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A new danger for anyone who shares a flat / house

A new danger for anyone who shares a flat / house

A new danger for anyone who shares a flat / house

Update 22 March: Hoorah! Since writing the blog, Experian contacted us to say it’d read it and seen your responses and has now changed its mind about the ‘financial linking’ element. See Experian u-turn for the full details. It is also going to think more about how to protect the ‘joint and severally liable’ if their flatmate defaults.

Credit reference agency Experian’s announced that by the end of 2012, your rental payment record could be added to credit files (see the Experian to monitor rents news story), so missed payments could kibosh mortgage and other applications.

This has pros and cons, but my strong objection is it means you risk being financially linked to anyone you live with, so their problems or missed card payments can hit you.

That seems a complete misunderstanding of who and how many flat shares work. Currently you can, of course, be credit linked if you get a mortgage with someone. That seems fair, it’s a major financial commitment usually with a spouse, close relative or close friend. However, with flat shares, it may be a cursory acquaintance, or very commonly someone you simply don’t know.

This new credit file regime (see the Credit Rating guide for the basics) could mean when you move in with someone, you’re going to have to commit to at least financially getting into bed with them – and that’s unacceptable. It’s not all bad, though. There are some plus points, but in my view it needs big work to limit the risks. Let me run you through it…

  • Any change will need to be contractual.

    Landlords will only be able to report payments if you sign a contract allowing it. You have a right to refuse, but equally, they can simply refuse to rent to you. It’ll likely be big agencies that start doing this – the advantage for them is they can track who has a good rental record when they sign tenants up. 

  • Paying rent on time could help your credit situation.

    On the plus side, one letting agency says 90% of people pay their rent on time and doing so should help build their credit file. There’s also the fact that for flat sharers, they can assume their landlord may be doing a check that any new flatmate has a reasonable history of paying rent on time.

    Of course, for those with a bad history this could become a nightmare, already people are prevented from getting new mortgages due to a history that lasts six years – so I’m guessing tenancy rejections could follow the same path.

  • Someone else’s missed rent could scupper you getting a mortgage.

    Many tenancy agreements mean you’re ‘jointly and severally liable’ thus if one of you can’t pay, the other is liable for it. While this makes life easy for landlords, I’m not sure most flat share tenants are aware of the risk they’re taking, until someone doesn’t pay. And even if you are aware of the risks, the ‘flat share audition’ process isn’t good enough to weed out bad payers.

    In the past, if someone in the house didn’t pay, that was an immediate financial problem. Now it will be a long term one. As if you or anyone you live with misses a payment it could negatively hit your credit score on applications for borrowing, mobile phone contracts and  pay monthly car insurance.

    The biggest worry is for those who are renting while they save for a mortgage. While there’s no info yet, it seems sensible to assume lenders will take your rental record as a substantial indicator in their credit scoring to determine if they should lend.

  • It’s not just rent, financial linkage to flat mates means if they don’t pay credit cards, you could be hit.

    Currently, the only way to be financially linked is a joint bank account or mortgage – which makes sense.  It’s one reason we suggest if your partner has a poor history don’t get any joint products with them (even marriage doesn’t link you – just joint finances).

    Experian has told us that sharing a flat will mean linkage can happen too. The result is when you are credit scored for a product, they can look at the files of anyone you are linked to.

    So if you move in with someone you’ve never met, who has a poor history of missed bills or credit card payment, it could hit you – and kibosh applications. 

The financial linking element of this, rams up against natural justice for me.  Individuals have no real way to find this out (and do we want people snooping and credit checking their flatmates anyway?). I intend to write to regulators, MPs, and the credit reference agencies to see if we can stop this financial linkage before it happens.

Overall, the whole episode leaves a rather sour taste in the mouth. When explaining what goes on credit files, the usual explanation is the electoral role info, and court judgements against you and any credit agreements you have. Yet renting isn’t a credit agreement, nor are gas and electricity bills, which are also starting to creep in.

I worry that this is a private company, making its own decision to stretch the net, who is policing that decision?

If I’m honest I’m still working through the thought process and logic of this myself, so these are initial thoughts, and I’d love your views.


