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Bridging Loans

Bridging Loans for Property Development: How Does it Work?

Bridging Loans for Property Development: How Does it Work?

Specialist development finance is a popular choice for property developers and construction companies, providing prompt access to significant sums of money for extensive and ambitious projects.

However, there are scenarios where a bridging loan for property development could be a better choice. Unlike development finance, bridging loans are issued in the form of a single lump sum – not released in a series of stages as the project progresses. In addition, qualifying for a bridging loan can be fairly straightforward, whereas development finance is offered exclusively to established property developers.

But how does a development bridging loan work, and what are its key features?  More specifically, what makes a bridging loan for property development a better choice than a standard commercial loan or mortgage?

Typical Applications for Property Development Bridging Loans

A bridging loan can be used for any legal purpose, with few restrictions as to the potential applications for the funds. Some of the more common uses of property development bridging loans are as follows:

  • To pick up low-cost properties at auction and to fund the subsequent renovations required.
  • To purchase a plot of land quickly and beat rival bidders to the punch.
  • To commence and complete a project as quickly as possible when time is a factor.
  • To fund any kind of property development project as a new or an experienced developer.

Property development bridging loans can also be a useful facility for subprime applicants, who would otherwise be unable to qualify for a conventional property loan or mortgage.

How Does a Development Bridging Loan Work?

A development bridging loan is a strictly short-term facility, designed to ‘bridge’ a temporary financial gap. Ideal for time-critical purchase and investment opportunities, a bridging loan can be arranged and issued within the space of a few days.

Repayment typically takes place six to 18 months later, in form of a single lump-sum payment inclusive of rolled-up interest. Monthly interest applies at rates as low as 0.5%, negotiable in accordance with the size and nature of the loan taken out.

Maximum loan values are tied to the assessed value of the assets used to secure the loan – typically the home or business property of the applicant. Lending policies vary, but most bridging finance specialists are willing to offer anything from £50,000 to more than £10 million.

How Much Deposit Do I Need for a Development Bridging Loan?

Technically speaking, there is no specific deposit requirement for a development bridging loan. Most lenders are willing to offer loans with a maximum LTV of 70% to 80%. This would therefore mean that the investor would need to cover the other 30%/20% of the costs, but not in the form of a deposit in the conventional sense.

Higher LTVs can sometimes be negotiated – often up to 100% LTV. An alternative option is to take out a bridging loan with an LTV of 70% or 80% and use a second- or third-charge loan from a separate provider to cover the additional costs.

As all development bridging loans are bespoke agreements between the issuer and the borrower, terms and conditions can be negotiated to suit all requirements and preferences.

Getting the Best Deal on a Development Bridging Loan

All bridging loan applications are assessed on their individual merit, highlighting the importance of presenting a convincing case.

Specifically, there are four factors that will determine the competitiveness or otherwise of the loan you are offered:

  1. Your Exit Strategy. Your lender will expect to see evidence of a viable exit strategy – i.e. when and how you intend to repay the loan. For example, by selling the property you plan to purchase after renovating it, raising the capital needed to repay the loan with additional profits for you to retain.
  2. Available Assets. All property development bridging loans are secured against viable assets – usually a residential or commercial property.  However, some lenders are willing to accept other assets of value, ranging from vehicles to business equipment to intellectual property to company shares.
  3. Credit History. Poor credit will not necessarily count you out of the running for a competitive bridging loan. Most lenders are willing to work with subprime applicants, but a good credit history could help you qualify for the best possible deal.
  4. Past Experience. Understandably, lenders will usually reserve their best deals for applicants with an established track-record in the property development sector. The more experienced you are, the more likely you are to qualify for a competitive bridging loan.

With each of the above, your broker will provide the independent support and advice you need to present a convincing case to your preferred lender.

Your broker will also negotiate on your behalf to ensure overall borrowing costs are kept to the bare minimum.

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Mortgages

Price of Mortgages Predicted to Be £800 More Per Annum Than in October 2021

According to mortgage advisor L&C, people looking to remortgage their homes are expected to pay on average an additional £800 each year when compared to just five months ago.

