Year: 2019

THERE are plenty of reasons why people fail to take out vital insurance protection for their loved ones and while some excuses may be valid, others are not. Too many people do not bother taking out life insurance, income protection or critical illness cover because they believe “it will never happen to me”. The truth is that serious illness or accidents can happen to anybody.

By HARVEY JONES

PUBLISHED: 11:47, Thu, May 9, 2019 | UPDATED: 12:34, Thu, May 9, 2019

Others say that they do not trust insurance companies to pay claims but new research shows this is misguided. Big protection insurers such as Aegon, Aviva, Legal & General, LV=, Royal London, Scottish Widows, Vitality and Zurich pay out on the vast majority of claims for bereavement, sickness and injury without dispute.

 

PAYING UP

Last year insurers paid out more than £5.3 billion in total, equal to £14.5 million every single day, up 4 per cent on 2017.

Just as importantly, they openly reveal the percentage of claims they accept and reject.

While many in the industry were originally reluctant, this transparency has served to boost customer confidence.

Insurers paid 97.6 per cent of claims in 2018, which will come as a shock to those who think insurers will do anything to wriggle out of their customer responsibilities.

More than 35,000 families were supported following an unexpected bereavement, with the average term life insurance payout being £81,269, according to the Association of British Insurers.

 

‘We’re that ABI head of health and protection Roshani Hewa said families dealing with a loss, serious injury or illness, are getting more help than ever: “Protection is there to ease the financial burden and many policies now offer excellent mental health support too.”

CANCER SHOCK

Self-employed bathroom fitter Neil Morgan discovered the importance of protection after he was diagnosed with stage 2 bowel cancer in May 2017 at the age of 50, then developed severe sepsis which required intensive care.

Neil had previously taken out income protection with insurer British Friendly, which paid him a replacement income until he was fit enough to run his business again.

He bought the policy through specialist insurance broker Drewberry and his £60 monthly premium has been worth every penny.

British Friendly paid Neil £323 a week free of tax, which covered his mortgage and other essential bills and took the financial pressure off his partner.

His policy eased him back into work with a one-off lump sum of £1,292 and Neil said he claimed benefits worth £22,000 in total: “My claims manager was extremely empathetic and because I didn’t have to worry about money, I could concentrate on getting well again.”

PROTECT INCOME

Drewberry head of protection advice Robert Harvey said Neil’s story highlights how vital income protection is, especially for the self-employed and added: “We’re hoping that more will secure their earnings against accidents and sickness.”

Yet only around one in 10 takes out this cover, even though it protects the earnings that pay for everything you buy in life.

British Friendly product and marketing director Nick Telfer said: “Many risk losing their home if [they are] unable to keep up with the mortgage payments or rent.”

Do not confuse income protection with the inferior payment protection insurance or PPI, which was rampantly mis-sold by banks.

MISSION CRITICAL

Income protection claims can be tricky to assess because they depend on subjective judgments about the claimant’s fitness for work, with insurers green lighting 88.1 percent.

Claims levels rise to 91.6 percent on critical illness cover, as claimants must be diagnosed with a specific hoping more will condition. The average payout was £70,926.

Figures from Aegon show the average age of a critical illness claimant was just 50 with the “big three” cancer, heart attack and stroke accounting for more than eight out of 10 claims. Aegon approved 93 per cent of critical illness claims, with the main reasons for declining being failing to meet policy definitions and misrepresentation.

Head of claims and underwriting Simon Jacobs said: “We’re proud to have been able to help people, businesses and families through some of the most difficult times in their lives.”

PENSION POWER

This does not mean that everybody needs protection. If you have already retired or will soon do so, you may be able to rely on your pension to see you through, especially if your children are grown up and you have cleared your mortgage and other debts.

However, family breadwinners, or those with financial responsibilities such as household expenses, servicing a mortgage or running their own business are taking a big risk if they go without financial protection.

Most people buy from an independent financial adviser rather than direct with the insurer. Check what protection you need.

‘In my 20s, the idea I might suffer a life changing injury never crossed my mind’: Is critical illness and income protection worth paying for?

•  Three quarters of those with a serious illness spend more money on everyday living costs due to their condition
• Average £153 extra is spent a month on necessities 
• Many people shun critical illness or protection insurance due to cost 

By GEORGIE FROST FOR THIS IS MONEY

PUBLISHED: 08:54, 7 May 2019 | UPDATED: 08:54, 7 May 2019

Ten years ago, while the world was in the grips of a financial crisis, I was going through a financial crisis of my own.

In 2008, at the age of 26, I suffered a life-changing back injury.

In the short-term I couldn’t work for almost a year, and in the long-term I have been left with permanent nerve damage and chronic pain.

Every year, around 1million people employed in Britain are unable to work due to injury or illness, according to estimates from the Association of British Insurers.

However, the loss of income may not be your only financial concern – the cost of everyday life can also increase.

Why everyday life costs more…

Of those who have suffered a serious illness, three quarters say they had to fork out more for basic necessities as a result of their condition, according to Direct Line Insurance.

On average, £153 extra a month – or £1,836 a year – is spent on increased travel costs, hospital visits and parking, medication and home adaptations.

‘When someone is diagnosed, it can turn family life upside down,’ said Jane Morgan from the company.

