Mortgage stress test at 7 per cent
AS a 16-year-old, William Shakespeare held little other than an unwanted puzzle, or an obstruction to a football pitch or running track. Not much has changed, but one line from Hamlet still holds true: “there is nothing either good or bad, but thinking makes it so”.
I have had numerous chats with house purchasers who are or were keen to get on the housing market, or ‘ladder' as it's sometimes referred to.
The most recent logic brims with confirmation bias that house prices will forever rise and interest rates will remain benign.
It has dawned on me, that many sub 40-year-olds have never experienced a mortgage when rates were near their average, let alone at 16 per cent.
To stress test their mortgages at 7 per cent would be unheard of – that would be Armageddon and a ‘conspiracy'.
And so our thinking can make anything so. What matters not a jot, is who is right but what is right, and the financial security of a family is much more important than the profit of a house, as those north of the aforementioned ages will bear witness to.
The rumbling of inconsistencies around the UK housing market is gathering pace and with interest rates rising for no apparent reason (attributable to the borrower), the perfect storm we mentioned two weeks ago is worth watching on your financial weather app.
The impact of the term funding scheme on mortgages rates; low interest rates and low sterling attracting overseas purchasers; the poor value for income that landlords on buy to lets now have; coupled with government interference in pumping up the housing market with the help to buy, have created the potential downside that borrowers should look to protect.
This month, those who were part of the ‘help to buy' experiment will begin their first payments.
We all know how easy it is to spend £100, but how uphill it feels to repay it. Having had a honeymoon of five years on the help to buy scheme, borrowers are now facing their first payments which rise each year.
145,000 properties were bought using the help to buy scheme with near 40 per cent of those on income below £40,000. Their disposal income will be minimal and you can't help but think they will want to pay this debt down (especially as interest rates rise) in the coming years thereby increasing the supply to the housing market (by selling).
Borrowers will have a fee of 1.75 per cent per year to repay which increases year by year at inflation plus 1 per cent - I can't help but think this scheme (or debt burden) was designed for securitisation later and to be sold off.
Whilst borrowers just have to pay the lower rate today, over the years the cost will increase substantially and the only way out is for borrowers to refinance and pay back the scheme. This will equate to the percentage of the new value of the property they own based on how much they borrowed.
Naturally there will come a point where borrowers will be forced to refinance the debt scheme, but that may be at a time when the costs of borrowing and the ability to borrow may be too high - the ultimate golden handcuff. To exit such a scheme, careful planning, with one eye aimed at future economics, will be key.
You might think you aren't affected by such a scheme if you don't have one, but there are countless impacts to you, such as: the consumer spending power of those crippled with new monthly payments and what that will do to the economy; the popping of the bubble it helped create for such houses particularly as they were heavily overpriced in the first place.
This would see the default landing on us, the tax payer, as they pick up the percentage downside loss the scheme would have to meet.
Whilst the scheme has been a disaster with the average person having to find eight times their wage to buy, the real benefactors, the developers, are paying out colossal bonuses off the back of it.
Persimmon, who sold 3,000 houses off the back of the scheme, afforded £232 million in bonuses between three directors.
Back to Hamlet then: “there is nothing either good or bad, but thinking makes it so.”
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. Have a question on remortgages? Call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.?