago and are coming to the end of their deal should brace themselves. Someone who found a three-year fixed-rate deal on the best-buy tables in March 2005 might have found a 4.5 per cent rate and an arrangement fee of around £400. Today, these borrowers face best-buy tables featuring Cheltenham & Gloucester's three-year fixed rate at 5.62 per cent, with a £1,094 fee.
Many mortgage brokers recommend tracker mortgages for remortgagers. Trackers are pegged to the base rate, so if interest rates fall, so does the cost of your mortgage. The disadvantage is that they offer no certainty over the cost of future repayments. If you want certainty, choose a fixed-rate deal. One of the best is First Direct's five-year fixed-rate mortgage, at 5.29 per cent with a £598 fee.
Most borrowers tend to go for a two- or three-year deal, but you could fix for as long as 25 years. This might sound mad, but often the redemption penalties that tie in borrowers only last for the first 10 years of a long-term mortgage.
Will the value of my property crash?
There are, broadly speaking, two futures being predicted by the pundits. One gives a more favourable view than the other.
Let's start with the positive view. Many of the major lenders, including Halifax, say that house price growth will merely be flat, or only slightly negative, in the year ahead. Is this a reliable prediction? Well, it's certainly in the lenders' interests to boost consumer sentiment with predictions of a soft landing; on the other hand, it's fair to say that the economic factors underpinning house prices, such as high employment levels and immigration, are solid, and that Britain's housing shortage props up demand – and house values.
The other way to see things is to look at the pressures currently on the housing market. Prices depend on the confidence levels across the country, and on buyers being able to get a mortgage. The ongoing credit turmoil means that more people are being turned down by lenders, and those who can get a mortgage are unlikely to be reassured by the fact that lenders' share prices can be demolished by nothing more than rumours, as happened to HBOS last week.
In regions where confidence is a major factor, property owners should be prepared for some sort of fall. Miles Shipside, of the property website Rightmove.co.uk, says that some areas of the South-west and the south coast could see falls as wealthy would-be buyers keep their hands in their pockets and decide not to splurge on second homes in the current economic climate. Certain homes in London and surrounding areas could also suffer. "Properties in the £750,000 to £3m brackets could fall, as these values are generally buoyed up by big City bonuses, which are looking less certain for the year ahead," says Shipside.
Oversupply and a lack of lender confidence has meant that the value of many new-build flats in city centres across the country have also taken a hit. Many mortgage companies now shy away from lending on new-build flats and maisonettes, because the incentives used to attract buyers – such as cash-back or stamp-duty-paid deals – obscure the true value of these homes, which is further deepening the problem of localised price falls.
Should I switch to an interest-only deal?
This is a common question being asked by people coming off fixed-rate deals and facing higher monthly bills. Opting to pay only the interest part of the mortgage, rather than the capital balance, is a strategy that will reduce your monthly payment. But it's only a strong option as a short-term fix, or if you have a solid plan to pay off the capital.
It's not without benefits. A new borrower with a £250,000 mortgage at a rate of 6 per cent, for example, would pay £1,250 a month on an interest-only deal; a full interest and capital arrangement would cost £1,611. Going interest-only is one way for existing borrowers to weather the storm if they can't afford full interest and capital repayments. It also allows new borrowers to get on the ladder even if they can't yet afford to pay off the capital.
Certain new borrowers might also benefit from the flexibility of interest-only, says Jason Whitcombe of Evolve Financial Planning: "When someone's income is bonus- or commission-driven, the borrower can pay off the capital when they have the cash, as opposed to every month."
Anyone who goes for an interest-only option will need a plan to pay off the capital part of their debt – either on a regular basis or at the end of their mortgage's term. Borrowers could bank on the increase in their property's value, for example, or build up a fund in an equity ISA. But each option is risky.
"It could help keep the roof over your head, but most people should view interest-only as a last resort," says David Hollingworth of mortgage advisers London & Country.
Should first-time buyers hold fire and carry on renting for a year?
Tough lending conditions mean that average punters who don't have a perfect credit history or a chunky deposit are now struggling to get mortgages. Many first-time buyers are being forced to wait it out in the rental sector; other buyers are choosing to hang fire until prices fall.
While nobody knows for sure what will happen in the market, buyers hoping for big drops could be waiting in vain. The Council of Mortgage Lenders (CML) says that if most first-time buyers aren't biting because they can't get mortgages (as opposed to just not wanting to buy), then all that is happening at the moment is that demand is being pent up. Should lending conditions soften and lenders start offering mortgages to less-than-perfect borrowers, prices ought to rebound once more on the strength of this unleashed demand.
