Simple Pound

Thanks to Rob @ Money Watch I didn’t miss this comprehensive overview of the credit crunch by the BBC. It is essentially a collection of key graphs to represent the economic changes in the last 12 months and I wanted to cherry-pick my favourites to share with you - but not necessarily because I agree with the message they are intending to bring across (hence the question mark in the title…)

Let’s start with a picture highlighting the key changes in our economy since the start of the credit crunch. The message is clear - petrol and food, two essential cost factors in nearly every household, have increased significantly in price over the last twelve months while the value of our homes has been eroded by approximately 4.4%.

With the rise in petrol prices come further cost increases in related fields such as energy or holidays (think airfares…). But did anyone ever stop to think that this has actually nothing to do with the credit crunch per se? Through an unfortunate coincidence we see a boom in commodities prices at the same time as our economy is already suffering from the aftermath of the subprime crisis - yet that doesn’t mean one caused the other.

Similarly, the food inflation we witnessed in the last couple of months originated in the commodities boom that saw prices in wheat and other agricultural produce reach heights of unprecedented nature. I agree that it has been rather extreme and that certain products seem to have been increasing at the rate of a penny a day, nevertheless that doesn’t automatically mean it’s a direct cause of the credit crisis.

More importantly I’m starting to wonder whether conditions like this couldn’t have been avoided if only people/businesses would have appropriately used hedging. Only today I read that South West Airlines still bought its fuel for $26 a barrel at a time when the market price had reached $80 (slightly old example, but it illustrates my point). How come the likes of Tesco’s, Sainsbury’s or Marks & Spencer’s didn’t come up with a clever idea like that? After all, hedging was introduced for companies to sell their risk in exchange for a small premium and stable input prices.

Before I rant even further, let’s move on to the last category in the summary picture: housing. If you have been reading this blog for longer than just a few days, you will know that I join forces with all the other people struggling to get their foot on the housing ladder and hence eagerly awaiting a double-digit drop in house prices. I totally emphasise with anyone who is worried about negative equity but if you are living in your house because it is your home then you have almost no reason to be overly worried. Hopefully nobody will be forcing you to sell any time soon, hence you can simply wait it out and I’m certain that we will see prices returning to their historic levels (with the only difference that hopefully a few more first-time buyers will have joined the ranks of home owners). And even if you are looking to sell and for whatever reason you cannot wait a few more months or a year until you do so, there are a one-hundred and one things you can do to enhance the value of your home.

In any case, my actual point was related to the graph below. After you got over the fact that house prices have officially been falling since April, have a closer look at the second graph with details of house prices over the last 10 years. Note that it charts the annual change in house prices - that means, as long as the graph runs above the 0 line, your home will have increased in value. Looking at your portfolio or pension account - how many investments can you quote that haven’t fallen in value once over the last 10 years? I doubt there will be many.

What I’m trying to say is that a house purchase has always been a good and solid investment with annual returns of anywhere up to nearly 30%. Now, for the first time in over 10 years we’ve seen a careful reversal of this trend and the world is in panic. As I said before, I totally emphasise with people worried about negative equity, especially as a house purchase is such a major investment, maybe the biggest one many of us will make in our life. However, that put aside, any investment bears the risk of losing as well as gaining in value. Why should property be different?

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The further the year progresses, the nearer the time comes that my boyfriend and I have set ourselves for buying our first property. And since I love planning and organising stuff I also have a tendency to get overly involved before it’s even necessary. For example, I started to monitor rental prices in London at least weekly (if not daily!) almost a year before we would actually have to move. That meant that I wouldn’t just waste hours sifting through property websites (which is fun!), but also panic about things that were completely out of my control (e.g. whether we’d ever find a flat that I liked within our price range).

Despite the assumption that human beings are capable of learning and hence avoiding past mistakes, I’m doing it again. I get weekly property updates from a range of websites and spent hours more searching for places that might fit our criteria. However, this time, I’m trying not to panic too much in advance, but simply use this flood of information to be as prepared as possible in order to avoid nasty surprises. By now (almost a year before we’re planning to make this buying commitment) I already have a reasonably good idea of the property prices in the area I’m considering, the mortgages that are available and the maximum amounts we will be able to borrow. Yet, beyond saving for a deposit, I’ve never had a closer look at what costs we’ll be facing as part of the process.