‘Everyday tasks often become far more difficult; frequently preventing individuals from working, resulting in a loss of earnings, at the same time as living expenses are increasing.’

The extra costs were found to be higher for those aged 18-34 compared to those over 55.

Think the unthinkable

Back in 2008, I had a staff job and received statutory sick pay which currently is £92.05 a week for up to 28 weeks.

A decade ago it was £75, certainly not enough to live on as a single person.

I fell back on my credit card to pay for everyday costs which took much of the next decade to pay off.

Now, I am among the growing army of freelancers in the UK but with the benefits of increased freedom and variety of work comes increased financial insecurity.

It is important for all workers though to make sure that plans are in place should the unexpected happen

Multiple sclerosis: ‘It’s a scary diagnosis’, says Rosie – ‘life definitely costs more’

Rosie Tong, from Canterbury, was diagnosed with multiple sclerosis in January 2016 aged 22.

‘It’s a scary diagnosis,’ said Rosie. ‘The first thing I did was to ask the neurologist how long until I was in a wheelchair. I didn’t know it was a young person’s disease.’

‘I thought my fiancé wouldn’t want to marry me anymore and that I would be a burden to my family.’

Rosie says it has taken her three years to come to terms with her illness’s impact on her body but not on her finances.

‘I don’t know how I would cope without the support of my now husband Christopher and my family.’

‘My employer has been really supportive but in the three years since diagnosis I have been off work more than I have been at work and I don’t get sick pay.’

‘Life definitely costs more,’ she said. ‘I do have a concessionary bus pass but it is only off-peak. I often need to get taxis or order take away if I can’t cook.

‘I make up to thirty hospital trips a year, which involves taking two buses, or driving – which costs me in petrol and hospital parking.

‘I also often have to pay for lunch or snacks, as hospital appointments are never on time.’

What is critical illness insurance?

In my twenties, the idea that I might suffer a life changing injury never crossed my mind.

I didn’t have a savings pot big enough or a benefits package from my work to cover me – critical illness cover could have helped soften the blow.

‘Critical illness cover can help protect people against the financial impact a serious illness can have on someone’s life,’ says Jane.

‘It could help towards additional travel costs or household bills whilst you’re unwell, enabling you and your family to continue day-to-day life.’

The policies pay a tax-free lump sum after you have been diagnosed with any of a number of specified conditions.

They are not cheap though and premiums increase with age and the state of your health, for example whether you are a smoker or not.

It is important to check what exactly is covered and the degree of severity of that condition needed for a pay-out.

But according to the ABI, around 92 per cent of critical illness claims are paid to policyholders.

How much cover do you need?

Jane adds: ‘When thinking about how much critical illness cover you might need, you may consider the financial commitments you already have.

‘This could include mortgages, childcare or day to day living.

‘It is important to consider the costs that could need covering if you’re unable to work as a result of long-term sickness or disability.

‘Product providers have their own lists of specified critical illnesses so it’s important to understand what’s covered and what’s not.

‘The list of illnesses we cover includes many types of cancer, heart attacks and strokes.

‘For example, some types of cancer are not included and you need to have permanent symptoms to make a claim for some illnesses.’

Income protection insurance

Income protection insurance pays out if you can’t work due to illness or injury, this could range from a serious injury, to stress or depression.

Unlike critical illness insurance, it does not pay out a lump sum – instead it will provide a monthly income of up to 80 per cent of your salary until you are healthy enough to return to work or retire.

It has never been a best-seller – partly because it is seen as complex and pays out smaller amounts each month instead of one big sum.

Some experts argue, however, that this is the best form of protection insurance if bought right.

It is vital to check what the policy covers and to find a decent policy it is worth seeking out independent financial advice.

One of the key issues is whether the policy will pay if you cannot do your own job or if you cannot work at all.

There are a lot of income protection policies around, but it is essential to realise they are not all the same. Cheap cover may not deliver when you need it, so it is worth paying for a good policy.

Things to think about include:

• The level of monthly payments required
• Whether cover is level or increases in line with inflation
• Whether premiums are guaranteed to stay the same over the policy’s term or whether they could rise
• At what age the policy should finish. Usually, it is between 60 and 65 to coincide with retirement although it is also possible to have short-term policies that only pay out for two years
• When the benefit should start to pay out in the event of a claim. This can be as early as four weeks and as long as 52 weeks. The earlier it pays out, the more expensive it is – the longer you can delay it the cheaper it gets. Consider how long your work’s sick pay runs for and any other protection you may have.

Other help

Being diagnosed with a life changing illness or injury can be a terrible shock but it is important to remember that you have rights and there is support available.

Statutory sick pay is a legal requirement when you are unable to work.

Those returning to employment are covered by the Equality Act which makes it unlawful for an employer to treat anyone less favourably because of disability.

Employers must make ‘reasonable adjustments’, which includes giving staff time off for medical appointments and offering flexible working hours.

Your doctor can point you in the direction of any support groups and Citizens Advice is invaluable in knowing what your rights are and what benefits you may be entitled to.

I was too proud to ask for help, and it cost me dear.

 

From credit ratings to ‘swaps’, what determines the interest rates lenders set on their mortgage deals?

When the time comes to select a mortgage, there are few more important considerations than the interest rate.

