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Here’s how home buyers could save some money amid rising interest rates

With mortgage rates poised to rise, it might be time to dust off a strategy that could help prospective homeowners afford their new abode.

TransUnion, one of three major credit bureaus, predicted that the average interest rate on a 30-year mortgage would approach 5 percent by the end of 2019.

This rate is a far cry from the heyday of double-digit interest rates in the 1980s, but it’s a noticeable change from where rates were in the last year.

“For a lot of people who have only been around to know the mortgage environment where everything was 4 percent, 5 percent seems pretty dire,” said Monica Sonnier, CPA and member of the American Institute of CPA’s National CPA Financial Literacy Commission.

See below for average historical rates on 30-year mortgages.

Add to that the fact that sales prices on homes have continued to rise — the median listing price for a home is $276,000, as of Nov. 30, according to Zillow.

More individuals believe now isn’t a good time to buy a home, primarily because home prices are so high, according to December data from Fannie Mae.

Enter a strategy that could help potential buyers afford a new home, even as mortgages become more expensive: Paying your lender a fee upfront in order to reduce the interest rate on the mortgage.

This is known as paying “mortgage points” or “discount points.”

“Largely the option for points is often there, but it becomes more a question of whether consumers want to be proactive and ask about them or not,” Joe Mellman, senior vice president and mortgage business leader at TransUnion.

Here’s what you should know about points and whether this move might be right for you.

What’s the point?
Each point that you pay is equal to 1 percent of the amount that you’re borrowing. In that manner, one point on a $100,000 mortgage is equal to $1,000 — the amount of money you’ll need to give to your lender when you close on your loan.

Points don’t have to be round numbers; they can be fractional.

The example below from the Consumer Finance Protection Bureau compares a $180,000 mortgage with a 5 percent interest rate and no points to a loan for the same amount with 0.375 of a point and 4.875 percent interest.

In the end, an additional $675 in closing costs will lead to an overall monthly savings of $14, according to the CFPB.

To determine how long it will take to recoup the additional upfront cost of the points — your break-even point — you’ll need to divide the additional amount you paid by the amount of monthly savings.

In that sense, if you spend $2,000 on a point and save $30 a month due to lower interest, it will take you about 66 months or 5½ years to break even.

Deductibility
While points may be deductible on your income tax return, you will need to itemize in order to take the break.

Don’t let the tax deductibility of points drive your decision.

Now that the standard deduction has been raised to $12,200 for single filers and $24,400 for married couples who file jointly (for the 2019 tax year), fewer people are expected to itemize deductions on their returns.

Cash up front
Generally, home buyers need to make a down payment of at least 20 percent of the purchase price in order to avoid the additional monthly cost of private mortgage insurance.

But what if you have enough cash that you’ll need to choose between making a 20 percent down payment or using some of the money to buy points?

“If I put the money into the down payment, I reduce the balance I’m borrowing,” Sonnier said. “If I pay for points, I’ll have a higher balance, but at a lower rate of interest.”

Get out that calculator and compare your monthly savings over the life of the loan. That’s because the additional cost of the private mortgage insurance could cancel out the monthly savings from the points.

Ultimately, whether paying down points makes sense for you will depend on how long you’re staying in the house.

“The rule of thumb is that it takes about five to seven years to break even,” Sonnier said. “If you’re sure you won’t be in that house for five years, then it doesn’t make sense to pay down the points.”

Source: Yahoo Finance UK

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Thousands of homebuyers in ‘leasehold limbo’

Thousands of homebuyers could still be “sleepwalking into leasehold limbo” despite the government’s pledge to ban new-build leasehold houses, a property expert has said.

In December 2017 then communities secretary Sajid Javid had pledged to end the “exploitation of homebuyers through unnecessary leaseholds” by legislating to prevent the sale of new-build leasehold houses except where necessary, such as shared ownership.

In July this year current communities secretary James Brokenshire put further weight behind the pledge, promising to to tackle “unfair and abusive” practices within the current leasehold system and cease funding of “unjustified” leasehold houses through government schemes.

But one year on from Mr Javid’s initial announcement, it has been claimed developers have continued to sell thousands of new-build houses with leaseholds – some believed to be funded via the Help to Buy scheme.

Phil Spencer, co-founder of property advice site Move iQ, said: “A year on from the government’s pledge to ban the sale of new build leasehold houses, thousands of buyers are still being allowed to sleepwalk into leasehold limbo.

“And in a further ironic twist, many are even being encouraged to do so by the Help to Buy scheme.”

The firm’s analysis of Land Registry figures showed 26,024 new-build properties have been sold with leaseholds since the government’s pledge last December, 2,644 of which were houses.

Data from the Ministry of Housing, Communities and Local Government showed 5,949 leasehold homes were bought with assistance from the Help to Buy scheme in the first six months of this year- 1,340 were houses.