And I’m horrified.

The list is seemingly endless: moving costs, legal costs, surveys and mortgage fees all have to be researched and compared in order to cut the best deal. And trust me, it’ll be absolutely crucial to get the best deal possible as the costs can mount up to almost 4% of your property’s purchase price. That is a lot of money. All along, I was hoping we could commit to a deposit of roughly 10% of the property’s purchase price. After my cost analysis, it looks more like 5% unless I start saving so much more aggressively than I have done in the past. Especially as there are further implications with not hitting the 10% deposit mark – many mortgage lenders won’t be willing to offer you their most competitive interest rates unless you can commit at least 10% of the purchase price.

In any case, check out the following list for an estimate of the magnitude of the costs you’ll be facing if you’re considering the purchase of a property. The property I’ve based the calculation on is a flat with leasehold and a purchase price of £400,000. Bearing in mind that the average house price in London is somewhere around £375,000 (depending on which source you query), it’s not that extortionate and probably represents the maximum amount we could afford anyway (optimistically speaking).

Moving costs

• Insure possessions against accidental damage during move (the following calculation is based on an estimated premium of 50% - 100% of our current contents insurance – I haven’t actually checked with them but I doubt it would be more than 100% our annual premium) - £50,- to £100,-
• Hire medium-sized van for a weekend (this will be cheaper than hiring a removal company, especially as the flat we are currently renting is furnished which means we will have very little heavy furniture to move – just tons of DVDs and books *grins*) - £120,- to £200,-

Legal costs

• Conveyance solicitor fees (this will depend hugely on whether you’re looking to buy a house – i.e. freehold – or a flat which is commonly on leasehold; to a certain extent it will also depend on the value of the property you’re looking to buy) - £300,- to £700,-
• Local authority searches (this search has to be carried out to establish whether any matters such as planning, environmental problems, building regulations etc. affect the property) – £100,- to £120,-
• Land Registry fee (this fee is payable to the Land Registry for them to put down your name as owner of the property in their records; tedious but important) – £220,-
• Land Registry search (as far as I can tell this search is conducted to purchase the registry plan and registry title (at £3,- each) from the Land Registry to ensure the property you’re being sold actually belongs to the seller) - £6,-
• Bankruptcy search (to ensure that the property you’re buying has no history of bankruptcy or financial difficulties which could affect your credit rating) - £2,-
• Stamp duty (this is by far the largest chunk of the costs you will have to put up with and is calculated as 3% of the purchase price for any property above £250,000 and below £500,000) - £12,000,-

Survey costs

• Home buyers’ survey (the main purpose of this survey is to ensure you’re paying a fair price for the property; you’ll be told about any defects that might affect your decision to proceed with the purchase or which may affect the price you’re willing to pay – a useful tool for price negotiations later on!) - £480,- to £550,-
• Valuation report (survey conducted by your mortgage lender to establish whether the price you’re quoting them for the property is justified and whether they feel save accepting the property as a collateral for your loan) - £525,- (you might be able to get this free as part of a mortgage deal)

Mortgage costs

• Deposit (as discussed, ideally you want to put down at least 5% - 10% to get the best interest rates from your lender of choice) - £20,000,- to £40,000,-
• Product fee (covers the initial mortgage setup and whatever else the bank can come up with to possibly justify a further grand of expenses) - £500,- to £1,000,- (possibly less depending on what mortgage you pick)
• Application fee (because they can) - £100
• Bank transfer fee (and more costs just to get the money the seller’s account asap) - £35

This brings us to a whopping total of between £14,440 and £15,560 in fees for the purchase of a £400,000 property. That number obviously doesn’t cover the additional 10% you want to put down as a deposit. If I include the 5 – 10% range, we reach a final sum of anywhere between £34,440 (with 5% deposit and all the best deals the street offers) and £55,560 (with 10% deposit and higher fees).

