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The hot topic of the moment is once again when will Base Rate start to rise. That was stoked up initially by the comments by The Governor of the Bank of England that the need to consider an increase would come into “sharper relief” around the turn of the year.
The August meeting of the Monetary Policy Committee saw one member vote for a rise of 0.25%, although that was heavily outweighed by the eight that preferred to once again hold the rate at its current record low.
Although there may not be an imminent change to the Base Rate it underlines once again that the current ultra low rate of 0.50% cannot stay that low forever. Even though most expect that any change will not be forthcoming until next year mortgage borrowers should still be considering their options now.
As expectation of a rate move heightens the funding cost for lenders is lifting and we have already seen some fixed rate deals edging up as a result. Although the market remains extremely competitive, which helps to keep rates attractive, lenders can only deal with higher costs for so long.
Some major lenders have increased some of their fixed rates already and some of the very lowest fixed deals have gone. Borrowers that fail to take action until the Base Rate has risen should expect to find that the lowest fixed rates will have already gone.
There’s no need for panic just yet as rates are still very competitive and the Governor has again emphasised that even when rates do start to rise it will be a gradual increase rather than rocketing costs. Nonetheless, anyone that is considering the benefits of locking into a fixed rate may want to review their options now.
Compared to the Stamp Duty overhaul last time round, the July budget was less dramatic for the housing market but still had a couple of notable changes.
A new “family home allowance” is being introduced, to remove inheritance tax from families whose wealth primarily consists of the home. This adds £175,000 per person to the existing £325,000 IHT allowance.
Like the standard allowance this is transferrable across married couples and civil partnerships to give a total theoretical allowance per couple of £1m.
The “family home” element is important though: since it’s ringfenced, estates with a home valued less than £350,00 (£175,000 per person) cannot transfer that allowance to other assets. That said, it seems unlikely that many £1m+ estates will have a home under the £350,000 limit.
There’s one exception to this: where homeowners downsize to a smaller property they will be able to retain the allowance from their previous residence – effectively the cash they realise from that sale is still protected from inheritance tax.
That’s a welcome move in that it won’t make older homeowners feel they have to stay in larger properties than they need (taking them out of the market for younger families) but still some critics argue that by creating a tax incentive for property over other assets, this may drive up house prices further.
Buy to Let Interest Relief
On the flip side to the inheritance tax cut, landlords face a tax increase.
Currently landlords can offset the cost of their BTL mortgage interest against income tax: so a mortgage costing, say, £5,000 per year in interest allows for an extra £5,000 of income to be earned tax-free.
Under new rules that tax relief will be limited to the basic rate of income tax, currently 20%. So landlords paying higher (40%) and additional (45%) rates will end up paying income tax at 20% and 25% respectively on that money, where previously they paid nothing. Basic rate taxpayers will be unaffected.
There’s no need to panic yet though. The change is to be phased in over 4 years, and doesn’t start until 2017. While the precise structure hasn’t been announced yet, clearly the impact is designed to be gradual and give landlords plenty of time to review their options. And after all, there is still that 20% tax relief not available on other investments.
However limiting the tax relief adds strength to the argument that landlords need to keep on top of their funding, and make sure they’re not paying more interest than they need to.
At a time when borrowers are enjoying record low interest rates, but savers are struggling to make their money work for them, offset mortgages can really come into their own. This type of scheme allows homeowners to link their savings or current account balances to their mortgage and only pay interest on the difference between the two.
In simple terms, instead of earning interest on their savings, the borrower pays less interest on their mortgage. That means that the effective rate of return on the savings is at the mortgage rate but because no interest is earned, there is no tax to pay. As a result offset can be especially effective for higher rate tax payers.
Lenders may then offer 2 options – borrowers can either keep their mortgage payment the same in order to reduce the overall term of the mortgage, or reduce the monthly payments. Importantly, mortgage-holders retain access to their savings at all times, and can add to or withdraw from their accounts as needed. The interest charge will simply be adjusted accordingly.
After deciding to capital raise on their residential mortgage in order to fund a Buy-to-Let purchase, our clients approached the mortgage service for the Guild of Professional Estate Agents looking for advice.
With a significant level of savings, representing around 20% of their new mortgage, they were keen to secure an offset product. Their adviser carried out calculations and found that by offsetting their savings and current account balances, the clients should be able to pay off their mortgage almost 2 years earlier, saving thousands in interest.
Their adviser was able to secure them a 5 year fixed rate deal at less than 3%, and using their savings alongside the mortgage would mean paying less interest over the 5 years than if they had chosen a traditional scheme with a lower rate.
Fixed rate mortgages have been the most popular type of mortgage by far, which is not likely to come as a surprise given the ultra low rates on offer. With Bank of England Base Rate at rock bottom borrowers like the certainty that fixed rates offer, especially when interest rates look set to climb at some point.
The vast majority have therefore elected to lock their rate down with a fix, given the very competitive deals and the fact that there is little to no chance of Base Rate falling. Against that backdrop why might a variable rate mortgage be a good choice?