After all, the interest rate plays a huge part in determining the size of your monthly repayments and how much it will eventually cost you to clear the loan in its entirety.

Yet very few of us understand how lenders set these rates, and the various factors that influence them and determine whether they will go up or down.

One common misconception is that the base rate, set each month by the Bank of England’s monetary policy committee (MPC), is a big driver in the rates that we pay for our home loans.

This isn’t really true though.

What really drives it?

Base rate has barely moved in the last decade, and yet we have seen significant movement on the rates charged by lenders. For example, according to Moneyfacts the average interest rate for borrowers with a 10% deposit on a two-year fixed deal has dropped from 4.8% in 2013 to just 2.65% today.

That said, if base rate moves, it may have a direct impact on the size of your repayments. Tracker deals, as the name suggests, track the base rate. So your rate might be base rate plus 1%, which would mean at the moment an interest rate of 1.75%. If base rate was increased to 1%, then your mortgage rate would rise alongside it to 2%.

If you are on your lender’s standard variable rate (SVR) – the rate lenders move you to once your initial fixed or tracker rate finishes – then these will usually be hiked up following a base rate move too, though the lender isn’t limited in how much they can increase the SVR. In other words, even if base rate only goes up by 0.25%, your mortgage rate could go up by more.

However, if you are on a fixed rate mortgage, your rate won’t be impacted at all by any change in the base rate.

What about wholesale costs?

With many things we buy, from the petrol we put into our cars to the gas and electricity we use to power our homes, the price we pay is significantly influenced by the wholesale costs.

In other words, the more that the supplier has to pay to get hold of that fuel, the more we then pay in order to purchase it from them. In theory, when the wholesale costs go down, that should make it cheaper for us to buy too, though in reality that doesn’t always happen.

It’s much the same with money. Mortgage lenders don’t always have huge pots of cash just waiting to be lent out – they might need to bring in some financing through the wholesale markets, to then lend out with a little on top for the sake of their profits to us borrowers.

As a result, the cost of bringing in those funds play a huge role in determining what rates lenders are able to offer on their mortgage deals.

The protection of swap rates

These are a little complicated but basically allow lenders to protect itself against the risks of the interest rates it pays on accessing funds moving out of step with the rates it charges on lending that money out.

Think of it this way – if the lender is committing to lending out money at 2% on a two-year fixed rate mortgage, it wants to be able to protect itself against the cost of raising that money moving above 2%. Lenders include the cost of these ‘swaps’ when pricing up deals – as it becomes more expensive to hedge, then its mortgage rates rise too.

How risky are you?

A big influence on the interest rate charged on different mortgages will be how risky the target borrowers are likely to be.

This can take a couple of different forms. For example, if you have a larger deposit you’re seen as less of a risk by lenders, so you’ll tend to enjoy much lower interest rates than the deals on offer to borrowers with a deposit of just 5-10%

Similarly, while most lenders restrict their deals to borrowers with near-spotless credit histories, there are some products which are designed for people who have been through CCJs and have a less than perfect record. These deals will come with higher interest rates though.

 How much competition is there?

Competition is definitely a good thing for mortgage borrowers.

Not only does it mean you have more deals to choose from, but lenders are pushed towards lowering their rates – and making less of a profit – on their products, in order to try to stand out from the competition.

The mortgage arrangement fee

The interest rate isn’t the only way that a lender makes money from its mortgage product. Borrowers will also generally have to pay an arrangement fee, or product fee, in order to secure that deal.

These can vary sharply in size on residential mortgages, from nothing at all to almost £2,000.

Mortgage deals with the lowest interest rates tend to come with more significant product fees, while you’ll have to commit to a higher interest rate in order to secure a fee-free deal. These fees can be paid all in one go, or added to your mortgage balance. Just remember that if you do so, you’ll be paying interest on it along with the rest of your loan, so it will end up costing you far more over the long term.

By John Fitzsimons

09:00, 14 APR 2019

The Bank of England recently held the base rate at 0.75%, as the Monetary Policy Committee took a ‘wait and see’ approach to Brexit. But with the UK’s exit from the EU potentially just weeks away, should you brace for a base rate shock in coming months?

The prime minister has secured a new, flexible extension to Article 50, meaning the UK is now set to leave the EU on 31 October at the latest, but that it could end up leaving sooner.

Changes to interest rates can have far-reaching consequences, on everything from your personal finances to the wider economy.

The Bank of England sets the interest rate – also known as the base rate – in response to current events and expected economic performance to try to keep inflation around its 2% target.

Deal or no deal, Brexit is set to have a seismic impact on the UK economy, so how will the Bank respond, and what will it mean for you.

Why the Bank of England base rate matters

Sometimes known simply as the interest rate, the Bank of England base rate influences how much banks and other lenders charge you to borrow money, and how much interest is paid on your savings.

In the case of a base rate rise, banks will tend to raise mortgage interest rates as well as loans, pushing up the cost of borrowing money. At the same time, interest rates on savings are also likely to increase, meaning your savings pot could grow a little faster.

Lowering the base rate could have the opposite effect, with mortgage rates becoming slightly cheaper, but savings deals offering lower returns.