The UK’s mortgage ticking time bomb

The UK’s mortgage ticking time bomb

The UK’s mortgage ticking time bomb

Mortgage costs for most are hugely expensive –- a ticking time bomb ready to blight the finances of millions and put the economy at risk. Whether it’s a lack of political will, clout, or ideas, nowt’s being done to stop it.

If you feel a sense of déjà vu over that sentence, don’t worry. It’s not you, it’s me. I first wrote about my fears of a mortgage ticking time bomb in November 2009. Sadly, things aren’t much better now.

We’ve just seen Halifax announce it’s hiking standard variable (SVR) mortgage rates by 0.49%, RBS increase its offset’s rate by 0.25%, the Bank of Ireland reveal it’s hoicking rates by a huge 1.5% and Clydesdale and Yorkshire banks upping rates by 0.36%.

While the change always feels bad, these aren’t the worst. There are other lenders with their SVRs up as high as 6%. It’s easy to think that isn’t such a problem as historically these rates still sound pretty cheap – but look at the bigger picture.

To say UK interest rates are low right now is a bit like saying the phone-hacking scandal caused a small PR issue. Interest rates aren’t low, they’re stuck in a drain, wallowing 1.5% beneath the recorded 200-year historic low.

The Bank of England’s original reason for slashing rates was economic stimulus, yet our nation’s financial arteries are still clogged. The margin lenders now make compared to before base rates plummeted means in real terms some are four percentage points higher than back then.

The evidence

So let’s have a bit of nerdom and play with the stats.

  • October 2008. Base rate: 4.5%. Halifax SVR: 6.5%.
  • May 2012. Base rate: 0.5% (I’m assuming it won’t move, though there’s no guarantee). Halifax SVR: 3.99%.

Back then, the Halifax rate was 2% over the base rate. Now it’s 3.49%, a mammoth increase. And this is reflected as a whole:

mortgage graph

The average gap over base rate used to be around two percentage points. When rates were first slashed, Government pressure to keep it there was partially successful, but now the gap’s around four percentage points.

However, there have been some minor improvements since I last wrote on this in 2009, at least with new mortgage deals:

  • October 2008. Base rate: 4.5%. Cheapest 5-year fix: 5.49%.
  • October 2009. Base rate: 0.5%. Cheapest 5-year fix: 4.99%.
  • March 2012. Base rate: 0.5%. Cheapest 5-year fix: 3.29%.

However, the gap between base rates and mortgage rates is still far wider than back in 2008. Plus the required loan-to-value ratios have got more stringent, meaning you need far bigger equity in your home to get the hot rates.

Of course, as many will know, fixed rates don’t actually follow base rates. Their funding’s more closely associated with swap rates which, in simple terms, are the City’s view on interest rates over a set period – and they’re depressed at the moment.

Yet it still means whether you’re on an standard variable rate (SVR), or getting a new mortgage, the margins are now much higher than they were pre-crunch for all except those on tracker mortgages, who are still gleefully dancing around their tracker-mortgaged homes.

Even then though, if you’re getting a NEW tracker, they’re now typically three percentage points above base rate (based on the average two-year tracker rate), where once it was half a point or even less.

The underlying problem – evaporating equity

Perhaps far more worrying is how many people are now forced to stick with their SVRs compared with before the base rate cut. This is all about the spectre of what I call evaporating equity. This affliction means you can’t get a new mortgage deal, due to a raft of new factors…

  • Tougher LTV limits. Pre-credit crunch, loan-to-value (LTV) ratios of over 100% (borrowing more than your home’s value) were possible and competitive rates were available at 95% LTV. Now to get a good deal, you need to borrow less than 75% of your home’s worth or usually 90% to get any deal at all. This cuts out huge swathes of existing mortgage holders.
  • Credit scoring. Credit history is a far bigger part of mortgage acceptability than it used to be. If you’ve had what were once relatively minor problems such as missed payments, you could still be scored out by some mainstream lenders. Of course, for the seriously credit-inflicted, there’s nowt available as sub-prime is (probably thankfully, on the whole) no more.
  • Self-employed. Once one of the great feeders of mortgage over-lending was self-certification mortgages, where the self-employed declared sometimes fictional earnings and were lent to based on that. These mortgages barely exist anymore, yet a by-product of the crackdown on this fraud is that it’s much more difficult for the self-employed, especially those without a few years of accountant-provided accounts to get a mortgage.
  • House price decline. The ‘value’ bit of LTVs means current house price values. So in the pockets where prices have plummeted, people’s LTVs have worsened. Many who were once in that competitive sub-75% zone aren’t any more.

