Four mortgage myths unmasked!
Confused by conflicting reports about house prices, 125% mortgages and how long we should expect interest rates to remain low? You're not the only one! Laura Starkey gets to the bottom of four popular property myths...
With the front pages rarely without a story on mortgage lending, house prices, negative equity or repossessions, our national obsession with property has never been better fed.
But if you regularly read the papers, watch the news and surf the web for the latest reports on the housing market, you may feel you're awash on a sea of confusion. Hard-hitting headlines aren't always backed up by evidence, and it's easy for facts to become confused with popular opinion.
In this article, I'll look at four popular property and mortgage stories - and unmask the truth behind the myths.
1. "125% mortgages are back!"
Earlier this month, news that Nationwide building society had launched a new 125% mortgage product dominated websites, television programmes and papers across the country. Initially, it was probably enough to excite the hopes of would-be homeowners and strike fear into the hearts of financial experts.
On one hand, the tightening up of mortgage finance that followed the credit crunch has prevented many first time buyers from putting their first foot on the property ladder. On the other, many economists now contend that banks and building societies' willingness to lend out huge mortgages during the boom years was a key cause of the financial crisis.
The truth behind the headlines is that Nationwide introduced a special mortgage deal for existing borrowers only at the start of June. This option was designed to allow Nationwide customers in negative equity to move to a more expensive home, and requires borrowers to stump up a deposit of at least 5% to put down on their new property.
By demanding a new lump sum from customers and 'porting' their negative equity from one home to a more expensive property, Nationwide is effectively allowing a select few of its customers to reduce the overall loan-to-value (LTV) ratio of their mortgages.
For existing customers, the maximum mortgage Nationwide is willing to offer is a 95% LTV deal.
2. "Negative equity is a nightmare"
It's easy to be spooked by negative equity. The thought that you owe more money on your mortgage than your home is worth is pretty scary.
To make matters worse, reports that repossessions are on the rise often appear within articles that also discuss negative equity. In reality, there is no reason to assume there should be a connection between the two!
As I explain in this article, negative equity is only likely to affect you if you want to move home, need to remortgage or cannot afford your mortgage repayments.
In all other circumstances, knowing you are in negative equity might be uncomfortable - but there is certainly no need to panic.
3. "Mortgages have never been so cheap"
Earlier this year, the Bank of England base rate was hacked down to its all-time low of 0.5%, and it has stayed at this level ever since.
Homeowners with tracker mortgages taken out before the start of the credit crunch reaped significant benefits from these unprecedented falls. Because old tracker mortgage deals usually came with rates set at a certain percentage below the base rate, some British borrowers have been enjoying 'interest free' mortgages for much of 2009!
Borrowers on new tracker deals should expect to pay a rate set at a percentage above the base rate: for example, base + 2.45%. Right now, these mortgages do look temptingly cheap.
However, today's trackers might not feel so affordable when the Bank of England decides the base rate should start to climb. What's more, banks and building societies can now borrow money from one another at far lower rates than they could a year ago - yet they are not passing these reductions on to consumers.
As a general rule of thumb, fixed rate mortgages are currently more expensive than tracker deals. However, they do offer borrowers enhanced security and peace of mind, and are available at rates that are, historically, quite attractive.
4. "The property market is picking up"
Finally, it seems we Brits are involved in a never-ending war of words when it comes to the property market. While some people are keen to seize on any 'green shoots' they can see, others loudly declare that the market has further to fall.
As always, statistics often add to the confusion. While Nationwide building society's house price index suggests prices rose 0.9% in June 2009, Halifax's index says property prices declined by 0.5% during the same month!
According to the Council of Mortgage Lenders (CML), gross mortgage lending went up by 17% between May and June 2009 - an increase that seems to indicate matters may be improving for would-be homeowners.
However, the CML also points out that mortgage lending last month was a whopping 48% lower than it had been in June 2008. In addition, it says gross lending in the second quarter of 2009 was an estimated £33.3bn - unchanged from the first quarter, which was the lowest quarterly reading since 2001.
Therefore, while there is some evidence that the pace of house price decline in Britain is stabilising, it is by no means certain that we've reached the 'bottom' of the property market.
**Articles featured on BeatThatQuote.com are for information purposes only and reflect the views of individual writers. Articles are not, and should not be considered as, financial advice. BeatThatQuote.com strongly encourages our readers not to rely solely on information contained within this article/our website, but to conduct their own research and seek independent advice about the financial products they purchase.**
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