Factors that influence the base rate

When setting interest rates, the MPC’s goal is to keep inflation as close to 2% as possible. Its decisions are informed by an inflation forecast, which takes into account:

• the current inflation level
• wage growth
• the cost of goods (including the impact of changes in the exchange rate)
• consumer spending
• investment levels

Interest rate decisions also consider unemployment rates and economic growth figures – the latter of which must not exceed a 1.5% ‘speed limit’ or inflation could rise above target.

The Bank of England puts it like this: ‘Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates.’

Timeline: interest rates since the Brexit referendum

As Brexit looms on the horizon, you might wonder how this unprecedented political event might affect the economy. While no one has a crystal ball, it can be helpful to look at what happened to the base rate during the past two years of Brexit votes and negotiations.

August 2016: Just over a month after the referendum on EU membership, the Bank of England cut the base rate in half – from 0.5% to 0.25%. This was the first time the interest rate had changed since March 2009.

Interest rates were already at a historic low before this reduction. In the wake of the 2008 financial crisis, the base rate fell dramatically from 5% to 0.5%, where it remained for almost a decade.

November 2017: the MPC restored the base rate to pre-referendum levels in order to combat rising inflation. The Bank linked this decision directly to Brexit, saying ‘the fall in the pound following the Brexit vote’ means that things from abroad cost more, ‘and that means higher prices in the shops’.

 August 2018: The MPC raised interest rates from 0.5% to 0.75% – the first rise above 0.5% in almost a decade. This decision was based on the economy’s steady growth, and the accompanying report noted that most referendum-related price hikes appeared to have happened already.

 February 2019: In January, inflation fell below the Bank of England’s target of 2%. This led the MPC to keep the base rate at 0.75% in February.

 March 2019: Just over a week before the UK’s original EU exit date of Friday 29 March, the MPC voted to keep interest rates at 0.75% once again, citing low unemployment and inflation almost exactly on target at 1.9%. Minutes from the group’s meeting did, however, discuss the negative effect Brexit could have on businesses.

What decision-makers have said about post-Brexit interest rates?

With so much uncertainty around what kind of Brexit we’ll see, it’s difficult to predict what the MPC will decide to do when (or if) Brexit actually takes place.

Still, key decision makers have hinted at what form post-Brexit monetary policy could take:

Mark Carney, governor of the Bank of England

In a November 2018 press conference, Carney said that rates could go up or down after Brexit, depending on the circumstances: ‘Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply, and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction.’

Carney reiterated this line at January’s World Economic Forum in Davos, saying ‘it’s not automatic which way policy would go in the event of a hard Brexit’.

Gertjan Vlieghe, MPC member

Speaking to the Treasury Select Committee late in February, Vlieghe went slightly further than Carney, saying ‘just because [interest rates] could go in either direction, doesn’t mean that each one is equally likely’.

The rate-setter supported Carney’s point that any interest rate decisions will have to be made in real time, after the committee can see what impact Brexit has had.

Despite this, Vlieghe did outline how a likely fall in the pound’s value could lead to higher inflation, which would require the MPC to take action.

The monetary policy committee (MPC)

In February’s inflation report, the MPC, which includes Vlieghe and Carney, said: ‘Whatever form Brexit takes, we will keep inflation low and support the economy.’

As we saw in 2017 and 2018, the MPC can opt to increase the base rate when they want to lower inflation. However, there will be other factors, such as a potential lack of consumer and business confidence that the Bank will have to contend with after Brexit.

Minutes from March’s MPC meeting said, ‘Brexit uncertainties also continue to weigh on confidence and short-term economic activity, notably business investment.’ The minutes also refer to ‘the possibility of further cliff-edge uncertainties that could have a significant effect on spending’ in the lead up to a delayed Brexit deadline.

However, the minutes note that if the economy develops in line with its projections, the Bank will likely raise rates ‘at a gradual pace and to a limited extent’ in the future.

What economists say about interest rates post-Brexit

Rocio Concha, chief economist at Which?

‘It’s clear that the political uncertainty surrounding Brexit is preventing the Bank of England from raising rates beyond their current level. In the medium term though, the Bank’s intention is still to gradually increase rates closer to their pre-recessionary norms – but only if the UK’s departure from the EU goes smoothly.

In the event of a no-deal Brexit, we expect that the most likely response is for rates to fall in order to stimulate a weakened economy. But, as the Bank says, that is by no means certain. A fall in the value of the pound will undoubtedly lead to higher prices and the Bank may find itself in a difficult position, balancing economic stimulus with tackling inflation.’

Ben Brettell, senior economist at Hargreaves Lansdown

Brettell told Which? Money: ‘The Bank of England has been setting a neutral tone as Brexit approaches. The minutes of recent meetings reiterate that the MPC still sees the need for higher interest rates in the coming years, but a deteriorating global growth outlook and mounting Brexit uncertainty have put paid to any thoughts of tighter policy for now.

Where we go from here is highly uncertain, as we still have little clarity over what Brexit will look like, if and when it happens. An orderly Brexit could see the Bank refocus on wage growth and raise rates later this year. A no-deal scenario would likely see sterling fall 5-10%, causing a spike in inflation, but I’d expect the Bank to look through this and cut rates to support the economy.’

Howard Archer, chief economic adviser to economic forecasting group EY Item Club

Archer told the Press Association: ‘Despite robust employment growth and firm pay, there looks to be zero prospect that the Bank of England is going to act on interest rates until the Brexit situation is resolved and it can see how the economy is being affected.