The analysis was based on several parameters using the basis of a homeowner who had 40% equity in their property, was looking to take on a 2 year fixed-rate mortgage and over a 25 year period on a mortgage of £150,000.

Figures provided by the Bank of England showed that applications for remortgage products rose in the last quarter of 2021 in proportion to overall lending. Market experts indicated that homeowners remortgaging the properties were hoping to grab a good deal before interest rates rose further, as they are predicted to do in the coming months.

Interest rates from major lenders were used by L&C, which were averaged out to create the analytic report.

The data showed that in October 2021, with interest rates at an all-time low, borrowers would be paying a little more than £557 per month on a 2 year fixed rate mortgage deal.

If the same homeowner was to remortgage now, they could expect to pay around £627 per month which will equate to an extra £70 monthly which is approximately an additional £840 per year.

In some instances, good mortgage deals are only being made available to borrowers for a very short period of time, often just days, and are then removed from the market. What homeowners need to realise is that they can apply for a new mortgage up to six months prior to the end of their current mortgage arrangement.

L&C also stressed that offers from lenders are typically valid for 3 to 6 months, giving the borrowers “Rates are moving quickly though and deals rapidly come and go, often only lasting a matter of days before being replaced with higher rates. sufficient time to make an application despite the fact that an ERC (early replacement charge) may stay in place for several months.

Associate director at L&C Mortgages, David Hollingworth commented: “Mortgage rates have been shifting rapidly as lenders are forced to adapt to the impact of market expectation of higher rates on their funding costs.

“The sheer pace of change is something that could take borrowers by surprise, especially when the cost of living and other outgoings such as energy are already rising too.

“Fixed rates are still at historically attractive levels so borrowers should review their current deal to make sure that they are on the best deal and protecting their position, especially against a backdrop of rocketing outgoings and further potential increases in base rate.

“Borrowers can lock in at a current rate up to six months ahead giving the chance to review well ahead and ensure a smooth switch over when their current deal ends. That could help them get ahead of any further rate rises.”

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Other Finance News

Base Rate Rise to 0.75% Expected from the Bank of England as Inflation Further Escalates

The Bank of England is under increasing pressure to raise interest rates as the Russian attack on Ukraine escalates. Despite the conflict bringing a high level of economic uncertainty to the UK, and warnings from the Chancellor of a turbulent future, base rates are expected to rise to 0.75% this week. This, coupled with the expectation that base rates will go as high as 2% by the end of the year, is a real fear in UK households with the cost of living going up every day.

In February this year the Bank of England predicted that consumer price inflation would hit its highest level in April at 7.25%, coinciding with the expectation that gas and electricity bills will be going up by a whopping 54% when the price cap increases.

These predictions have now been adjusted and are expected to rise to as much as 9% inflation rate in the coming months. The rise in interest rates is an attempt by the Bank of England to fight the increasing cost of living, making borrowing far more expensive than previously.

With inflation currently at a 30 year high of 5.5% and expected to rise to more than 4 times the Banks 2% target, it is imperative that the Bank finds a way of getting inflation under control.

The invasion of Ukraine by Russia has placed additional pressure on the Bank to increase the base rate.

The nine members of the Monetary Commission are predicted to increase the rate on Thursday of this week (17th March) from the current rate of 0.5% to 0.75% in the battle to gain control over the economy and inflation.

This indicates a third rise in the base rate since December 2021 and will mean increased mortgage costs for millions of UK homeowners.

The invasion of the Ukraine has resulted in sky rocketing prices for natural gas which has risen by an incredible 60% since February, prior to Putin’s troops entering Ukraine.

Experts have stated that the rise in interest rates will not have an immediate effect on inflation in the short term and that the escalating gas and electricity costs will be a struggle for every UK household but will ultimately reduce inflation. Achieving the right balance is the aim of the Bank of England.

Research director at the Resolution Foundation think-tank, James Smith stated: “I think it’s really tough for the Bank at the moment to get this right. If they go too slowly, you get the inflation shock. If they go too fast, it chokes off recovery. And then there is a recession risk on top of that.”