Mr Spencer said: “Millions of Britons live happily in leasehold homes. But anyone buying a leasehold property needs to do so with their eyes wide open, and should take legal advice to understand the obligations that go with owning a home this way.

“While leasehold tenure is normal for flats, the government says it is determined to stop newly built houses being sold in this way – while at the same time offering Help to Buy incentives. These mixed messages are deeply confusing.”

Mr Spencer said when the ban is introduced there should be some redress for the thousands who have bought leasehold houses.

He said: “At the very least they should be given first refusal on the freehold of their home at a reasonable rate, before it is sold on to a third party.”

The Ministry of Housing, Communities and Local Government has recently launched a technical consultation on how to implement reforms to the leasehold system, which shut at the end of November.

It is now considering next steps with a view to bringing forward legislation in due course.

A spokesperson said: “It’s unacceptable for home buyers to be exploited through unnecessary leaseholds on new houses.

“We have announced measures to ban leaseholds for all new build houses unless there is a genuine reason, and ensure ground rents on new long leases are set to a peppercorn.”

It is understood that development contracts in place until March 2021 prevent the introduction of an outright ban on the sale of leasehold houses or setting terms around ground rents without giving risk to legal challenge.

But the government said: “We have been clear in telling developers that Help to Buy funding should not be used for leasehold houses, and recent statistics show this practice is already reducing.”

Source: FT Adviser

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Buyers eye up Christmas offers as prices slip in November

Homeowners hoping to sell their house are slashing prices and expectations, in a move that signals a boon for buyers in the run-up to the festive season.

Property prices tumbled 1.7 per cent this month, marking the largest November drop since 2012, with London’s stagnant housing market continuing to see a sharper decline than any other UK region.

While prices typically edge down ahead of the Christmas period, today’s data from Rightmove signals a higher-than-usual drop as sellers lower their demands in a bid to lure in cautious buyers amid Brexit uncertainty and wage stagnation.

Inner London’s house prices saw the sharpest monthly fall, with values from October to November dropping 2.5 per cent to an average £754, 726. However, the lowering of prices has signalled a slight uptick in activity, with a modest one per cent rise in the number of November sales compared with the same month last year.

“Some new-to-the-market sellers and their agents have acted early to try to improve the buying mood and avoid the traditional “buyer humbug” dislike of Christmas housing activity,” according to Rightmove director Miles Shipside.

He added: “While many thought that the down-to-the-wire Brexit deal uncertainty would hold people back from buying, more buyers have actually jumped in. Some buyers see this pre-Christmas price lull as a gift to their negotiations. It proves that people need to get on with their lives and will continue to buy homes if the underlying economic fundamentals remain strong.”

Prime Central London’s market has seen one of the most noticeable price drops in the last 12 months, underlined by a slowdown in high end residential areas such as Kensington.

Stamp duty and market volatility have helped deter a swathe of wealthy buyers looking to snap up homes in the capital, with a recent LonRes study showing prices across prime London dipped three per cent in the third quarter of 2018 in the wake of greater buyer uncertainty.

Source: City A.M.

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Third of homebuyers ineligible for new Help to Buy

More than a third of homebuyers who would have previously qualified for the government’s Help to Buy scheme, will be ineligible in 2021, under rules outlined in this week’s Budget.

In his speech on Monday (29 October) the chancellor announced Help to Buy will be extended until 2023 but revised rules mean only first time buyers and homes within new regional price caps will be eligible.

This means 38 per cent of homebuyers who used Help to Buy to buy a home in 2018 would no longer be eligible to use the scheme, research from a home moving quotes provider has found.

In London, assistance will be limited to homes worth up to £600,000, while in the north east of England, homes beyond £186,100 will be ineligible.

The caps have been calculated at 1.5 times the average first time buyer price, as estimated by government forecasts.

Rob Houghton, CEO of reallymoving.com., said: “Our data shows that around 38 per cent of people who have used Help to Buy Equity Loans so far this year would no longer qualify after the changes in 2021, indicating that the revised scheme is quite rightly much more targeted towards first time buyers who need help onto the first rung of the property ladder.”

Research released by the home moving quotes provider earlier this month suggested first time buyers using the government’s scheme were paying on average 8 per cent more than those buying new homes without the scheme.

According to data collected from 41,000 of its first time buyer clients, the firm found those purchasing a new build home without Help to Buy paid on average £257,908, compared with £277,968 paid by those using the scheme.

Mr Houghton added: “Despite its improvements, we’re pleased to see the scheme being scaled back, given that our analysis suggests there’s a risk that the Help to Buy Equity Loan scheme encourages higher prices, more than it helps first time buyers get on the ladder or encourages new properties to be built.”