With Brexit now looking most likely to be delayed until at least 30 June – and very possibly significantly later still – and the economy looking soft overall in the first quarter, we believe that it is ever more likely that the Bank of England will sit tight on interest rates through 2019 – assuming that the UK ultimately leaves the EU with a ‘deal’.’

What can you do to prepare?

If the Bank of England base rate does change after Brexit, the key things that might be affected are your mortgage and your savings.

Savings

For savings, a base rate rise could see your account’s interest rate increase, giving you better returns. On the other hand, if the base rate is cut, you might see your interest fall.

Switching to a fixed rate account will secure you against any potential Brexit turmoil, but you’ll miss out on the possible benefits of a base rate rise.

If you’re thinking of switching, you can compare hundreds of savings account at Which? Money Compare to find the best home for your savings.

Mortgages

Variable rate and tracker mortgage customers could face higher repayments if the base rate rises. If you’re worried about this, you could remortgage to a fixed-rate deal in order to secure cheaper repayments for a set period.

However, if the base rate is lower, variable rate borrowers may see their repayments become cheaper. You’ll miss out on this if you’re on a fixed rate.

By Ian Aikman (Which?) 11^th April 2019

With nearly half of all house sales collapsing before completion during Q4 last year, the process of selling your home is undoubtedly stressful and not guaranteed to go the way you want it to.

In order to reduce the chances of your sale falling through, it’s worthwhile to be aware of the qualities your property has which may make the sale difficult, so you can work on resolving them before you find a buyer. So what are the most common issues that can scupper the sale of a property? NAEA takes a closer look.

Nuisance neighbours

Whether it’s a dispute over boundaries, shared access to driveways or anti-social noise, falling out with your next-door neighbour is not only stressful but can adversely affect the sale of a property.

Anyone looking to sell their property is legally obliged to disclose information about any disputes they’ve had with neighbours on the ‘Seller’s Property Information Form’ provided by their solicitor. Omitting or providing false information could lead to legal action taken against you by the buyers, so honesty is the best policy.

Structural problems

If your home has any serious structural defects which aren’t visible on first inspection, this can put serious doubt in the minds of buyers. For example, if the survey finds there’s something wrong with the foundations, they may wonder about how long the house will be around, whether it’s even safe to live in, and of course that their mortgage provider may refuse to lend against the property. If you’re aware of a major structural problem with your property, try and fix it before putting it on the market. If you are not in the financial position to repair the issue, get an appropriate contractor to give you an estimate for repair and be transparent about it. You should disclose everything to the buyer and provide the documentation on how to remedy the issue.

By doing this leg work, you’ll eliminate doubt in the mind of the buyer.

Japanese knotweed

Knotweed is often found during site surveys, but while it may look small and contained, do not underestimate the scale of the potential problem; the plant can grow up to nine feet in height and roots up to three metres deep. It’s important to have it treated professionally as soon as possible to avoid further growth and prevent the property sale from falling through.

The invasive plant, Japanese Knotweed, is more common than you think, and it can damage the foundations of your home and significantly devalue it if it’s at risk of subsidence as a result. If you think you can see any in your garden, call a professional to excavate it as soon as possible. It also affects the mortgage ability as lenders take a dim view if it is present.

Rail timetable changes

If your property is in a commuter town, any changes to train timetables which make it more difficult to commute to the nearest city, could have detrimental effect on house prices and the saleability of your property altogether. If you’re in an area popular with commuters, keep a beady eye out for any changes to the timetable.

Planning permission

Buying a property without planning permission for any works is risky for prospective buyers. If you’ve had any work carried out while you’ve been living in the property, such as extensions or conversions, make sure you obtained appropriate planning permission and building regulations, and have access to these documents. If you haven’t got the right documents, you may find that you must pay for them retrospectively before agreeing a sale.

Mark Hayward, Chief Executive, NAEA Propertymark comments “Almost half of all house sales fell through before completion in the final quarter of 2018, so concerns from buyers and sellers that it could happen to them are entirely justified. To try and prevent this from happening, there are several things you can do, like using a Propertymark Protected estate agent who will guide you through the process and help you navigate any unexpected events

 

WARREN LEWIS

Property Reporter

9th April 2019

 

Average two-year fixed rate drops to just is 3.3%, Moneyfacts says

A mortgage price war to attract first-time buyers with deposits as low as 5 per cent is intensifying, with providers slashing their rates, analysis has found.

The rate gap between the average two-year fixed-rate mortgage on the market for borrowers with a 5 per cent deposit, and the typical two year-fix for those with a 10 per cent deposit, is now at its smallest in six years, Moneyfacts.co.uk found.

This is despite borrowers with the smallest deposits often being seen as more “risky” and recent reports suggesting uncertainties relating to the economy and Brexit are having an impact on the housing market.

The 0.65 percentage point gap in rates is smallest Moneyfacts has seen since February 2013. The average two-year fixed rate for borrowers with a 5 per cent deposit is 3.30 per cent, while the average rate for borrowers with a 10 per cent deposit for this type of mortgage is 2.7 per cent.

The narrowing rate gap has been driven by “healthy competition” by providers looking to attract people with a 5 per cent deposit, Moneyfacts said.