The fear among experts is that increasing rates to keep prices down will have a detrimental effect on an already fragile economy. Sanctions levelled at Russia are resulting in massively increased oil prices which is hitting each and every household with fuel prices going through the roof. All of this disruption is triggering fears of a potential recession.

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Mortgages

Lenders Withdraw 500 Mortgage Products in a Single Month as Great Deals on Mortgages Become a Thing of the Past

More than 500 mortgage deals have been made unavailable by building societies and banks over the last month, with home buyers being left with no other choice than to take on mortgages with high interest rates.

According to Moneyfacts, an institution that provides financial information services, when compared with data from the beginning of February, there were a whopping 518 less deals available at the commencement of March.

This indicates the biggest monthly drop in mortgage deal availability since May 2020 when, as a result of the Covid pandemic and the economic uncertainty it brought, a massive 626 mortgage products were dropped.

The current number of mortgage products on the market for buyers to choose from is 4,838, which indicates a drop of 384 products from March 2020, when the pandemic first hit.

Lenders have removed these products as a direct response to the increased base rate set by the Bank of England. Some lenders have removed whole products from the market while others have stopped lending for certain deposit sizes.

Further to this, the shelf life of some mortgage products has been reduced by 14 days over the last month, meaning potential home buyers have, on average, just 28 days to secure their preferred mortgage deal.

For five months in a row, both two year and five year fixed rate mortgage interest rates have risen by 0.21% and 0.17% respectively. The two-year fixed average rate, at 2.65%, is at the highest seen since November 2015.

This is not good news for homeowners coming to the end of their two year fixed rate mortgage deal, who will find it extremely challenging to find another fixed deal at a decent interest rate and it will find it virtually impossible to get a better one that they have previously enjoyed. This will become particularly relevant if the homeowner has little to no equity in their property, thereby making it difficult to access a higher LTV (loan-to-value) band and more competitive interest rates.

Five year fixed interest mortgage rates are showing their highest figures, at 2.88%, since April 2019. Homeowners approaching the end of their fixed rate deal may still have the opportunity to find a decent deal on a five year fixed rate as the average rate has stayed at 2.93%, which is 0.05% lower than what it was in March 2017.

The only mortgage products that showed signs of improved availability were on 5% deposit loans, with seven new deals being added to the market. March 2022 was the first time that a 5% mortgage with a two-year fixed interest rate has shown an increase of 0.06% up to 3.11% since April 2021.

Even though the base rate set by the Bank of England has no direct effect on fixed interest rates, lenders typically will increase their rates to cover any increased borrowing costs that will most definitely arise.

Last summer saw mortgage interest rates hit an historical low, with interest rate deals available at as little as 0.83%. This was largely due to lenders wanting to capitalise on a buoyant market and the fact that lending costs were at an all time low with the Bank of England lowering the base rate to 0.1%. This was subsequently increased to .02% in December, followed by another increase in February 2022, to 0.5%, with the expectations that further rises will be seen in the months to come.

Eleanor Williams, finance expert at Moneyfacts, said: ‘Borrowers contemplating securing a new mortgage deal may be disheartened to see that rates are continuing to rise this month.

‘While factors beyond lenders’ control are uncertain, as the cost of living crisis continues and economic conditions are volatile, to mitigate the risk of default, it could be that providers may tighten their lending belts even further moving forwards.

‘Borrowers looking to get onto the property ladder or to remortgage may therefore be wise to seek advice to ensure they are abreast of the changing market and to move forwards with securing the most suitable deal for them.’

Finding a Good Fixed Interest Deal

There are still many decent fixed term deals out there which are significantly lower that these average figures provided by Moneyfacts, particularly foe clients with large deposits and/or equity in their property. Experts warn buyers to consider their options carefully and shop around to find the best deal before committing to any fixed rate mortgage product.

“Rates have gone up which will cost homebuyers a little bit more, but I want to stress this shouldn’t put people off from moving to the house of their dreams or taking that first step to get on the property ladder.

‘We’ve seen a sharp and slightly panicky reaction to the Bank of England base rate rising to 0.5 per cent in February but 30 years ago in 1992, it was more than 20 times higher at 10.38 per cent. So, we must view this rise with some much-needed context and with a cool-head.’

