This piece first appeared in Reader's Digest in June 2002
The text here may not be identical to the published text
You could have more money – for a car, a dream holiday, for your retirement, or just to pay off debts. And if you want to know where from, look around you. Homes have doubled in value since 1987 and the average home is worth nearly £15,000 more now than it was a year ago. But how do you unlock that spending power? It can be frustrating to live in a fortune yet be unable to spend any of it. So here is how to make some concrete gains out of your bricks and mortar.
Could you slash the cost of their mortgage by a third – releasing £1000 a year or more to spend? Most people could. They are still stuck in a traditional mortgage paying what the bank or building society call a ‘standard variable rate’ on their mortgage. That may well be 6% or more. On a typical £50,000 loan you will pay £3000 a year in interest. You can easily cut that by 2 percentage points saving £1000 a year, slashing your mortgage bill by a third. And the higher your mortgage, the more you will save.
Clara Stafford and fiancé Charles Dennison did just that. They moved to what will be their family home in an area of Outstanding Natural Beauty near Tunbridge Wells in Kent – a four bedroom detached house with a third of an acre and horses in the field next door. Just right for the babies Clara and Charles intend to have!
"It needed a lot of work doing on it and the end is in sight now but there a couple of things to do. We took a one year fixed rate at 5.75% last August with Abbey National and it looked quite good then. There are no penalties so we decided to switch and have just completed moving to 4.99% from Portman fixed for three years. We think interest rates are going to rise and we have a big loan compared to our income so we wanted to make sure payments wouldn’t rise. It was very simple to do. We had one meeting with our mortgage broker, the valuation was done externally – we did not have to be there. Abbey National wanted to keep us but couldn’t offer anything competitive. We wanted a three year fix and the £80 a month saving was a bonus."
That £960 a year will come in very handy for the jobs on the house still to be done. And why three years? "We plan to marry in three years time. Then we can remortgage and pay for our wedding!"
In 2001 nearly one in three new mortgages were re-mortgages. There have been fears that lenders would stop offering low mortgage rates to people who switched mortgages. But Ray Boulger of mortgage brokers Charcol says that is not happening yet.
"It hasn’t ended and doesn’t seem that it will. There are good value deals around. For example Coventry Building Society is offering a rate of 3.69%, that’s a discount of 2.06% off their standard rate which lasts until May 2004. And Newcastle Building Society has a two year fixed rate at 4.23% completely penalty free."
Fixed rates are a gamble. As Clara said, they have the advantage that you know exactly what your outgoings will be for the fixed period. But if mortgage rates fall you can come unstuck. Some people are locked into a rate of 8% or more that seemed a good deal a few years ago. If they pull out early they face hefty financial penalties.
The alternative, like the Coventry deal, is a discounted rate – a guaranteed discount off the lender’s standard variable rate – or SVR. At the moment SVRs vary from more than 6% down to 4.74% with Nationwide. You can also get a rate which is guaranteed to be a certain rate above the Bank of England base rate. Nationwide offers a mortgage 0.09% above the base rate for two years or 0.29% above for three years.
As Clara found, moving your mortgage is fairly simple and the new lender or your broker will take you through all the steps. But there are charges to take account of. Some lenders charge a fee for arranging the loan and all will need a valuation to check what your property is worth. You will also need a solicitor to handle the legal side and you may choose to pay a broker to find and sort out the best deal. The first three can cost up to £300 each – though many lenders will pay the costs of some or all of them for you. That is a big bonus as otherwise you may well end up spending your first year’s savings on fees. Both the Coventry and the Portman building societies have good deals where they pay legal and valuation fees but both have an arrangement fee of around £300. Clara had her costs paid by Portman and even got £350 cashback! These offers vary from deal to deal. If you use an advisor you may have to pay them up to 1% of the loan. And yes they do get paid twice – the lender pays them too. So try to haggle for a lower fee.
You can save some of these costs by staying with your existing lender. Nowadays most of them will offer good deals to existing customers as well - but only if you ask. Some will charge you an arrangement fee and there may be a transfer fee of up to £150 to pay as well. But there should not be any legal fees nor a valuation fee, unless you are increasing your mortgage substantially.
If you are willing to do the work and spend the time every couple of years to move your mortgage, then you will get the best deal by changing lenders. The best advice today is to move to a lender with a low standard variable rate, perhaps one which tracks the Bank of England base rate, offers a big discount for two or three years or a good fixed rate if that is what you want, and pays the fees for you.