Paul Gibson, a chartered financial planner and managing director of Granite Financial Planning, also said he believes the Help to Buy scheme has not worked as well as it should have and has driven property prices up.

He said: “The scheme has not really worked as intended as evidenced by the fact that those using the scheme are paying more.”

“I don’t think the government should be subsiding house builders but do feel more needs to be done to help first time buyers in general. Perhaps more stringent tax rules for those with second homes would release more capacity on the market as a starter.”

the price caps set by the government are:

Region                                    Price Cap

North East                               £186,100

North West                              £224,400

Yorkshire & The Humber         £228,100

East Midlands                         £261,900

West Midlands                        £255,600

East of England                       £407,400

London                                    £600,000

South East                               £437,600

South West                              £349,000

Source: FT Adviser

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Fifth of homebuyers seek mortgage alternatives

Alternative finance, including crowdfunding, mezzanine finance or unregulated loans, was used by 19 per cent of home buyers in the past decade, research has found.

Research commissioned by bridging lender Market Financial Solutions, found 52 per cent of borrowers used a mortgage or remortgage to finance a property purchase in the past decade and 42 per cent had purchased using cash.

Alternatives were the least popular options, with bridging considered by a mere 13 per cent of homebuyers. However, alternative finance was used by a respectable 19 per cent of borrowers.

The lender had surveyed 2000 residential homebuyers who had a bought a property in the last ten years, with a quarter of the sample owning two or more residential properties in the UK. About 37 per cent of homebuyers had sought advice from a broker when considering their funding options.

It found 46 per cent of homebuyers felt they did not have the knowledge or confidence in alternatives beyond mortgages to choose them.

The lender claimed homebuyers were restricting their ability to find funding because they lacked the confidence to consider alternative finance options.

Paresh Raja, chief executive at Market Financial Solutions, said: “To remain reliant on the mortgage market could restrict an individual’s ability to get the funds they need.

“Indeed, in the UK’s competitive property market, it is essential that buyers are aware of the financial products they can choose from, in turn putting themselves in the best position to progress with a purchase quickly and efficiently.”

Mr Raja added: “Over the past decade, a range of new alternative finance products has arisen to give buyers different options that might be better suited to their needs – however, today’s research demonstrates that there remains a lack of understanding about what these options are and how to use them.”

But Ruth Whitehead, financial adviser and director at Ruth Whitehead Associates, said she was pleased that bridging loans remained a minority pursuit, considering them an expensive option that should be used as a last resort.

She said: “Traditionally their function has been to ‘bridge’ the gap between sale and ongoing purchase, if the sale process is too slow. However, in the current market in London, which is significantly affected by the uncertainty around Brexit, this situation rarely obtains.

“Property values are going down, and it’s better for a purchaser to complete on their sale, bank the proceeds and then couch-surf while looking for a property to buy without a chain behind them – bridging loans are only ever intended to be short term, and are extremely expensive.

“They have some applicability to a shrewd property investor who can afford to take the risk of not being able to raise the finance to pay off the bridging loan, but for our clients buying and selling their main residence, the word ‘bargepole’ springs to mind.”

Source: FT Adviser

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Homebuyers need to be more aware of new build risks

The Ministry of Housing, Communities and Local Government (MHCLG) has released figures that show where homes are being built including those on flood risk zones and potentially contaminated land.
Its figures for 2016-17 show that more homes were built on flood risk areas and the green belt.

More than one in ten (11%) of new residential homes were built within areas of high flood risk. This is an increase on 9% recorded the year before. However, it could be more according to Future Climate Info Urban Homebuyer Flood Risk Report.

Geoff Offen, managing director at Future Climate Info, said: “The government notes more than one in ten new homes in 2016-2017 were built on sea or river flood plains which are prone to flooding. But with more granular information available, it’s possible that even more homes may be susceptible to flooding.

“Our data shows that around one in seven homes in 2016-2017 were at risk of flooding, a figure that climbs to one in three in some urban areas.”

Previously developed land

MHCLG said that over half (56%) of new residential addresses were created on previously developed land, which is 5% down on 2015-16. The main previous land use categories are:

  • Agricultural land – 16%
  • Other developed use – 14%
  • Industrial and commercial land – 13%

Offen commented: “As we build, more secrets beneath our feet may become apparent too late. According to government figures, nearly half of new build properties were built on previously developed land in 2016-17, which means these homes could lie on contaminated land, unstable ground or in areas that exceed legal air quality levels. Homebuyers will only become aware of all risks by assessing an environmental report and then following its advice.

“The risks of flooding, subsidence, sink holes and contaminated soil can all leave unprepared homeowners out of pocket every year. It’s crucial that all homebuyers are informed, prepared and aware of the risks around them.”

The MHCLG report also showed that 2% of new homes were built within the green belt in 2016 but that doubled in 2017 to 4%.

Source: Mortgage Finance Gazette