Even though mortgage interest rates are still relatively low when compared with historical figures, the average house price in increasing but not in line with the average income.

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Mortgages

Average UK House Prices Hit New All-Time High in February

Economic uncertainty has become the norm, as the UK continues to deal with the lingering aftereffects of COVID-19. But while some sectors are struggling to get back to pre-pandemic performance levels, others are breaking records left, right and centre.

Once again, average house prices hit a new all-time high in February, exceeding £260,000 for the first time. Data published by Nationwide suggests an astonishing 12.6% average annual growth rate for the month, taking house prices in most key UK regions to new record-highs.

This is the largest year-on-year increase since Nationwide’s monthly index was launched in 1991, suggesting staggering performance for the sector despite the highest level of inflation in over three decades.

On average, the price of a UK home is now approximately £44,000 higher than it was before the pandemic hit – an increase of around 20%.

Supply Continues to Lag Behind Demand

According to Nationwide, issues with available inventory are the main cause of the past year’s record of property price increases. Demand continues to exceed supply in most areas of the UK, with affordable inventory having all-but dried up entirely.

Meanwhile, house price growth continues to outpace wage rises, making it increasingly difficult for the average UK worker to buy their own home.

“The continued buoyancy of the housing market is of little surprise, given the mounting pressure on household budgets from rising inflation, which reached a 30-year high of 5.5% in January, and since borrowing costs have started to move up from all-time lows in recent months,” commented Nationwide.

“The squeeze on household incomes is set to intensify, with inflation expected to rise above 7% in the coming months,”

“Indeed, there is scope for inflation to rise even further as events in Ukraine threaten to send global energy prices even higher,”

“Assuming that labour market conditions remain strong, the Bank of England is also likely to raise interest rates, which will exert a further drag on the market if this feeds through to mortgage rates,”

A Positive Picture for Current Homeowners

While the housing market is becoming increasingly inaccessible for first-time buyers, all-time record house prices are benefiting millions of existing home owners.

“There has arguably never been a better time to be a homeowner as, despite all that’s been thrown at it, the UK property market continues to go from strength to strength,” said Marc von Grundherr, director of Benham and Reeves.

“This performance really is quite alarming when you consider the wider economic turmoil that we’ve faced for some years now and it proves that there really is no safer investment than bricks and mortar,”

“Even across London where market conditions have remained far more muted, values have continued to climb, and the capital’s property market is now poised to enjoy an accelerated rate of growth over the coming year.”

Further monthly property price increases have been forecast by all major banks and lenders, though at a significantly slower rate than those recorded over the past year.

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Mortgages

How to Reduce your Mortgage Repayments and Save Money

As inflation increases and the cost of living rises, many homeowners are looking for ways to reduce spending. One way this can be done is by cutting the cost of their mortgage.

UK households are bracing themselves for the predicted increases in their monthly outgoings due to the increase in inflation and the escalating energy crisis. Alongside this is the rise in interest rates which will have a serious effect on monthly mortgage repayment amounts.

We calculated that on average, since December 2021, on a standard variable mortgage, people would be paying an additional £656 per year in repayments. So, with tough times ahead, it is wise to consider some options for saving money on your mortgage.

Remortgage Your Home

This option will suit anyone approaching the end of their existing mortgage deal and should be the first option to consider when trying to reduce monthly repayments. In the current climate it would be frugal to take advantage of the deals still on offer before the predicted increases in interest rates.

According to research, homeowners can save on average around £3900 per annum by switching mortgages and locking in a good deal.

If you are not at the end of your current deal you many have to pay your mortgage lender an ERC (early repayment charge) but it is useful to know that you can, in fact, switch mortgages 6 months before the end of your deal without being penalised.

Long-Term Fixed Rate Mortgages

Fixing your monthly repayment amounts can give you a little peace of mind knowing exactly how much you will be paying irrespective of fluctuating interest rates.

Locking into a good deal on a five year fixed interest rate mortgage could be the perfect solution to bringing a bit of financial stability for homeowners. There are still many great 5 year fixed interest offers available on the market particularly for buyers who require a higher loan to value (LTV) ratio.