Making money by borrowing more may seem a contradiction in terms. But if you are going to borrow anyway – or already have – using the value in your home may be the cheapest way to do it. And you can use the money for a holiday, a car, or even to start a business. The rise in property prices – nearly 17% in the last twelve months – means there is billions of pounds-worth of value – what the experts call ‘equity’ – in our homes just waiting to be unlocked. And that is just what Julia and Tommy Leahy did.
They have three boys aged 6, 4 and one month [ed. Predicted dob May!]. Don’t tell Julia she doesn’t work! But as a fulltime Mum she wanted to start a small business that she could fit in with the children.
"I needed to borrow about £3000 for stock. It’s a beauty product business where you go round to people’s houses. I went to NatWest and they offered me the money no problem. But then we thought of re-mortgaging. We also had about £3500 credit card debt which was costing us dear, so we wanted to move that to the mortgage as well. We bought our house two years ago for £124,000 and now I reckon we could get £170,000."
Julia and Tommy decided to go for a flexible mortgage from Intelligent Finance (IF), part of Halifax Bank of Scotland. IF has a low standard mortgage rate of 4.85% and they were offering 1.5% off that for six months. Julia was quoted repayments of £89.41 a month for four years from NatWest for the £3000 loan to buy stock. By borrowing it from IF she could pay back £90 a month and finish ten months earlier – after just 38 payments. In addition, they were paying 14.9% and 11.9% on their credit card debt with Abbey National and Egg so moving that debt to the mortgage saved them money too – but they should also draw up a schedule to pay that off over a reasonable time.
Many people are using their mortgage in this way – to borrow more money cheaply. Mortgage lending is so flexible nowadays that if your home is worth a lot more than your mortgage, then you can borrow more at low rates from your mortgage company.
Flexible mortgages come in many sorts. The most basic – and everyone should have one of these – is to make sure that you can overpay and that the money is credited to you right away. Some lenders make you wait for a year before reducing your debt. The best will do it the day the money arrives. The second step in flexibility means that you can underpay or even skip a payment. That can be handy if you have a sudden expense like Christmas or a wedding. By skipping a couple of payments, you effectively borrow that money and add it to your mortgage. Stage three allows you to borrow money directly by increasing your mortgage. Steve Bloor of Nationwide says there are two ways of doing that. "You can overpay and then ask to have that overpayment back. So if you have overpaid by £1000 you can ask for a cheque for £1000. Or you can borrow more as long as it does not take your total loan above 75% of the value of your property. Again it can be for any purpose. We will send you a cheque."
The ultimate flexibility is to combine the mortgage with a current account or a savings account. In that way, instead of having one account for a mortgage which is in effect minus £60,000 and other savings account that is plus £2000 and a current account with an average balance of plus £200 you combine them all so that you have one account which is minus £57,800. In that way your savings and your current account are reducing the amount you owe and in effect ‘earning’ interest at the rate of your mortgage. And when you want to borrow a bit more you just write a cheque – though of course you must be careful not to borrow too much.
Ray Boulger says they are useful if you are careful.
"For those people who are fairly sophisticated it is a very good idea because a mortgage is just about the cheapest credit you will get – apart from some 0% deals on a credit card. If you start from the premise you are going to borrow it anyway then that is a sensible way to do it. But you must be disciplined and you must pay it back as soon as you can. It is not sensible to pay for a holiday and then repay it over 20 years. But watch that you don’t pay much over the odds for your mortgage. You may have to have a slightly higher interest rate for this kind of flexibility."
So if you are a sophisticated and well organised person with your finances, flexible mortgages could be the key to providing a very cheap loan for…well whatever you like. (847 words)
Joan and Bob, 79 and 81 years old, have lived in their bungalow in Norfolk for nearly 30 years. For most of that time they have been retired. The house is now worth almost ten times what they paid for it – certainly more than £150,000. Living on a fixed pension and with a ten-year old car, they decided to spend some of their bricks and mortar. Bob explains
"I am rather lucky. Our pensions come to around £1000 a month, we don’t want a lot out of life and that does us nicely but we’ve never had what you’d call capital. I only have two immediate relatives – my niece and nephew in law and they said "Don’t leave us any money, we don’t need it, we don’t want it. Spend it and have a wonderful time."