That is a lot of free capital you need to have available before committing to a house purchase. I will seriously have to review my savings pattern to assess how I can possibly squeeze more money out of my budget for savings…

In case you want to read more about this evil topic, I suggest the following sites:

• 4Money’s guide to buying a home
• WhatPrice (actual cost estimates slightly outdated)
• Adviceguide (for a description of the whole buying process)
• DirectGov
• Complete Guide to Homebuying (the clue is in the title; slightly outdated but informative)

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I’ve come across a really good comment in the FT the other day and have kept the page on my desk at work every since - with the intention of sharing it with you guys. Due to copyright issues I won’t be able to recite the whole article here (nor would I want to), so I’m just going to quote you the best passages.

The original comment was written by Jonathan Guthrie and was published in the FT on Thursday, January 10th. The heading reads “Three cheers for falling property prices”.

“The assumption that rising house prices are good is deeply embedded in our culture. A belief in witches was too, years ago.”

“We pay a heavy price for the delusional comfort that comes from owning expensive homes, both in loan charges and distorted personal priorities.”

After discussing the amazing property returns we have seen in the UK over the last 12 years (160% on average, 193% in London), he observes the following

“Such inadvertent financial coups confer bragging rights at dinner parties from Barnet to Bromley. Yet the tiramisu-scoffing asset allocators could only realise their swollen capital if they relocated permanently to Barnsley.”

“The main beneficiaries of steep prices are therefore footloose retirers […] fly-by wrinklies too mean to sling younger relatives a few grand towards their own homes.”

He continues to wonder why people could possibly interpret rising house prices as something positive…

“[…] given that disposable income would, all things being equal, rise if mortgage costs fell. More Britons could then afford the ultimate contemporary status symbol, a full tank of petrol.”

…and examines the consequences of such an attitude…

“Television makeover mavens have shown soi-distant developers how to make a packet by tarting up a basement bedsit and advertising it as a garden studio.

Buy-to-let investors have piled into residential property in […] Balkan towns whose names they cannot pronounce.”

And he finally concludes

“My hostility to national property bingo reflects ambivalence at my own commonplace success in it. Like many Britons, my annual capital gains after costs have been equivalent to almost half my salary for no more effort than a little light decorating. But I am no richer as a result, unless I sell up and sleep in a ditch.”

His opinion is so different from the often-recited press view that you instinctively want to disagree with him. However, you come to realise quite quickly that he has an awful lot of perfectly valid points and the more thought you give his argument, the more you’ll see his point.

If you’re intrigued and want to read the whole article, you should still be able to access it here, but I’m not sure whether or not you might need a subscription? In any case, enjoy!

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Now that we have moved into our flat a few months ago, I’m starting to get itchy feet and can’t wait to go property hunting again - this time in order to buy. While I couldn’t stand having to constantly pack and unpack in college as I had to vacate my room over the holidays (i.e. three times a year…), I wouldn’t mind having to pack up the flat in order to move to my first very own flat or house!

Unfortunately, there are still a few obstacles in the way before we can set foot into our first property. I don’t need to tell you that prices in Central London are astronomic, that interest rates have seen lower levels and the credit crunch has substantially tightened lending criteria.

Luckily, the financial services industry is usually fairly quick to serve a market niche and exploit opportunities that exist in the market. Even if the market situation is as unstable as it is at the moment. What I am talking about are alternative mortgage options that go beyond the “plain vanilla” tracker or fixed mortgages.

1. Share-to-buy. Probably the easiest way to afford a decent property is not to buy on your own but instead find someone else to buy it with. Not only will multiple salaries increase the borrowing amount you’ll be granted, but properties with a larger number of bedrooms tend to be a little more spacious in general, which means that your money will go much further in terms of square footage.

However, buying a property with someone else is a major commitment and is nothing that should be decided on the fly. Instead, no matter how well you think you know the person you want to buy with, a legal agreement is a must. This should cover all eventualities regardless of how unlikely they seem at the time of purchase.

The Share-to-Buy website is a good source of information and does even provide a sample legal agreement that you can use as a starting point.

2. Professional Mortgages. If you are training to become an accountant, a dentist, doctor, pharmacist, vet or solicitor, you might be able to borrow on a higher multiple of your current salary in recognition of the fact that these professions start out on a relatively low salary compared with their future earnings potential.