Ticking timebomb

The paradox is that while mortgage rates have been relatively unresponsive to falling base rates, it’s likely they’ll shoot up, mostly in parallel, when they rise.

Millions are locked into standard rates or high-margin trackers, or are due to be when their current deal ends. So when rates finally turn and start to rise, it’ll be like a smash-and-grab brick through windows.

Imagine the base rate returns to 2008’s historically normal 5% (not a prediction – just a possibility). Someone with a £200,000 interest-only mortgage tracker would see their payment explode from £500 to £1,330 a month.

For many on top of the recession-led financial freeze, that’s catastrophically unaffordable.

Rising bills don’t simply flick back into place like elastic. The pain of increased costs out-balances the joy from when they fell. People have re-jigged their finances around new lower rates and locked into other commitments.

Waiting to administer treatment when rates rise will be too late. This mortgage margin timebomb’s growing now, so we need Government to act. I’ve mentioned this problem over the past few years while giving evidence at parliamentary select committees and said it to MPs. Most seem to acknowledge the issue, but I’m simply not sure anyone (me included) knows what to do about it.

And if nothing happens, that means many must prepare for the possibility of even harder income squeezes.

DIY help

You can’t bet on any government laying a golden mortgage egg anytime soon. Your best bet is to crack it yourself.

  • Repay your mortgage with savings. Reducing outstanding debt means you’re less at mercy from mortgage rate rises, and it helps lower your LTV, possibly meaning access to more competitive deals. Plus, it can add up. Someone with a £100,000 mortgage at 4%, overpaying £100 a month, would clear the mortgage 6 years earlier, saving £21,000 in interest (try it yourself using the Mortgage Overpayment Calculator).

    Of course, you should check whether you’re allowed to overpay without penalties first. If not, the penalties will usually kibosh any savings. Assuming no penalties, the financial mathematics to decide if it’s worth it are simple. If your after-tax savings rate’s lower than your mortgage rate, pay it off. If you used £1,000 of savings currently earning a decent 2% after-tax to repay a 5% mortgage, then you’re £30 a year up.

    If you’ve other more expensive debts, pay those off first. Plus keep an emergency fund, as with most mortgages, overpayments can’t be borrowed back, so ensure you’ve money to keep paying all bills and future mortgage commitments. For more, and a special calculator, see the Should I Repay My Mortgage? guide.

  • Build a war chest. If you’re on a super-cheap rate now and haven’t got savings, put money aside in case rates rise. This way, you’ll avoid mortgage payment default.

  • Get a mortgage broker. Once lenders salivated for your business. Now they cover their hands over deals like schoolkids preventing their neighbour copying. So have a mortgage broker on call to speedily grab short-lived deals, preferably one who’s ‘whole-of-market’, meaning it must look at all the mortgages available to it. See the Mortgage Broker guide.

  • Check the FSA best buy tables. Some lenders deliberately pump out ‘direct only’ deals which can’t be accessed by brokers. They should appear on though, so check that and if it looks good, ask your broker to crunch the numbers (see the free Remortgage Guide for more help).


Property Porn.. revisiting a hypnotised nation…

How many household-name property pundits, interior designers & home experts can you name? Now the same for city or personal finance journalists? For all but extreme money nerds, I suspect the first group outnumbers the latter by 5-1 or more.

This discrepancy is important: I’ve just given an academic journal an interview on economic decline, and the role of financial journalists in the crash. Much of it wasn’t 100% relevant (it was more about City/Business journalism), but there were some interesting questions.