Gardening and Slugs

Nothing to do with mortgages at all, but I've been busy in the garden recently. Last year I used slug pellets with fairly minimal success, however this year I have something new.

Nemaslug Slug Killer
After reading several great reviews I have been using Nemaslug and the early indications are brilliant. After plenty of research I have found the cheapest nemaslug available. In fact there is a special offer on at the moment and if you order a packet of seeds alongside the nemaslug, you'll get a pack of herb seeds absolutely free!

So if you're looking to buy nemaslug why not pop along today!

Northern Rock and 125% LTV

The press has been alive today with the talk of Northern Rock apparently offering 125% LTV deals after it was state owned. One source referred to it as "toxic lending".

Toxic Lending?

Lets look at the actual Northern Rock "together" product. It was a 95% secured loan (i.e. a mortgage) and the remaining 30% up to a maximum of £25,000 was an unsecured loan that just happened to have the same rate as the mortgage.
This is NOT a toxic loan
The credit card companies that were extending £10,000+ credit limits to people as soon as they bought their first house - that was irresponsible, toxic debt.

U-Turn by the Financial Services Authority

So the dear old FSA, after admitting to failing to properly regulate the banks and then awarding big bonuses to themselves are admitting that Principles Based Regulation was flawed.

Worse still chief executive of the FSA, Hector Sants says "be very frightened of the FSA". Good words to a sector that is on its knees.

Principles Outcomes Based Focused Regulation

However what Sants is planning to replace "principles based regulation" with is "outcomes focused regulation". This appears to be even more esoteric than previous regulation.

In particular they will....
make judgments on the judgments of senior management

Oh good, that fills me with lots of confidence.

The beginning of the end?

Mr Sants really can't have that long left at the FSA with ideas like this. Some IFAs are already calling for the abolition of the FSA citing that it is not fit for purpose.
Although I don't think we'll see the FSA scrapped just yet, I think some changes are going to have to happen and these changes tend to happen from the top.

Goodbye Mr Sants, please close the door on your way out.

Mortgage Income Multiples

Did mortgage income multiples really get too high?

Is anything over 3.5x salary too much?
If you believe the press then the answer is yes. Cast your mind back to the late 80's / early 90s when interest rates hit 15% and lenders were still offering 3.5x income multiples.

For comparision our fictional £100,000 mortgage (over 25 years) would cost:
Capital Repayment @ 5%: £584.59
Capital Repayment @ 15%: £1280.83

What the press fails to report

Generally the general media quote income multiples but fail to explain that most lenders work on affordability.
What does this mean? Well the lender looks at your income and your outgoings (including the proposed mortgage payment) and sees if this fits their criteria. This metric is normal expressed as a ratio of "debt to income".

For someone with a £500 mortgage, £100 loan commitment, £200 council tax and a monthly (gross) income of £2000 their debt to income ratio would be:
500 + 100 + 200 / 2000 = 0.4 or 40% debt to income

The debt to income or affordability calculation is a much better way for lenders to determine what level of borrowing an applicant can support. In general the costs for council tax / food shopping / loans are not significantly more expensive for someone who earns £100,000 p.a. over someone who earns £10,000 pa.

Lets compare a couple of examples Note: I have used 5% as a standard interest rate in all calculations and the calculations have been simplified for brevity..

£10,000 income - 3.5x income
Maximum mortgage borrowing = £35,000 = £204.61 monthly
Council Tax: £100
Food Shopping: £200

Total debt to income: 66.6%
Disposable income: £278.72 (before tax and national insurance)

£100,000 income - 6x income
Maximum mortgage borrowing £600,000 = £3507.54 monthly
Council Tax: £300
Food Shopping: £500

Total debt to income: 51.7%
Disposable income: £4025.79

Personally I wouldn't advise either of these clients to borrow to this level, but it demonstrates the concepts of affordability. You would certainly say that 5x income multiple could be fine for the applicant on £100,000, but the applicant on £10,000 should probably be on something closer to 2.5x.

It is no longer sufficient for lenders to use a "one size fits all" income multiple. To ensure that they are lending responsibly they need to look at each applicants affordability.