However, when considering the mortgage amount you want to borrow, you should not forget that you will also need to be able to meet your monthly payments. It is no help if the bank is comfortable lending you 6x your current salary if you’re left with a mortgage payment that eats up 75% of your current salary. Hence when considering the mortgage you want, you should always think about other monthly outgoings that you have (council tax, utility bills, phone, broadband, credit card payments, food, insurance… there’s a long list!) and what amount you will have left over after all those payments are taken care of.

Places that currently advertise professional mortgages include Scottish Widows (a subsidiary of Lloyds TSB if I’m not mistaken…), Standard Life, Bristol & West and Ulster Bank (Ireland). Bear in mind that, even though your Bank / Building Society may not openly advertise this option, you might be in a position to better negotiate if you are aware of the other options you have in the market.

3. Graduate Mortgages. The clue is in the name… Having gone to University, many of us will have a few grand in student loans to pay back which could make the first property purchase even less affordable. But, similarly to the case of professional mortgages, banks are aware of your future earnings potential and will hence agree to be a little more flexible with your mortgage arrangements. This includes higher salary multiples you can borrow and the ability to borrow up to 100% (or even more) of the property’s value.

Many banks offer this option but with varying restrictions on age. Scottish Widows will allow you to take out this mortgage up to the age of 40 while HSBC is a little more stringent and insists that you must have graduated within the last 5 years.

4. Interest-only Mortgages. Most lenders will assume that your monthly payments should go towards paying down both the amount you’ve borrowed (the capital) as well as the interest accrued in borrowing it. One way of decreasing the amount you have to pay every month is to go for an interest-only option, where the total amount of your payments is used to pay only the interest you owe.

This means, no matter how long the mortgage is taken out for, the underlying amount you owe the bank never reduces. Depending on how well (or badly) the property market is performing, you might be forced to sell your house for less than you bought it for, hence owing the bank more than the proceeds from the sale. Moreover, the interest-only option means that the house you’re living in will never actually become yours - it’s effectively the bank’s property.

Most banks will offer this mortgage option, but bearing in mind the severe disadvantages it brings over the long-term, you should only use it as an interim solution.

5. Guarantor Mortgages. If the mortgage amount you’d be able to borrow on your own is just not enough to cover the value of your property (something that is very likely in the South of the country, especially London), your last resort could be your own family. Even if they don’t have any money to lend you per se, you can ask them to act as a guarantor for your mortgage.

The process for determining how much more money you could borrow if your parents (or other blood relatives) are included in the deal, is fairly complex and varies between the different lenders. Sometimes your parents will only be liable for the shortfall (i.e. the difference between the property value and the mortgage amount you’ve been granted on your own) while in other cases they would potentially have to be able to cover the full amount should you default (i.e. be unable to meet your mortgage payments).

Banks offering this type of mortgage include Newcastle Building Society and The Co-operative Bank, but again you might be able to negotiate something with your lender of choice by quoting the other options you’d have with another provider.

If you want to know more about mortgage alternatives that might be available to you, I suggest you have a look at this website as I found it very comprehensive and helpful.

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It has been all over the news since August this year - credit squeeze here, liquidity crisis there. So we certainly can’t claim that we haven’t had enough press and media coverage on the topic, but - if someone walked up to you and asked you to explain the credit crisis to them, would you be able to?

To come to your (and most likely my own) rescue, I luckily discovered a really good video on the FT website that explains this rather complex economic phenomenon in fairly simple, easy to follow animations. It’s definitely a must read/watch if you want to understand how the world’s largest and most stable economies were forced to their knees.

Check it out here. Don’t disregard the suggested further reading either as it will provide you with a deeper understanding of the dependencies between the different players in the market, their role in the crisis and the wider macro-economic impact the current situation is likely to have.

If any questions remain unanswered, you’re welcome to post them in the comments and I will do my best to shed some more light!

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After I have been going on and on about the housing market, Jay from Fool.co.uk made me aware of a recent article they’ve published on the Fool website. He asked me to comment on it and share my thoughts about the topic with the world… and as you know, I’m quite happy to announce my opinion

First of all, here is the article we are talking about. If really can’t be asked to go and read it, I shall give you a brief summary of what it is all about. Gazumping. That’s what it’s all about. I can clearly see the question marks above your heads right now - which is why I told you to go and read it, but if you prefer here’s a definition courtesy of reference.com.