The interest rate on a five year fixed mortgage is higher than that of a two year fixed mortgage, however with the uncertainty of the economy, paying a little more on monthly repayments could pay dividends should the cost of living continue to increase, as expected, in the coming years.

Green Mortgages

The concept of a green mortgage is to reward the buyer as an incentive to buy a home which is environmentally friendly. Lenders’ do this by offering mortgages with lower interest rates, therefore lower monthly repayments for the homeowner.

In order to qualify for a green mortgage, the property must have EPC (Energy Performance Certificate). Ratings of A or B will be given access to the best green mortgage deals which can offer the biggest discounts in interest rates, cash back incentives and additional low-cost borrowing option.

Part and Part Mortgages

As the name suggests this type of mortgage is on a partial interest only and partial repayment basis. Mortgage brokers will tailor a part and part mortgage to suit your individual needs and would ensure a clause is included to enable you to make additional overpayments should you wish to.

It is important to consult with an experienced broker when considering a part and part mortgage as this mortgage product is not suitable for all homeowners.

Overpayments on Your Mortgage

Monthly overpayments or a single lump sum payment is a wise move while interest rates are still low. Investing your money into your home during these turbulent economic times could prove to be the best place to put your cash, with many other investment options being very risky.

Typically, most mortgages permit the borrower to overpay by up to 10% per annum and by taking advantage of this you can make huge savings in the long term. Just an additional £50 per month can save you around £5000 and reduce your mortgage period by 2 years.

Offset Mortgage

This type of mortgage links to your savings account and any saving you have in that account will be considered, by the lender, as mortgage overpayments. You will still have access to the funds in the saving account and be able to withdraw cash but that will affect the interest rates of the mortgage.

Offset mortgages require that the mortgage and the savings account is with the same provider.

Size of Your Deposit

It goes without saying that the larger the deposit you have to put down on a property, the better access to great deals with low interest rates. Your monthly payments will be less and long term you will end up paying less for your home.

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Mortgages

Discounts on Green Mortgages for Energy Efficient Landlords

With the upcoming changes to EPC (Energy Performance Certificate) rules, the interest in green mortgages is on the increase with many landlords qualifying for great deals on BTL mortgages.

Green mortgages offer incentives to landlords who are willing to upgrade their properties to a high energy efficient level.

Although there are currently only a few lenders offering green mortgages, there is an expectation that many more lenders will follow suit in the near future. Green mortgages are available, not only to buy-to-let landlords, but also to regular home buyers and re-mortgagers. Buyers are offered a discount on interest rates for homes which are deemed to be energy efficient.

The first green mortgages were offered in June 2021 by specialist BTL lenders, Landbay. The response from buyers and landlords has been extremely positive with the prediction that many more lenders intend to offer the same type of mortgage product in the near future.

What is an EPC?

An Energy Performance Certificate is a certificate that measures just how energy efficient a property is, which is then awarded a rating, ranging from A to G, with A being the most efficient and G, the least.

A property that is highly efficient and emits minimal greenhouse gases will be allocated a rating of A, whereas as a G rating indicates poor performance in both efficiency and emissions.

An EPC rating inspection is carried out by a qualified energy assessor who will estimate the average energy use. The assessor will take into account things like hot water, electricity and gas costs as well as levels of carbon dioxide emissions, when rating a property.

Energy Performance Certificates also suggest improvements that can be made to improve efficiency with an estimate of costs for the changes needed, and potential savings the improvements will bring.

EPC’s for Rental Properties

Rental properties have been required to have an EPC since 2007, resulting in the government now having energy data for around 50% of residential homes in the UK.

Approximately 58% of houses and flats have an energy efficient rating between D and G. This is largely due to the large number of old housing in the UK and is not surprising when considering that around 20% of all housing was built before 1919.

In direct contrast, 95% of new homes in the UK have rating between A and C, with the majority having a rating of B.

Landlords have been required, since 2018, to have a minimum EPC rating of E, but new government rules mean that this will change by 2025, when landlords will be required to improve to a C rating for all new tenancies. This will be followed by all existing tenancies to reach the same C rating by 2028.