It’s not just fixed rates that have improved in the lender rate war and some tracker and discount rates can offer very low rates, slightly undercutting those on corresponding fixed rates. Those that feel there is still a way to go before interest rates start to climb may therefore feel a tracker offers good value.
Secondly, trackers and other variable rate options are far less likely to carry any early repayment charges, which generally apply on fixed deals. These charges tie the borrower in so those that need more flexibility, either to overpay or to keep their options open, will find the freedom of many variable products attractive.
Of course, any borrower that is considering a variable product will need to check that they are well equipped to cope with higher payments, if interest rates do start to climb sooner and/or more quickly than they expected. Looking at the impact of higher rates on the mortgage payment will help a borrower test just how much they value flexibility over security.
It’s unlikely that we will see a big shift from fixed rates towards trackers and borrowers understandably like to know where they stand. However, variable products should not be dismissed and can be a good option for the right borrower.
According to the July 2015 Land Registry data, there was a monthly increase in average house prices across England and Wales of 1.7 per cent. The East region experienced the greatest monthly price rise at 2.8 per cent, followed by London at 2.5 per cent, while only Wales experienced a fall at minus 0.3 per cent.
The East also showed the highest annual change in prices at 8.9 per cent, followed closely by London and the South East. The North East saw the lowest annual change at 0.4 per cent but no region experienced a fall. The overall annual price change now stands at 4.6 per cent, making the average house price in England & Wales £183,861 and in London £488,782. By property type, semi-detached properties showed the highest annual increase at 4.9 per cent; the lowest was seen in flats and maisonettes at 4.2 per cent.
In greater detail, 14 counties and unitary authorities saw an annual fall in prices, one more than in June, the greatest being Blaenau Gwent at minus 5.5 per cent; Reading experienced the highest annual rise at 13.6 per cent. The strongest monthly growth was seen on the Isle of Anglesey with an increase of 3.4 per cent, while Pembrokeshire had the most significant monthly drop at minus 3.2 per cent. Eight counties and unitary authorities saw no monthly price change.
Of the metropolitan districts, Trafford again showed the largest annual price increase at 7.1 per cent; four saw a fall, the greatest being Bradford at minus 1.7 per cent. South Tyneside saw the highest monthly price increase at 2.3 per cent, while seven saw a drop, the largest being Wolverhampton at minus 1.4 per cent.
Of the London boroughs, Hillingdon saw the highest annual price rise at 14.6 per cent, while Camden experienced the lowest at 0.1 per cent. On a monthly basis, Barnet showed the highest increase at 2.6 per cent, while Hammersmith & Fulham saw the biggest monthly fall with a movement of minus 0.4 per cent.
The volume of properties sold in May 2015 was 15 per cent lower than a year earlier in England and Wales and 24 per cent lower in London; falls were seen across nearly all price brackets. Properties sold for more than £1 million across England and Wales as a whole fell by 21 per cent and in London by 26 per cent over the same period.
Month on month, the total number of properties sold across England and Wales rose from 57,180 in April to 65,619 in May, an increase of 14.8 per cent, chiefly seen in properties valued under £500,000. The number of property transactions from February 2015 to May 2015 averaged 61,283 per month, compared to 70,029 over the same period a year earlier.
The Office for National Statistics (ONS) reported that in the second quarter of 2015, the UK economy grew by 0.7 per cent, compared to 0.4 per cent in the first quarter. The Bank of England forecasts that, for the year as a whole, the UK economy will grow by 2.8 per cent, maintaining the same momentum as shown last year, when the economy expanded by 3 per cent – its best result since 2006. The Confederation for British Industry (CBI) has also upgraded its forecasts for this year at 2.6 per cent and next year at 2.8 per cent, based on an expectation of increased household spending, robust investment growth and an interest rate increase to 0.75 per cent in the first quarter of 2016.
The CBI’s revised forecast arose from recent ‘more hawkish’ comments by the Bank of England’s Monetary Policy committee (MPC). At the beginning of the month, the MPC voted by eight to one to leave the Bank Rate at 0.5 per cent, while unanimously agreeing to maintain the size of the Asset Purchase Programme at £375 billion. At the same time, the Bank of England Governor, Mark Carney, warned that the first base-rate rise in more than six years was drawing closer, possibly by February 2016, and that it would climb higher sooner. The Bank simultaneously released its latest Quarterly Inflation Report, which indicated that it expected inflation to be back to its target rate of 2 percent in two years’ time.
In mid-August, the ONS announced that inflation turned positive again in July, with the Consumer Prices Index (CPI) measure rising to 0.1 per cent from zero in June; a smaller fall in the price of clothing was reported to be the main reason, although it was partially offset by falling food and non-alcoholic drink prices. The CPI has been almost flat for the past six months, having turned negative in April for the first time since 1960. The Retail Prices Index measure of inflation was unchanged at 1 per cent.