Darren Cook, a finance expert at Moneyfacts.co.uk, described first-time buyers as the “lifeblood of the mortgage market”.

He said: “Providers need to factor in the greater potential of default on higher-LTV (loan-to-value) mortgages, which is why rates are typically higher at 95 per cent LTV – but as we’ve seen, they’re increasingly willing to sacrifice these margins in order to compete.”

Mr Cook said the average two-year fixed-rate mortgage for borrowers with a 10 per cent deposit has “changed little” since October 2017, increasing from 2.62 per cent by 0.03 percentage points to reach 2.65 per cent now.

Over the same period, the average two-year fixed mortgage rate for borrowers with a 5 per cent deposit has fallen significantly, from 4.19 per cent in October 2017 to 3.30 per cent now.

Mr Cook said: “This is fantastic news for potential first-time buyers who are looking to find their first step on the housing ladder.

“However, even though mortgage rates at the 95 per cent LTV tier are falling, it may not be that simple.

“Since the financial crisis, the Financial Conduct Authority has introduced clear affordability measures that mortgage providers must follow, so potential first-time buyers will still need to jump through several affordability hoops before they find themselves on the property ladder.”

Vicky Shaw

The Independent

PA

Mortgage customers who have previously been unable to switch to a better deal despite being up to date with their payments, commonly known as mortgage prisoners, could soon be able to do so.

The Financial Conduct Authority (FCA) has proposed changes to how lenders assess whether or not a customer can afford the loan in a report into its Mortgages Market Study which have been widely welcomed by the home lending industry.

It says that while the mortgage market is working well in many respects, it falls short of the FCA’s vision in some specific ways and it has set out how new lending rules can be designed to help the market work better.

It is seeking to speed up more widespread participation by lenders in innovative tools to help customers more easily identify what mortgages they qualify for and is proposing that the Single Financial Guidance Body (SFGB) extends its existing retirement adviser directory, currently under the Money Advice Service brand, to include mortgage intermediaries to help customers make a more informed choice of broker.

A consultation will be launched in the spring on proposals to change mortgage advice rules and guidance to help remove potential barriers to innovation and there will be further, in-depth analysis to understand more about those customers that do not switch mortgage to inform any necessary intervention.

‘The market is working well for many with high levels of customer engagement and competition. The package of remedies we are taking forward will benefit consumers by encouraging innovation and making it easier for them to find the right mortgage,’ said Christopher Woolard, executive director of strategy and competition at the FCA.

‘We are particularly concerned about consumers who are commonly referred to as mortgage prisoners who are currently unable to switch. That is why we are acting now to help remove potential barriers in our rules. These changes should make it easier for consumers to get a more affordable mortgage,’ he added.

The FCA has proposed that, for those customers who are up to date with their mortgage payments, and seeking to move to a more affordable deal without borrowing more, active lenders will be able to undertake a more proportionate assessment of whether they can afford the new loan.

The FCA is particularly concerned about customers of inactive lenders and entities not authorised for mortgage lending as they are unable to move to a new deal with their existing lender. To ensure these customers are made aware of this change, inactive lenders and administrators of entities not authorised for mortgage lending will be required to review their customer books to identify and contact eligible customers.

Jackie Bennett, director of mortgages at industry body UK Finance, said that lenders have been working closely with the regulator, responding to the challenge of mortgage prisoners with a voluntary industry-wide agreement which has already seen firms contact over 26,000 customers.

‘The regulator’s offer of more flexibility around affordability testing is encouraging. This will help those customers who are up to date with payments or who are not looking to borrow more. Requiring inactive lenders and administrators of entities not authorised for mortgage lending to review their existing customer books to identify and contact eligible customers is a positive step,’ she explained.

‘However, even under these proposals, there are thousands more customers with inactive lenders or unregulated owners that the regulated industry would be unable to help. We therefore call on the Government to work with the FCA to ensure that all customers, regardless of owner, have full regulatory protections to ensure they are treated fairly,’ she added.

Kate Davies, executive director of Intermediary Mortgage Lenders Association (IMLA), also welcomed the report and said the industry is encouraged by the FCA’s view that a market solution is the best way of helping consumers to find the right mortgage.

‘There is currently considerable activity in the market to develop new ways of delivering this, and whilst some of these have yet to prove their effectiveness, we believe that competition and innovation is best driven proactively by the market, rather than reactively in response to regulatory intervention,’ she pointed out.

‘Whilst there is scope for giving consumers more information on which to base their choices, a balance must be struck between what it is possible to provide and what is likely to be helpful to consumers,’ she added.

Martin Lewis, founder of MoneySavingExpert.com, which has been calling for change for over four years, said he is pleased that there is recognition that while there needs to be affordability tests, reform is needed.

‘In a nutshell the FCA is supporting our proposals. It is suggesting that the affordability test be changed so that as long as you’ve been meeting your mortgage repayments for a year, then provided the new deal you’re applying for is cheaper, in other words, it has lower interest, and the repayments are lower, then you will be deemed to have passed the affordability test,’ he explained.

‘We hope this proposal is enacted. It will still need lenders to play ball, but I’m hopeful that will happen, because they’ve often told us they find the current rules frustrating too. We need to make sure those with existing debts can engage with a competitive market, releasing the pressure valve on their finances. If we get this right it’s a triple win: it’s better for the individual, the economy and lenders,’ he added.