The changes are due to the ongoing global warming crisis and are part of the government’s strategy to reach the environmental target of zero-emissions by 2050. Housing is estimated to contribute 16% of total carbon dioxide emissions making it imperative that all homes are improved when it comes to energy efficiency, irrespective of whether they are owned or rented.

For landlords to qualify for a discounted green mortgage, the property must be awarded a rating of at least C. Green mortgages are also available for new build homes.

How Can I improve Energy Efficiency in My Property?

There are few simple things you can do to improve energy efficiency and lower carbon emissions in your home. You can make small changes like changing lightbulbs, or bigger improvements such as new double glazing, floor and wall insulation and solar panels all which are highly effective.

The gas boiler is the biggest problem when it comes to carbon dioxide emissions which can be improved by upgrading to a combi boiler or heat pumps which are considerably more environmentally friendly than the old style boilers.

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Mortgages

Property Market Shake Up as Cheap Fixed Rate Mortgage Deals Disappear

For the last ten years or so, buyers have enjoyed the luxury of low cost mortgages, but this long enjoyed privilege looks set to end.

2021 showed record low fixed rate mortgage deals of lower than 1%, but these rates are officially over, with interest rates nearly doubling over the last six months.

In October 2021, home buyers could take out fixed rate mortgages at the low rate of 0.79%, however, the cheapest you can get right now on a 2 year fixed term, has risen to 1.25%.  In real terms, this would mean on a loan of £150,000 you could expect to pay an additional £375 annually. The lowest rate on a five year fixed term mortgage has risen from a low of 0.91% to 1.59%, which equates to approximately £565 in additional costs per year.

Buyers have enjoyed low interest mortgage offers since the end of the global recession when the Bank of England significantly decreased the base rate. When the Covid pandemic struck the base rate was at a record low of 0.1% but has since been increased to 0.5% with the expectation that it will rise further in the immediate future as the cost of living soars.

As a direct result of this base rate hike, lenders have followed suit with many increasing fixed rates by up to 0.5%, including Virgin Money, Halifax and Santander.

The expectation is that rates will continue to rise and could go as high as 2% by 2023. The UK hasn’t seen rates this high since December 2008. For those currently on low cost fixed rate mortgages, they will find it difficult to find an equally good deal when their current term comes to an end.

Imran Hussain, mortgage broker at Harmony Financial Services, commented: ‘The sub-1 per cent interest rate is almost certainly a thing of the past.’

If the rate is increased to 2% by the Bank of England in 2023, this would mean that on a property worth £150,000 on a two year fixed rate, monthly payments would be £711, and on a 5 year fixed rate would be £723.

Financial adviser at Carl Summers Financial Services, Scott Taylor-Barr, added: ‘Those who were lucky enough to secure a fixed rate at the historic low rates we saw last year have to be aware of what lenders call ‘payment shock’, which is when rates rise while you are insulated on your fixed rate and exit that deal into a much higher interest rate market.

‘All you can do is ensure you budget with a reserve to allow for an increase in payments when your deal ends.’

Lock In Now – If You Can

Approximately 75% of buyers are locked into fixed rate deals that last between one and thirty years. Other homeowners are on variable rate mortgages and are therefore subject to the rise and fall of interest rates. Should the Bank of England push the rate further to 2% this would mean a property worth £150,000, with the average standard variable rate of 4.5, will have to pay £1,592 in additional costs per year.

Mortgage brokers are urging homeowners to do all they can to switch to a fixed rate mortgage before we are hit with further interest rate increases, if they can.

David Hollingworth, of L&C, says: ‘Taking advantage of the current crop of deals will help to weather the storm.’

He went on to say that many lenders will make mortgage rate offers that they will honour for up to six months, giving buyers and homeowners the opportunity to get a good deal before it’s too late.

Look Into Long Fixed Term Deals

Longer term fixed rate mortgages are becoming more and more popular, with the cost of a five year fixed term not being too much higher than that of a two year fixed deal. With this in mind, there is a trend among buyers considering taking out even longer, ten year deals. The best deal available on a 10 year deal is currently with Lloyds at a rate of 1.66%.