All this means that those who can secure a big enough mortgage would be well advised to go for it now, especially as the slow market means that they should be able to haggle for a 5 and 10 per cent discount off asking prices.
Is now a good time to buy at auction?
Yes, but buyers might not have the pick of the crop. The number of homes offered at auction rose by 15 per cent last year, while the number of repossessed properties rose by 20 per cent, according to the Royal Institution of Chartered Surveyors.
The CML predicts even more repossessions in 2008 – meaning more homes under the hammer. But if buyers are hoping to pick up a four-bedroom home in a desirable area for a knock-down price, they may be disappointed: much of the repossessed stock coming to auction is ex-local authority houses and flats.
Do brokers still have good deals up their sleeves?
As borrowing becomes trickier, going to a broker can make good sense. "We can't magic great rates out of the air, but brokers can hunt out the best rates for your circumstances. It's a really fast-moving market right now, where tracking the best deals takes time and good deals get withdrawn at very little notice," Hollingworth says.
Ask whichever adviser you go to whether they can choose the best mortgage from the whole market or are tied to just a handful of lenders. Also, find out up front whether they are paid by fees from you or by commission from lenders. London & Country(www.lcplc.co.uk), for example, is independent and does not charge fees to borrowers, but does take payment from mortgage lenders' commission.
How big a deposit do I need?
Although there have been some reports suggesting that borrowers might need deposits of up to 25 per cent to get a look-in, this is not true for everyone. Professionals, such as solicitors and doctors, can still get 100 per cent mortgages through lenders such as Scottish Widows, and there are still lenders willing to lend solid-looking borrowers up to 95 per cent of the value of their property.
However, brokers expect increasing numbers of lenders to insist on 10 per cent deposits in the coming weeks, and if you go shopping for a mortgage with only a 5 per cent deposit, expect your choice of lenders to be limited, and your interest rate higher.
Should I sell my buy-to-let property?
Probably not. The latest survey by the Association of Residential Letting Agents (Arla) indicates that buy-to-let landlords are enjoying higher yields and increasing rents.
In the three months to the end of February, average rents in the private rented sector rose by an average of 4 per cent for houses and 2 per cent for flats – not exactly inflation-busting, but the outlook for further rises looks good.
Because many first-time buyers are being forced to wait it out, demand for rental properties is solid. Arla also says that immigration in some areas is fuelling demand and keeping yields high. Landlords who do decide to sell now should bear in mind that on 6 April the old rules for capital-gains tax are being shelved. For many higher-rate taxpaying landlords, this means that the lowest rate of CGT they pay will drop from 24 per cent to 18 per cent. But those who have owned their investment properties since before 1998 might have more tax to pay if they sell, due to the scrapping of indexation and taper reliefs on 6 April – allowances that reduce the investor's tax liability.
How much of my salary should I spend on a mortgage?
This entirely depends on your outgoings, though statistics from the CML suggest that, in 2007, the average first-time buyer was spending 19.4 per cent on mortgage interest alone.
There are no hard and fast rules. Someone who is debt-free and does not have expensive tastes might be able to spare more than half of their salary, after tax, for mortgage repayments, whereas someone who has credit card debts and a love of exotic holidays and fine dining might only have 20 per cent of their income to spare. "Do a realistic budget. It's amazing how many people imagine they could live off £10 a week for food," says Hollingworth. Many lender websites, such as www.nationwide.co.uk, offer online affordability calculators.
How can I convince mortgage companies to lend me more money?
There are two ways: boost your deposit, or reduce your outgoings and demonstrate that you have more of your income available to pay for a larger mortgage. Tackle your consumer debts, even if it means using some of your savings to pay off credit cards: this will help persuade mortgage lenders to be more generous.
"Many lenders would much rather lend to someone with less consumer debt than, say, someone with a £20,000 deposit but £10,000 on their credit cards," Whitcombe says.
Even when you have no intention of spending it, pre-approved credit can also weaken your borrowing power. One way of boosting your case is to ask your card issuers to reduce your limit. This pre-approved liability is otherwise counted on your credit history and weakens your profile.
I'm starting to fall behind with my payments. How can I keep the wolf from the door?
Contact your lender as soon as possible. They can give you more options to help keep the roof over your head. These might include adding the amount outstanding to the rest of your mortgage and accepting higher monthly repayments. You could also extend the term of your mortgage, or switch to interest-only for a short time. Free and independent advice is available from a number of places, including the debt charities National Debtline (www.nationaldebtline.co.uk, 0808 808 4000) and the Consumer Credit Counselling Service (www.cccs.co.uk, 0800 138 1111), or the housing charity Shelter (www.shelter.org.uk, 0808 800 4444).

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