 

Propertywire.com

27^th March 2019

 

Parents reveal some of the new ways to get your kids on the property ladder (and you could end up quids in)

• Almost one in four first-time buyers now turn to the ‘Bank of Mum and Dad’ 
• 30-year-olds whose parents have no property are 60%  less likely to own a home
• You can give all or part of a deposit to a buyer as a, tax-free, non-returnable gift 
• If you cannot afford to give a deposit away, you can lend it — on your own terms 

By SAMANTHA PARTINGTON FOR THE DAILY MAIL

PUBLISHED: 22:38, 5 March 2019 | UPDATED: 09:57, 6 March 2019

It has never been harder to get a foot on the housing ladder. House prices are now nearly eight times the average wage, and they have been rising faster than most can save.

Almost one in four first-time buyers are now turning to the ‘Bank of Mum and Dad’, figures from Aldermore Bank show.

And 30-year-olds whose parents have no property wealth are 60 per cent less likely to be homeowners, according to the Resolution Foundation.

But if you can’t hand over a hefty deposit to your loved ones, you could still lend a hand.

Last week we explained how you can aid them in preparing potential first-time buyers’ finances to get mortgage-fit in two years. Here, we explore other ways to help them get the keys to their first home…

How to give money away for a deposit

Family or friends can give all — or a chunk — of a deposit to the buyer as a simple, tax-free, non-returnable gift.

Simply handing over a deposit is the most common way parents help their children onto the ladder, and this is where the term ‘Bank of Mum and Dad’ originates.

Legal & General figures show the Bank of Mum and Dad gave close to £5.7 billion in 2018.

Alongside savings accounts for first-time buyers such as Help to Buy and Lifetime Isa’s, a gifted deposit can top up any shortfall.

But this may be an option only for wealthy parents who have money they won’t need in retirement if they intend to give all their loved ones an equal deposit

Vicky Bradley, a product manager at Skipton Building Society, had saved £9,000 for a deposit when she fell in love with a £125,000 two-bed terraced house in Keighley, West Yorkshire.

Her parents, Bob and Linda Bradley, offered to help cover the 10 per cent deposit and fees.

‘They agreed to an informal loan of £3,000, but then told me it was really a gift,’ says Vicky. ‘It was such a lovely surprise and allowed me to arrange a mortgage straight away.’

Gifted money could be subject to inheritance tax.

For gifts above your annual allowance of £3,000, you must live longer than seven years from the date you gave the money away to avoid the risk of an inheritance tax liability on your donation.

A gifted deposit can also prompt questions over who gets the money back if a couple splits and their house is sold.

A solicitor can draw up a legal document such as a Declaration of Trust to note which buyer the gift was given to, and the share of the property to which they are entitled.

…and how to get money back if you lend it

If you cannot afford to give a deposit away, then you can lend it — on your own terms.

A loan lets you keep some control by specifying when you need the cash back. It may be exempt from inheritance tax but the rules are complex, so check with a tax expert first.

A solicitor is needed to draw up the terms and, just like with a mortgage, the parents would register a charge on the property deeds to ensure the loan is paid back.

The charge on the deeds would specify that on the sale of the property, or when it is remortgaged, the money lent is repaid.

A drawback for the parents, however, is that they are also required to stick to the terms and cannot readily access their cash.

Only a handful of lenders accept a parental loan as a deposit, and those that do take monthly repayments into account — which could restrict the amount your child can borrow.

Lend your name to the mortgage

First-time buyers can now add their parents to the mortgage application while keeping Mum and Dad’s names off the deeds.

A ‘joint borrower, sole proprietor’ deal allows the buyer to apply for a home loan using their parents’ income. Adding family members to the mortgage, but not the property, has grown in popularity.

Lenders prefer this over a traditional guarantor deal, where parents are vetted separately to make sure they can make payments in case the children default on the loan.

After Virgin Money withdrew its guarantor mortgage last year due to a lack of demand, only a handful of lenders, including Hinckley & Rugby, Cambridge and Market Harborough building societies, will still consider this type of deal.

Instead, around 20 lenders offer the new joint borrower arrangement — double that available ten years ago.

High Street banks such as Barclays, Metro, and Clydesdale offer a mortgage on these terms, along with building societies such as Newcastle, Hinckley & Rugby and Buckinghamshire. Interest rates are typically the same as with a regular mortgage.

The cheapest five-year fix available is 2.34 per cent with Barclays for borrowers with a 10 per cent deposit. On a mortgage of £150,000, the monthly repayments would be £661. Over five years, the total cost of the mortgage, including a £999 fee, would be £40,659.

The length of the mortgage offered will depend on the age of the oldest borrower.

Mark Harris, chief executive of mortgage broker SPF Private Clients, says: ‘This type of deal helps with the affordability of the mortgage but not the deposit.

It also ensures the child qualifies for first-time buyer stamp duty exemptions, while the parents sidestep the additional 3 per cent stamp duty surcharge for purchasing a second home.’

And by not owning a share of the first-time buyer’s home, parents can also avoid paying capital gains tax on any increase in the value of the house when it is sold.