Dominik Lipnicki, director at Your Mortgage Decisions Ltd, says: ‘Many borrowers are not just concentrating on the lowest possible monthly payment now.’

Graham Cox, director of Self Employed Mortgage Hub, adds: ‘We’re finding borrowers who aren’t looking to move locking in on a longer period of five or seven years.’

He did warn, however, that long term rates are not always the best choice for every buyer, particularly if they have to move:  ‘Although they will be portable, there is no guarantee you will meet the lender’s criteria then.’

Can a Cheaper Mortgage End Up Costing More?

A great number of mortgages have an early repayment fee, but lenders usually permit borrowers to repay up to 10% extra, penalty free, every year.

By paying an extra £100 per month on a mortgage of £150,000 with a 1% interest rate, you could clear your loan almost 4 years early and save around £3,374. Although this may seem like a good move, it is vital that consideration of other debts are made first.

Mr Hollingworth stated: ‘Although the cost of living rise will cause many to rethink their budgeting, there could still be room for some overpayments to be made now while enjoying a low rate.

‘That will help reduce the interest bill and the mortgage balance to save money overall and to put them in a better position to cope with a potentially higher-rate environment when the current deal comes to an end.’

Should I Pay to Leave Early?

It may be cost effective to just pay the ERC (early repayment charge) if a low fixed interest rate mortgage can be found, but borrowers should calculate whether it is in fact worth it before making any commitment.

Managing director at The Mortgage Girl, Samantha Bickford, says: ‘A client on a great rate of 1.79 per cent with a year left came to me this week willing to repay the £700 exit fee to secure a new fixed rate deal for as long as possible.

‘We secured a deal at 1.89 per cent for the next five years, to take him to the end of his mortgage term.’

But experts say rates are relatively low and are not likely to surge.

Rob Peters, principal at Simple Fast Mortgage, says: ‘We have had an unprecedented period of all-time low interest rates. Those with highly leveraged debt burdens will be the first to feel the pain.’

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Mortgages

Bigger Mortgages Could be on the Cards for Buyers as Bank of England Considers Relaxing Affordability Tests

The Bank of England has said it may relax the rules surrounding the affordability of mortgages so that buyers will be able to apply for higher value homes than they would normally be able to.  This will allow people to financially stretch themselves in order to purchase property.

A consultation, by the Bank of England, has been arranged to discuss the changes that will be made to the affordability tests that lenders are using to assess potential buyers. This will inevitably lead to more borrowers being able to access larger mortgages. This consultation is a direct result of concerns that this will further drive up house inflation.

It is a fact that stringent affordability tests, that don’t represent current borrowing conditions, have prevented many FTB’s (first time buyers) from taking out a mortgage which could be considerably cheaper than rental rates.

What Changes Will Be Made?

The rules that will be affected will be the affordability test and the loan-to-income limit, both recommendations established in 2014 by the Financial Authority Committee. These rules were created with the intention of preventing buyers from getting themselves in financial difficulty by taking out mortgages that they could not afford.

The rules provide limits on both loan-to-income ratios and affordability which provides lenders with a “stress” interest rate so that they can assess buyers’ ability to keep up with mortgage repayments.

A loan-to-income ratio is the rate at which the banks and lenders will calculate the size of the mortgage they will offer, by using the buyers’ annual salary. This rate has been set at 4.5 times annual salary since 2014.

The affordability test involves the buyer proving that they can afford to keep up with repayments should the interest rates increase by 3% above the standard variable rate of the lender.

Standard variable rate mortgages (SVR’s) typically follow on from a fixed rate mortgage when the term has come to an end and are generally more expensive. A large number of buyers will switch to a new fixed mortgage deal to avoid an SVR mortgage.

Although these rules stopped many from accessing mortgages, only 6% (approximately 30,000 mortgages) of buyers were forced to accept lower value loans.

The expectation is that the loan-to-income rule will remain as it currently is, but the affordability stress test will be relaxed. This will mean that the repayment amount will be based on predicted market interest rates over the coming 5 years, or an increase of 1% on the current rate, whichever is greater.