So they did. They took out a plan with Norwich Union where the insurance company lends them a sum of money which is never paid back until they die. The interest is ‘rolled up’ in other words added onto the debt each year. And when finally both Bob and Joan die – which seems unlikely to happen for many years – Norwich Union will take the money they are owed out of their estate. Interest is fixed at the start of the deal – Bob and Joan are paying 8.25% though the current rate is now 7.79% – and Norwich Union guarantees that the debt will never exceed the value of the home. There are also fees to pay – nearly £730 for Bob and Joan and they could be more for a bigger loan or a more expensive property. At their age, Joan and Bob could have borrowed just over a third of the value of the home – around £55,000. But they chose to have less, £40,000 so they could come back for more later if they wanted.
Roll-up loan plans, like Joan and Bob took, are one way to release the money you’re your home. The other is called a home reversion scheme. You give an insurance company a share of the value of your home – maybe 50% - and in return they give you a lump-sum. The advantage over the roll-up loan is that there is no debt – the insurance company gives you a sum of money in exchange for a right to a percentage of the proceeds of the home when you die. So as house prices rise, so does the value of their share. You can transfer the deal if you move. David McGrath is the Manager of Hinton & Wild (Home Plans) ltd, one of the few independent financial advisers who specialise in schemes to you’re your home into cash.
"The market is developing very rapidly. There is a growing amount of equity in homes, and more companies coming in. In the past it was people strapped for cash on a low income. But now they have a nice property, little or no mortgage and they want the opportunity to tap into it to enjoy life. I don’t blame them."
But he warns people to take care. First you should only go for a scheme that is a member of Safe Home Income Plans – SHIP. That will guarantee that the scheme is clearly explained to you, including the costs, the risks, and the effect on your estate when you die. You should also discuss it fully with your family, consider the effects of inflation and changes in property values. Make sure you can move home or go into a care home easily without giving up the advantages. All these schemes are better value for money the older you are. For a roll up loan scheme you need to be at least 55, though will not be able to borrow very much at that age. For home reversion, 60 is the absolute minimum. If you are a couple, then the youngest needs to have reached these ages. But if you fulfil the criteria, like Joan and Bob, it can give you a much better quality of life in old age.
"It’s been absolutely wonderful. We hadn’t really had a holiday for years so we went on the QEII to New York, and I swapped my J reg Ford Fiesta for a brand new Vauxhall Corsair which has everything someone of my age might want – power steering, automatic gearbox, air conditioning – it’s a lot less worry and a lot more comfort. The rest we put in Premium Bonds – and we’ve already won £600 which is very nice. And now we can go another cruise, maybe to the Mediterranean or just see England, staying in five star hotels and having a wonderful time."
Joan agrees "I’m the down to earth one. I was a bit cautious, it took a bit of thinking about but yes if you discuss it with your close relatives and they are happy then it is a good idea."
BUY TO LET – OR LET TO BUY
Nearly 200,000 people are now protecting their future by buying property and letting it out. These buy-to-let landlords can start with modest means. Kevin teaches in a local secondary school, his wife Diana is a technical assistant at the art college. But on a joint income of well under £60,000 they have borrowed more than half a million pounds and bought three more properties close to where they live in Greenwich, South London.
"My wife had worked part-time and I had not been in teaching all my life so we were worried that we were not making sufficient provision for our retirement. We had a £30,000 mortgage on a house then worth £200,000. Diana had always been interested in property. So when a house came for sale in 1999 in the area we lived, we remortgaged and borrowed enough for a deposit and to have some money in the bank to tide us over any problems. We then took a fixed-rate buy-to-let mortgage and bought the empty house."
Using the value locked into your home to start you on the buy-to-let ladder is not unusual, says Charcol’s Ray Boulger.
"Quite a lot of buy-to-let borrowers won’t have savings so raising more through their own property is not uncommon.. It is important to have a buffer, an alternative is a flexible mortgage to draw down from, a useful option for part of the deposit."
Buy-to-let was invented by ARLA, the Association of Residential Letting Agents, and the mortgage industry in 1996 and it has proved a popular alternative to stock market investments for people with a strong nerve and in interest in property. Buy-to-let loans are a little more expensive than borrowing money for a home you live in. Ray Boulger warns there are other costs too.
"The extra margins have come down it is about half a percent more now on a fixed interest loan. But look behind the headline interest rate for total costs. There may be a higher arrangement fee, for example, perhaps 1% instead of about £300."