But Mr Harris warns: ‘Anyone named on the mortgage is jointly responsible for making payments. It could also damage their credit rating if repayments are not maintained, and affect the parents’ ability to take out further debt in the future.’

Former garage owner Carl Bojen, 65, used the Family Springboard mortgage to help his granddaughter Toni Thornton, 28, buy her first home nearby in Grimsby, Lincolnshire, with partner Kane Ramsey and their son Ronny, three.

‘I want to help all my grandchildren buy their own homes, but it would break me to give all six of them a deposit,’ Carl says.

Carl and his wife Linda, 65, put £13,200 of their savings — 10 per cent of the £132,000 purchase price — into a Barclays savings account attached to the mortgage. After three years Carl and Linda will get their money back with interest, ready to help their next grandchild.

Without help, Toni, who works in telephone sales, and electrician Kane would have had to save for another three years.

Do a savings swap to help buyers with a deposit

Among specialist offers aimed at families is a 100 per cent mortgage tied to a savings account.

This allows first-time buyers to buy a house without a deposit on the condition that a family member deposits money in an attached savings account for a fixed period.

The Barclays Family Springboard and Lloyds Lend A Hand mortgages require 10 per cent of the value of the house to be locked away in a fixed-interest savings account for three years.

Although your money is tucked away and you cannot access it in an emergency, you will get it back, along with interest, when the term ends.

Lloyds pays 2.5 per cent on savings, and Barclays currently pays 2.25 per cent — its rate is set 1.5 per cent above the Bank of England base rate.

David Hollingworth, of mortgage broker L&C, says: ‘This could help parents or grandparents who are not in a position to give money away, or have a large family and need to share their wealth around.’

But for the first-time buyer, it may mean they have to stay in the property until its value increases enough to give them a substantial deposit in order to take the next step on the housing ladder.

If the house price falls, they could find themselves in negative equity. If mortgage payments are missed, banks may hold on to the money for longer until they are cleared or, depending on the lender, use some of the money to clear any debts.

Get a charge put on your home

Another option for families is, instead of offering cash as a deposit, parents can allow the bank to put a charge — like a mortgage — on their home for the equivalent amount.

The value of that charge could be, for example, 20 to 25 per cent of the value of the first-time buyer’s house. It remains on the property for around 10 years.

It can be reviewed before then, and if there is enough equity built up in the home, it can be removed early.

Aldermore Bank and Family Building Society are two lenders that offer these types of mortgages. Family BS requires the first-time buyer to contribute 5 per cent of the deposit.

It could suit parents who have lots of property wealth and do not plan to move house.

If parents want to move, particularly in the short term, there must be enough equity in their new home to still provide the same guarantee.

There is also the risk that they could lose their home if their child or grandchild’s house is repossessed and there is not enough money to repay the loan.

Use a family offset mortgage

Families can also use a savings account to slash the interest a first-time buyer pays on their mortgage.

A family offset mortgage is similar to the savings and mortgage account option, but instead of getting interest on the money in the account, it is used to reduce the mortgage cost.

Parents will get their money back after a fixed period. This is usually ten years, but it can reviewed earlier — for example, when the borrower’s fixed rate comes to an end.

The drawback is that the money is locked away for a period and will not earn interest for the parents. It could also be eroded by inflation.

If the house is repossessed or sold for less than the loan amount due, savings in the offset account can also be used to foot the shortfall.

But in a low interest rate environment, savers may prefer to forego earning a small amount of interest in favour of helping their children pay less towards their monthly mortgage payments.

Kim and Alison Wilkinson, both 60, from Surrey, used a Family Building Society offset mortgage to help their daughter Sarah, 26, buy a £260,000 three-bedroom terraced home in Portsmouth, Hampshire.

The couple had built up savings but did not need to use them in the short term. Earning next to no interest in a savings account, they decided to put the money to better use.

Secondary school teacher Sarah’s mortgage with Family BS was fixed for five years at 2.89 per cent.

‘Mum and Dad wanted their money to work as hard as possible,’ says Sarah. ‘By putting it in the offset account, it effectively earned 2.89 per cent.’

While she could afford the monthly repayments without her parents’ help, she says: ‘This reduced my mortgage payment from around £750 to £550, which gave me more disposable income to furnish the house and enjoy treats such as holidays, which I may not have been able to do as a first-time buyer.’

Cash in on your own home

Income-poor older homeowners with plenty of property wealth could unlock their home’s equity to help.

Equity release is available to borrowers aged 55 or over. It allows homeowners to gift their property wealth now, instead of waiting until they die and their house is sold.

In the first half of 2018, close to 20 per cent of borrowers taking out equity release used the money to help family, according to Canada Life.

The only has to be repaid only when the homeowner dies or moves into long-term care. There are also options that allow borrowers to pay the monthly interest if they want to reduce the cost of the overall loan.

This can also reduce your inheritance tax liability, as the value of the equity release loan will be deducted from the overall estate when the inheritance tax bill is calculated.

Rates on equity release mortgages are higher than traditional mortgages. The average interest rate is 5.24 per cent, compared to the average two-year fixed rate of 2.49 per cent on a traditional mortgage.

Interest is also rolled up and added to the loan monthly, which can double the debt every 14 years.

Parents or grandparents should seek legal advice before entering into a family mortgage arrangement.

s.partington@dailymail.co.uk