This is a good thing. Borrowers with lower commitments should be able to borrow more - its just good sense, or as Gordon Brown would say "prudent".

Bonus Culture and the FSA

Big city bonuses are bad, aren't they?

So bad that the Financial Services Authority felt compelled to draft guidlines about bonuses.

Specifically they say:

The need for firms to offer competitive remuneration packages is recognised, but industry comparators should be a secondary rather than a primary factor in the determination of remuneration policies.

From FSA Code of Practice

So we shouldn't look outward at other companies for salary comparison.

Regulators at the Financial Services Authority are in line for pay rises totalling up to £10m as part of a concerted effort by the City watchdog to attract and retain the highest calibre of staff.

Hector Sants, chief executive of the FSA, said its board had agreed to the extra funds to make the salaries comparable to those on offer in the City. Firms the FSA regulates face steep rises in the amount they will pay to be supervised.

From: The Guardian

Do as we say, not as we do.

So the FSA are making pay awards by looking at other companies for salary comparisons? When pushed on these double standards they responded by saying

We are not a commercial company so some parts of the code will not apply to us. Where we feel it is applicable, we will follow it.

Its nice to think that in a time of recession the FSA is increasing fees to advisers which will have to be passed onto consumers. Its about time they came out of their ivory tower and took a look at what is happening outside.

Suggestions for what the letters FSA could stand for are welcome on a postcard. (I'm struggling to think of any that don't involve expletives)

Savers and the 0.5% Base Rate

What should savers do now that Bank Base Rate has hit another all time low?

If I were cash rich I would be looking to make some buy to let investments. In my local area yields over 6% are possible again while currently the best savings rates are around 3.5%.

Obviously those with debts would be much better paying these off than saving. Similarly now would be a very good time to be making overpayments on your mortgage or depositing in your offset account.

With sensible negotiation a cash buyer should be able to purchase a property at a price towards the bottom of the market. This should also give a good opportunity for long term capital growth.

So those with significant chunks of capital should be celebrating and buying property and not whinging about low interest rates. As always during economic crisis there is good money to be made by those with liquid cash. So savers, stop moping and start making that money work hard for you.

It looks like some people have already realised this.

Over the weekend a couple of local estate agents have reported having sold 7 properties already this month.
I also spotted this just as I was about to click post.

However, the diminshing returns savers are experiencing may inadvertently help the property market as those with savings look for an alternative to cash in the bank. One of the options that is increasingly being explored, is purchasing property as a buy to let investment in order to generate an income.

From: Will interest rates reache zero percent?

Gordon Brown and Prudence

... Mr Brown said the Financial Services Authority would be considering controls on mortgages of more than 100% of a home's value, and so-called high multiple mortgages offering loans of up to six times an applicant's salary.

From: http://http//news.bbc.co.uk/1/hi/uk/7904621.stm

So 100% loans are bad

Chancellor Alistair Darling also suggested that some mortgages would be lent at up to 90% of the value of the property being bought.

From: http://news.bbc.co.uk/1/hi/business/7904748.stm

But 90% loans are good. It's all fairly straight forward isn't it? That 10% obviously makes all the difference.

Hang on, lets just think about this.

100% LTV in 2006. In the year 2006-2007 average property prices rose 17% so lets take the hypothetical £100,000 house...

2006: mortgage balance £100,000, property value £100,000
2007: mortgage balance £100,000, property value £117,000

Loan to value: 85.4% - According to Gordon Brown, this is not prudent

90% LTV in 2009. In the last year property prices have fallen 17% (http://news.bbc.co.uk/1/hi/business/7911735.stm) and Mr Darling is urging banks to lend to 90%.

2009: mortgage balance £90,000, property value £100,000
2010: mortgage balance £90,000, property value £83,000

Loan to value: 108.4% - Is this prudent?

Now I really hope we don't see another 17% fall in property prices over the next year, but I think this illustrates my point. For the Government to suggest that lending 100% in the good times was not prudent but lending 90% in the current climate is suggesting Gordon Brown is either:

1. Stupid and has very bad advisers
2. Only made these comments for spin

Personally I don't believe point one for a second.