To the bright side of the road

Housing has finally turned the corner. Here and on pages 14 to 15 we show how to be streetwise on mortgages

It's official, the housing market is recovering. Autumn sales are expected to be the strongest for eight years and, according to research by the Royal Institution of Chartered Surveyors (Rics), the market has improved for 12 consecutive months. Sales rose over the summer, indicating the return of buyer confidence. At the same time the number of properties for sale fell, creating a shortage that helped push prices up.

But so far the recovery is patchy. Rics reports that the biggest price upturn has been in country homes and two-to-three-bedroom houses built before the 1960s. Flats and maisonettes - the traditional purchase of the first-time buyer - have lagged behind, but their prices are now starting to rise too. Surveyors in the North say that although interest is strong, prices remain static. Andrew Turner, from Jackson-Stops & Staff, of Darlington, says: "Pockets of the market are starting to perform extremely well, with quick sales and some genuine competition for well-located cottages and village houses. But the improvement in the market is not universal and some houses are still struggling to attract interest, particularly if they are over-priced.

"The future for the market looks bright as long as asking prices are kept in check."

Surveyors in London, the South-east, South-west and East Anglia have been the most likely to report price increases to Rics.

Some people are already considering residential property as a good area for investment again. The Association of Residential Letting Agents (Arla) has been spurred by low interest rates and the "reasonable certainty of sustained capital growth over the coming years" to launch Buy-to-Let, a scheme that encourages people to buy property to rent out. The Buy- To-Let official guide claims the investment opportunity is "as attractive as commercial property or gilts".

The TSB Affordability Index still shows that the cost of buying a home is at its most affordable level since 1978. John Stewart, an independent housing analyst who compiles the index for the TSB, says: "The combination of tax cuts in April, lower mortgage rates and faster average earnings growth has helped improve affordability over the past few months. "This has

been more than enough

to outweigh the negative impact of a slight rise in house prices."

However, the bargain hunters should get their skates on. Property will become less affordable after Christmas, predicts

the TSB , as house prices

continue to increase and with interest rates forecast to rise by 1 per cent.

Lenders have already responded to the improvement in the housing market. Last year, and in the first half of 1996, loans were designed to attract remortgage business. People who had no intention of selling their homes were persuaded to switch lenders with the offer of large interest-rate discounts and cash gifts of up to pounds 6,000.

The incentives were so generous in some cases that the Building Societies Commission, the industry's regulator, warned societies to be careful about the quality of loans being made.

But now several lenders have withdrawn products targeting the remortgage market to concentrate on buyers. Abbey National and Halifax Building Society have both positioned their loans to deter remortgagers.

Abbey National, for example, is offering cashbacks of up to 5 per cent of the loan value to buyers. Remortgagers, meanwhile, are being offered 1 per cent or 2 per cent, depending on the amount of equity they have in their property.

Margaret Schwarz, chief economist for Abbey National, says: "Lenders have realised that churning existing mortgages wasn't doing anything for the housing market whatsoever. We want to give the right signals to borrowers - to encourage them to start buying."

Chris Sonne, a spokesman for the Halifax, agrees: "The price war for remortgage business has been severe, and we don't want to be involved in the blood-letting. The real engine in the market is first-time buyers."

As remortgage packages disappear, they are being replaced by an rising number of negative equity packages, 100 per cent loans and mortgages that feature more flexible repayment terms.

Ian Darby, of independent mortgage broker John Charcol, believes this is a positive sign. All three types of loan represent considerable risk of loss to the lender. Negative equity and 100 per cent loans do not require the borrower to provide any equity, while most "flexible" mortgages will actually allow the borrower to withdraw cash using the loan.

Mr Darby says: "Lenders would not offer this type of mortgage unless they thought house prices were going to increase, thus providing borrowers with equity in their homes and so counteracting the risk."

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