A NEW KIND OF COVER FOR DIFFICULT TIMES

With the threat of redundancy looming large for millions of people it might be a good time to review what type (if any) cover you may have. Traditional mortgage protection payment insurance (MPPI) usually pays out when you can’t do a job the insurance company feels you’re suitable for. But your idea of what you’re suitable for might not be the same as theirs – making it hard for you when it comes to claiming on your plan.

A new product from insurers LV called Mortgage & Lifestyle Protection has looked at these problems and rebuilt the product from the ground up, basing it on what customers really need. Whilst traditional MPPI usually gives short-term accident and sickness cover, paying out for 24 months at most this new product is more akin to traditional Income Protection where it will pay out for the whole term or until you’re able to go back to work, whether that is 24 months or 25 years. In terms of unemployment it will pay out for 12 months at a time and up to 36 months over the term of the policy. Unlike traditional MPPI it pays out if you can’t do your own job.

Traditional MPPI premiums are regularly reviewed, which means your provider can increase premiums at any time with very little notice. They can also cancel your contract with only 90 days notice. Mortgage & Lifestyle Protection works on the premise of guaranteed premiums. Once the plan is agreed it will not be increased, regardless of how many claims you make on it.

Also traditional plans can only cover you for your mortgage payments and related expenses but Mortgage & Lifestyle Protection can cover you for extra living expenses too. This cover can also go on longer than your mortgage does giving you extra flexibility.

Why Have This Sort of Cover?

Have you given the thought to the following:-

• How would you keep paying for your mortgage or rent if you became too ill to work, or involuntarily unemployed?
• How long could you manage without your income?
• How long before savings ran out?

In August 2009 there were over 2.6 million* people claiming due to illness or incapacity. Sadly many of them thought that would never happen to them. It’s important to understand the real risks, so that you can make an informed choice about financially protecting your home and lifestyle. As you have long term commitment to your mortgage it makes sense to have long term, not short term protection.

Employment and Support Allowance (ESA) is set at just £51.85 a week if you are under 25 or £65.45 a week if you are over 25 years of age for the first 13 weeks. From week 14 this increases to £91.40 or £96.85 a week dependent on various criteria. It is therefore certain to cut back significantly on your lifestyle.

If you want to find out more about this exciting new cover or even have your existing cover reviewed just give me a call or drop me an e-mail. Cheers until the next time.

World markets have responded positively in the main to the news that US has effectively nationalised the two mortgage giants known as Fannie Mae and Freddie Mac. On Sunday the Secretary of the US Treasury Henry Paulson announced the takeover of these two huge American Institutions or GSE’s as they are known – meaning ‘Government Sponsored Enterprises’, a curious mix of both state and privately owned entities. Now overseen by the newly created Federal Housing Finance Agency on the heels of the Housing and Economic Recovery Act of 2008 – the move by the US treasury to buy these mortgage backed securities should help bring some stability back to troubled markets. Some commentators are even predicting a longer term rally, perhaps lasting a few months. Let’s hope so!

So Who Are They?

Fannie Mae is short for Federal National Mortgage Association. It was founded in 1938 at a time when it was very difficult to obtain funds for mortgages. It was a government agency until 1968.

Freddie Mac or Federal Home Loan Mortgage Corporation to give it it’s proper name was founded in 1970 to provide competition.Both these organisations do not actually lend money direct to mortgage applicants. Rather they they buy mortgages and sell them on to investors.

Nearly half the US mortgage is owned by them and this equates to roughly $6 trillion. Given this staggering figure it easy to see why the future stability of these companies is so central to US and World economics.

We shall wait with baited breath as to what the future for the beleaguered UK mortgage market holds on the back of this announcement, but even though things may be more stable in America after the rally on the Dollar the Eurozone may face choppier waters yet.

One thing is for certain here in UK – house prices continue to tumble and getting a mortgage without a substantial deposit and a watertight case regarding your finances is as difficult as ever for those desperate to own their own home.

Watch this space.

Current News!

Most of you will be aware of current problems in the banking sector, especially with the recent publicity surrounding Northern Rock. Although in many ways Northern Rock’s difficulties were unique to that particular lender there can be little doubt that it was also related to a lack of confidence in the lending sector as a whole.

The problem emanates from the US where the sub-prime market accounts for 20% of the whole market, making lenders somewhat exposed when people default on their loans. Whilst most analysts are maintaining that we do not have the same problems (the sub-prime market here in UK only accounts for 5% of all mortgages), and that our economy remains robust, there is no doubt that in an increasingly global market, a lot of nervousness is lying dormant just under the surface of many peoples thoughts, layman and professional alike.

A very clear, succinct and encouraging snapshot of just what the Northern Rock crisis means across the industry here in the UK is given by the guys over at the excellent http://www.financialdirector.co.uk though. Their hype free analysis is particularly welcome and deserves wider exposure to help prevent the type of underlying fear which can so easily spark widespread panic such as we’ve just witnessed at Northern Rock.

However, because of the recent volativity we are seeing an abnormal number of rate changes from our lenders, which makes sourcing of loans particularly hazardous. Thankfully the super technology I use now at Integrity and our network partnerships enable me to receive up-date alerts instantly when they are published each day. It’s important to monitor these rate/product updates constantly to help ensure that the deal you choose is still current when your application is submitted.

Trying to manually keep an eye on so many rapid changes within such a sector without specialised software, is time consuming and can be pretty confusing. It’s the fine print which can be the most tricky and can easily be missed, yet is one of the most important aspects of these type of mortgages and you need to read it carefully.