“The verb gazump means to refuse to formalise a sale agreement at the last minute in order to accept a higher offer.”

If you read on you learn that this word became ganster slang in the 1920s. How exciting! Anyway - Gazumping was a common phenomenon in the UK in the late 80ies when house prices seemed to be rising endlessly (does that sound familiar?) because a buyer’s offer is not legally binding until there is a contract of sale. Alison’s article provides you with five tips that should help protect you from being gazumped.

Her first piece of advice is to insist that the property is removed from the market immediately after the sale has been agreed. More often than not, properties that have already been promised to a buyer continue to be advertised on the market, thus increasing the chances of another buyer outbidding the first offer price. Since this will mean more commission for the estate agent (whose fees are usually expressed as a percentage of the sales price), he will be quite happy to pass on the higher offer to the seller who then might be tempted to accept the higher bid.

Unfortunately, taking the property off the market is no guarantor for not being subjected to higher bids, especially if the place you’ve set your heart on is very popular and many have had the chance to see it before you. Talk to your estate agent to get an idea of how many people have viewed the property before you and how many of those seemed interested enough to be of potential danger to you. While this will still not necessarily prevent anything from happening, at least you’re prepared and can speed up the drafting of the contract as much as the situation requires.

Further, Alison advises you to sell your own property before making an offer for the next. This would prevent the sale from being delayed on your side and hence the seller looking for someone who’s more prepared and ready to buy than you. Alison suggests you stay with parents or friends, or even rent while shopping around for properties. While this is certainly sound advice, there are a few things to bear in mind. Firstly, moving in with your parents or accepting your friends’ hospitality is fine for a couple of days or even a few weeks but is likely to get very annoying in the long run. You don’t ever want to over-extend your welcome if you still intend to be friends with those people afterwards.

Secondly, while renting is a lot more flexible than trying to sell a house before moving, make sure that the lease period suits your needs. There is no point in having a 6-months contract for a flat if your house is ready for you to move in after a month. Further, renting a property adds more expenses to your list that are potentially unrecoverable - think estate agent fees, inventory charges and the like. Plus you will have to move all your stuff twice, which doesn’t just add to your bill but also increases the likelihood of any accidental damage done to your property.

Her next advice on how to prevent gazumping is to exchange contracts as quickly as possible. I have no buts and ifs for this advice since I believe that it’s probably the best (if not only?) advice to prevent the seller from looking for someone else. Obviously, you shouldn’t rush buying something that you’re not 100% happy with and don’t dismiss all the essential checks like water, heating, doors and window locks, neighbours, area, transport and so on and so forth. There’s no point buying a property only to find out later that the entire electricity wiring will have to be replaced.

But as soon as you’ve made up your mind, do everything possible to speed up the selling process. In the end, it’s a win-win situation as you get your house quicker while the seller gets his cash. Stay in touch with your seller to make sure he knows you’re keen on the house and you’re doing your best to tie up lose ends. Tell him what’s going on and what the progress is with bureaucratic matters that will inevitably take quite some time to get resolved. But don’t call him up every day just to have a chat. He’s not supposed to become your friend, but simply a good business contact. Don’t annoy him with updates, just make sure he knows what’s going on.

Your final option, according to Alison, is drawing up a contract (or, more specifically - have a solicitor do it for you) that will guarantee you exclusive rights to the property once the sale is agreed. While this is certainly a valid option and will bring the law onto your side, it will also involve further costs, errands and admin tasks. To be honest, I am not quite sure what to think about this option. While it would make you win in court, drawing up an agreement like this could be destroying all your hard work that you put in to establish a good relationship with the seller.

I would probably rely on my gut instinct to decide whether the benefits of this contract would potentially outweigh the drawbacks. However, if you decide to have this contract written for you, be weary if the seller refuses to sign - chances are he’s trying to put his best interests well above yours. No matter how nice the property is, if he refuses to give you exclusive rights to it after he’s accepted your offer price, I would rather walk away than invest a lot of time, money and effort in a property that’s likely to be offered to someone else while you’re discussing the sale contract with your solicitor.

Unfortunately, there is no guarantee that you can avoid being gazumped, so all I can do is join Alison in wishing you the very best luck with your home purchase!

More tips on how to avoid gazumping here.

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