Mortgage technical manager at John Charcoal, Nicholas Mendes, commented: ‘The scrapping of current rules would be welcome by homeowners and brokers alike as this would be a boost for the market given the ever-increasing property prices.

‘This will give homeowners, at least in the short term, the ability to borrow more.’

Despite these rule changes, the ever increasing cost of living could completely nullify the effects of the change, as household bills are on the rise and lenders will need to factor this in when performing the affordability test.

‘We are expecting to see inflation continue to increase into 2023,’ added Mendes, ‘with multiple base rates rises, lenders could choose to not make any changes, because predicting where rates could be in 5 years’ time seems almost impossible.

‘As the costs continue to escalate, we could see lenders exercise caution and start to consider other factors to ensure the mortgage remains affordable.’

Rising rates and escalating inflation have resulted in many lenders, including TSB, Santander and Barclays, to alter their affordability stress test to reflect the current economic arena.

Mortgage consultant at Private Finance, Chris Sykes, said: ‘We can expect more lenders to take these costs into consideration moving forward, especially after the removal of the energy price cap in April.

‘This means we can expect tighter affordability for some and lower loan amounts available than was previously the case.

‘This could reduce people’s maximum borrowing, which in turn could be a problem for those already in a tight situation.

‘We are already seeing the impact these changes are having with Barclays with a recent client able to borrow a very significant £100,000 less following the implementation of the changes to their affordability calculator.’

This could present problems, not only for first time buyers but also for people looking to remortgage their property. It will prevent many owners from being able to remortgage their homes, forcing them to remain on more expensive monthly repayments.

In addition, the increased price of the average home will further contribute the difficulties first time buyers are having trying to get a foot on the property ladder.

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Rightmove Predicts Booming Year for the UK Housing Sector

The past 12 months brought the kind of property market activity that has not been seen for some time in the UK. House prices have hovered at all-time highs, demand has outstripped supply by a clear mile and the return of the 95% LTV mortgage was welcomed by many thousands of first-time buyers.

Now, Rightmove believes that 2022 could be another incredible year for the housing sector. Last year, the company recorded the most explosive performance on the housing market since going into business 21 years ago. In turn, Rightmove now believes that housing market activity will return to pre-pandemic levels before the end of the year, with no sign of a slowdown in sight.

Even with inflation at a 30-year high, Rightmove believes that unprecedented demand for quality homes in all key regions of the UK will ensure the sector maintains its momentum. The market’s performance is also set to be bolstered and perhaps even accelerated by the rapid removal of all remaining pandemic restrictions.

Record Performance at Rightmove

According to the latest figures published by Rightmove, the company achieved a year-on-year profit increase of an impressive 67%, hitting an annual pre-tax profit of £226m for the year ending 31 December 2021.

During the same time, total revenues were up by approximately 50% to reach £305 million. Full year revenues were up 5% compared to pre-pandemic figures in 2019, and a huge 48% higher than recorded at the height of the pandemic in 2020.

“As the market normalises, we expect the number of transactions to return to pre-pandemic levels,” Rightmove said in a statement.

“We remain alert to the macro environment, but Rightmove is not materially impacted by the property market cycle other than in the most extreme circumstances.”

An operating margin of 74% was reported by Rightmove for the period. The FTSE 100 company collects most of its revenues from real estate agents and customers who pay to advertise their homes via its online channels.

Rightmove predicted further growth in revenues as the company continues to scale back the discounts it had been offering during the COVID-19 pandemic to encourage buyers and sellers to make their respective moves.

Shares in the company were up an impressive 5.3% in London early last Friday morning.

A Generally Positive Outlook

The housing market in general is predicted to record a stellar performance throughout the year, with average house prices having once again increased 9.5% in February compared to the same month in 2021. Average UK property prices are once again hovering at all-time highs in most regions.

On the whole, the average purchase price of a home in the UK is now just under £349,000 – up almost 10% since the same time last year, which is the highest annual rate of growth recorded in almost a decade.

In just two years, average UK house prices have increased by around £40,000, effectively pricing millions of would-be buyers entirely out of the market.

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