So What Exactly Is a Sub-prime mortgage?

A sub-prime loan is one taken out by someone who has had credit problems in the past and has probably been turned down by the more traditional High Street lending institutions. Traditionally these loans are more expensive to repay as the lenders consider people with bad credit history as a greater risk. If you’ve recently been turned down by one of the main banks or building societies then one of these loans could be something for you to consider.

How do I find out about them?

Using the latest sourcing technology I referred to above enables us to find the most suitable loan for applicants. There are now dozens of sub-prime lenders in the market place and they all have their own lending criteria, which can make finding the most suitable product a potential minefield, so it’s wise to tread carefully. Rates are related to the extent of your credit problems so it is vital to ensure that for example, if you only have slight adverse credit that you don’t end up paying too high a rate.

What are the pitfalls with a Sub-prime Mortgage?

One potential problem with Sub-prime loans is that they can have heavy redemption penalties for paying off your loan early if you wish to refinance and take advantage of an improved credit rating. The fees can also be quite prohibitive with some products/lenders and some companies out there may try to take advantage of the fact that your choices are limited. Remember that you will probably want to re-mortgage once the initial tie-in period has expired, especially if you’ve repaired your damaged credit so it’s important that you don’t end up in a deal that has heavy penalties for a longer tie-in.

Conclusions

Whilst we can see sub-prime rates rising the near future at least, we still think there are some pretty decent deals out there for those who want to buy or re-mortgage who may have had a few credit problems in the past or who may even just have difficulty proving their incomes.

Therefore despite recent market volatility and primarily due to the beneficial difference between the UK & US Sub-prime market I covered earlier it’s still relatively easy to access the funds you want for the home you wish to buy – just keep an eye on the fine print I mentioned above.

A brand-new Royal Institute of Chartered Surveyors accessibility index report published in August 2007 reveals that the cost of purchasing a home in the UK has become substantially more difficult by 350% since 1996. First-time buyers both on lower quartile earnings (£26 667) now need to find approximately £25,600 to pay for a deposit, stamp duty and various purchase costs for even a standard starting home. For a couple buying for the first time this equates to a massive 96% of their joint take-home incomes.

According to government figures from the June 2007 House Price Index the average house price in England is now over £200,000. In Scotland the median price is over £160,000. London prices as ever steal the show – the average property there is now well over £300,000. Over the past year first-time buyer households crossed the threshold for stamp duty in Scotland, making it more and more difficult for Scots to buy affordable housing.

London, the southeast and southwest are the most problematic areas though. Here first-time buyers will need to save over 100% of their joint annual incomes just to get precarious toehold on the lowest rung of the property market ladder. Then even when having done so, the pressure of maintaining such huge monthly housing overheads brings with it a plethora of difficulties and stress which sometimes begin to attack the very heart of what keeps up successful monthly repayments – the couple’s relationship itself.

With 51% of first-time buyer household incomes needed to fund monthly mortgage payments in London, it’s not surprising that some couples could find such pressure almost overwhelming.

The senior economist at the Royal Institute of Chartered Surveyors – David Stubbs says… “House prices have risen by over 11% a year since 1996 whereas first-time buyer incomes have only risen by 3.5 a year.”

With the recent US debacle regarding US ’subprime’ mortgages only just unfolding, and the attendant fallout affecting interest rates having a global knock on effect, UK first-time buyers find themselves increasingly challenged to come up with more and more creative solutions to not just owning the house they want, but ensuring they can keep it from repossession too.

We wish there was some better news for all those seeking a first-time buyer mortgage but for the moment it’s a case of gritted teeth and gung ho determination that things will work out somehow for good.

Here are five suggestions which may help you if you’re one of those buoyant souls with the gumption to give it a try.

1. Decide early that you may simply need to rent until you’ve build up the necessary equity needed to buy a property. Consider establishing a separate income stream apart from your main job on a part-time basis. Far from being a foolish thought, becoming an ardent eBayer could well provide exactly what you need to build the savings you are looking for.

2. Research possibilities of acquiring property at auction whereby houses can often be purchased at below market values.

3. Research possibilities of acquiring property through Housing Associations. Many housing associations allow you to purchase a 50% share in the property. Then after a provisional of in most cases one year you can purchase the remaining half of the property either immediately or in 25% chunk’s. In addition to paying the mortgage you’ll also need to pay the rent on the outstanding half of the property until you have purchased it outright.

4. Consider the possibilities of purchasing property with other trusted parties (family, friends etc) each taking equal shares in the house you choose to buy together. Large older properties can often offer ample living space to accommodate two to four people in this way without encroaching on each other’s privacy.

5. In a similar vein to the last comment, consider taking on board a lodger. The government have a scheme called “Rent a Room” which allows you to receive up to £4250 pa tax-free from your lodgers rental income. In essence it means you’ll be able to earn over £350 each month tax-free which can of course help pay your mortgage.

Finally, faced with such astronomical mortgage payment challenges, some people are increasingly considering taking out interest only mortgages rather than capital repayment ones. This is because of the substantially lower monthly costs associated with this model. Caution however should be exercised when making decisions as to the type of mortgage which suits best for unschooled first time buyers.

What is flexible and convenient for one couple may well prove to be the financial undoing of another less disciplined in setting in place provision to pay back the capital element of an interest-only mortgage. As always, wise trusted counsel can save the unwary from many a pitfall at this important stage in life.