Malcolm Harrison, of ARLA, says if you take advice and take care it can be produce a good return.
"It is a medium to long-term investment, say 10 to 15 years. Decide what you can afford in terms of mortgage and find out what rental value is from a competent local agent. The rent should exceed the mortgage repayments by 130-150%. Finally, forget your own tastes, buy what sells."
Greenwich is ideal buy-to-let country. Thanks to new transport links it has short travelling times to both the City and the new Canary Wharf development. Kevin and Diana had problems with their first tenant who left after three months owing rent. Now they use an ARLA agent to find their tenants, but they collect the rent and do the day-to-day management themselves. Now in their mid-forties, they are now negotiating to buy their third property to rent. .
"We bought the first one in 1999 and it has now doubled in value, in fact it has gained about as much in value as both our earnings put together. If they grow by 10-14% a year if we have three or even four we hope to retire at 52, sell off one pay off the loans and live on the rental income."
Kevin and Diana live in an ideal location and have managed the business sensibly. Not everyone thinks borrowing is the way to do it. Rosie Border is a landlord and author of Letting Your Property and Taking in a Lodger published by the Stationery Office,
"I think buy to let is silly because you are dependent for paying your mortgage on your property being let. And if you have a lean period or a bad tenant you still have to pay the mortgage. If you pay £50,000 for a property and then get a tenant who leaves owing rent, maybe they have no money or have left the country – it happens – if you weren’t relying on that rent you’ll weather it. Buy it outright if you can."
Not everyone of course can afford to buy outright. And Malcolm Harrison says returns can be good even with a mortgage.
"The national average is around 7% gross. In other words, with a £100,000 property then you will get around £7000 rent – plus of course capital appreciation. Out of that you have to pay management charges, 10% for finding the tenants and up to 15% of the rental if you want the full service. Then there is maintenance and you have to allow for the property being empty – on average for 27 days a year."
And now there is another factor to take into account. Property prices are seen to be rising steadily, so fewer people rent and demand falls. At the same time, many people are entering the buy-to-let market increasing supply. The Royal Institute of Chartered Surveyors says residential landlords have seen rents fall for more than a year. Jeremy Leaf, Chairman of the RICS residential lettings panel, warns
"In view of what has happened in the market, people who are disappointed in returns from other investment should be wary of getting involved in something that could show just as poor return as a stock market investment. The most important thing to realise is that it is a longer term investment. And the need to take independent professional advice never been greater."
An alternative to buy to let is called let to buy. Why not rent out the house you live in now and use the money to fund a mortgage to buy somewhere in a cheaper area? Letting to buy has all the problems of buying to let. You must change your mortgage and insurance as the property will now be tenanted and not owner-occupied. Both end up more expensive. And if there are problems with the payments or times when your home is empty then you will still have the mortgage to pay and nothing coming in.
But if your mortgage is low, buy to let and let to buy are ways to share in the rise of property prices, save for your retirement, and enjoy a new challenge all at the same time. (1037 words)
Could your home be a star? Film and TV companies pay well to use your home as a location for a movie or a TV series. You can earn up to £750 a day for the full use of your property which they insure and return to its former state afterwards. The first step is to find an agent near you – look under TV, Video, and Film Production in yellow Pages and then find a company with ‘location’ in its title. Or contact the regional BBC and ITV company nearest where you live. The first step will be to send a good photograph and description of your home. The second could be stardom!
RENT A ROOM
You can get up to £81 a week tax-free if you rent a room in your house to a lodger. The room must not be self-contained so they would normally share some facilities – such as a kitchen or bathroom – with you. Make sure you get a proper agreement with them about terms, but there is no problem in bringing the arrangement to an end as it is a room in your own home. As long as the total is less than £4250 in a tax-year it does not have to be declared to the Inland Revenue. Advertise in the local paper or at the supermarket or newsagents. Never let to anyone you do not like.
Once your children have moved out leaving you rattling around in a family home, one obvious solution is to sell it and buy somewhere cheaper. It is often called ‘trading down’ but it can be a move up – ‘cheaper’ does not have to mean ‘smaller’ when there are only two or even one of you. But do make sure you are not cut off from friends, family, and important local services like public transport, post offices, and reasonably priced shops. Use the money you release to pay off any debts and then invest it somewhere safe to provide an income for your future.
Read the article as published in Reader's Digest