Forget about mortgage debt – become a happy renter instead
First-time buyers are suffering, and mortgage rule changes could lead to yet more misery, so perhaps it's time to consider the benefits of being a tenant, writes Laura Howard
Sunday 27 June 2010
George Osborne's recent pledge to dismantle the Financial Services Authority and hand greater powers to the Bank of England could be the final nail in the coffin for the nation's first-time buyers.
Under the Chancellor's new arrangement, the Bank would have the authority to place a cap on the amount that mortgage lenders could hand out to borrowers – and some fear this could mean maximum loans of 75 or 85 per cent of the property price.
Ray Boulger, the senior technical manager at broker John Charcol, insists that the move would particularly hurt first-time buyers, by denying them a mortgage that they could afford or driving them to finance part of it with an unsecured loan or a credit card. "And this is a group that the Government claims it wants to help," he says.
Things are sticky for first-timers already. Since the banking crisis hit in 2007, those yet to get on the property ladder will need to raise at least a 10 per cent deposit – a sum that, in spite of the recent housing crash, is often unobtainable. For example, the average house price is now £169,162 according to Nationwide, following a 0.5 per cent monthly rise.
Even if average first-timers can muster up the required £17,000 and qualify for a mortgage on the remainder, they will pay through the nose in interest. According to Moneysupermarket.com, the average interest rate on a 90 per cent mortgage is currently 5.83 per cent, compared with 4.2 per cent for a loan of 75 per cent of the purchase price.
"This translates into an extra £144 each month for someone buying a £150,000 home, which is already a major impact on first-time buyers' monthly budgets," says Hannah-Mercedes Skenfield of Moneysupermarket.com. But she adds that a 75 per cent loan-to-value cap on mortgages would make things worse still. "We have grave concerns about this possibility – it seems like a new government is trying to fix a complex problem with a blunt instrument."
High property prices combined with increasingly obsolete mortgages will result in a generation of the "haves and the have nots" when it comes to property, says Helen Adams, director of FirstRungNow.co.uk. "Generally speaking, only those with wealthy, generous parents, or very well-paid jobs, will be able to step on to the property ladder. Those who can't get a mortgage and don't inherit a property may well be committed to a lifetime of renting."
Evidence of this is already under way. Figures from the Association of Residential Lettings Agents (Arla), the industry body, reveal that there were 3.8 million privately rented homes last year, compared with 2.4 million in 2001.
A recent report published by the National Landlords Association (NLA) has also revealed that as many as one-in-five households could be renting from a private landlord in the next 10 years. NLA spokesman Alan Ward said: "At a time when government funding is strapped, it is private investment that will enable essential housing needs to be met. Rather than being seen as a last resort, private tenancies are becoming the choice of many people who need the freedom to choose homes where they need and for as long as they need."
There are several clear benefits to long-term renting, according to Peter Bolton King, the chief executive of the National Federation of Property Professionals. "Unlike house prices, rents have risen almost exactly in line with the average wage since 1994 – which makes renting more affordable in spite of low mortgage rates. Tenants will also escape the cost of repairs and maintenance to their homes, as this will fall to the landlords, and have total flexibility to move."
If you are looking to stay put for the long-term, Assured Shorthold Tenancy Agreements (ASTs) – the contracts used in the private rented sector – can state any duration of tenancy agreed by both landlord and tenant. But an AST lasting several years should incorporate break clauses which will allow either party to exit or continue the arrangement, says Mr Bolton King.
Tenants should also be prepared for landlords to use break clauses to hike the rent up – especially when the contract spans several years, he adds. However, such raises should typically be in line with the Retail Price Index (RPI) measure of inflation.
Economies of scale will apply though, which means you can use the longer-term tenancy as a negotiating tool to barter down your starting rent. "Especially for landlords with larger portfolios of property, long-term tenancies are attractive," says Mr Bolton King. "It's expensive and time consuming to keep switching tenants."
Since 2007, deposits – which typically amount to between four and six weeks' rent – will be held by the lettings agent and protected by the Government's Tenancy Deposit Scheme. According to figures from the TDS, the average deposit amounts to £1,000, but don't expect to earn any interest on it – even if it's being held for 10 years, says TDS spokesman Malcolm Harrison. "The lettings agent will probably argue that the interest barely covers the administration costs of holding the deposit in a ring-fenced account. Or if they do pay interest, they might charge an administration fee."
A thorough inventory – that states what furniture and appliances are in the property, and in what condition, when your tenancy begins – becomes especially important with long-term renting. "With the best will in the world," says Mr Harrison, "who is going to remember what was and wasn't there five years later?"
Staying in any home for several years will mean it needs to be redecorated and, as a tenant, you will be entitled to do this. However, the AST is likely to state that the property will need to be restored back to its original condition before you move out.
All tenants, regardless of the length of contract, will need to undergo a credit and reference check to ensure they are a reliable payer. Costs vary but, at a typical £50, this is one charge that will fall at the tenants' doorstep.
Bricks & torture: 'A mortgage would have cost £1,300 a month – renting is just £750'
Lucy Kemp, 29, and her partner, Dan Nash, 27, pulled back from the brink of buying their first home in Birmingham last month in favour of continuing to rent.
"We put an offer in at £210,000 against the £230,000 asking price and began looking for mortgages," said Lucy, a marketing account manager. "But only having access to a 10 per cent deposit, the cheapest deal we were offered was a three-year fix priced at 6.5 per cent. With bills, this would work out at more than £1,300 a month."
Instead, Lucy and Dan found a larger, more central two-bed apartment with en suite and terrace, available for rent at £750 a month. "The money we are not spending means we can continue having fun and that we have retained total flexibility to move to a house with a garden when the time is right."
Lucy was also worried about tying her money up in a dubious property market.
"If you buy an apartment, you can't extend it to increase the value – you have to rely on the market to increase or even hold its value – and I don't trust that at all."
Lucy and Dan are not worried that they have never been homeowners. "My mother only bought one house in her life but things are different now. We move around more so long-term renting suits us.
"Some people say renting is throwing money down the drain, but you have to pay to live, and it offers a whole host of other benefits."
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