Time for concern?Posted on: 21 July 2014 by Gareth Hargreaves
Steve Wanless looks at the legacy of the financial crisis and the impact it continues to have on property sales and lending
It’s not just savers who’ve endured a rough ride over the past six years. Despite the headlines of record increases and its status as being a national favourite, home ownership is not always the smooth path to that crock of gold.
For vast sways of the UK, mostly away from the south-east, having a house and a mortgage has been a commitment that has only been possible because of historically-low borrowing-rates. You may be treading water, but at least you are not drowning.
“Hanging in there” – if you can for long enough – can bring rewards. The value of the house increases, as does your equity. At least you can get out with something in those circumstances, making the sacrifice worthwhile.
Sadly, that escape hatch is not available to everyone, especially in less affluent areas where irresponsible lending and soaring prices were rampant just before the banking collapse of 2008.
You can see the impact for yourself by going interactive with a “Where can I afford to live?” calculator using pricing and rental date (October 2013-May 2014), produced by residential property analysts Hometrack.
Once you realise that you will never be able to live in Mayfair, it is a far more sobering exercise to study the areas of the UK that have not recovered and are still struggling.
Revealingly, in Northern Ireland, because so few properties were sold, the data includes asking prices and mortgage valuations – and there was no rental data. Another recent mortgage report calculated that 41% of mortgages taken out in N Ireland since 2005 are still in negative equity.
It becomes a vicious circle. Those in negative equity cannot get the best mortgage deals, or move their mortgage, therefore struggle to reduce the debt. Selling the property is no solution and now there is threat of a rate rise shortly. Negative equity also means it’s unlikely they will be able to get a fixed-rate deal.
It also causes problems for the community. If all your energy and resources are put into servicing the debt to keep a roof over the family, then there’s little to spend on other goods and services.
Northern Ireland’s situation was certainly made clear to Mark Carney, the Governor of the Bank, when he met First Minister Peter Robinson at Stormont Castle recently.
Robinson insisted the meeting would: “ensure the issues affecting people in Northern Ireland are given full consideration when the bank is making decisions impacting on the entire United Kingdom. Access to finance has been a major concern for some time, but there are encouraging signs the lending environment here is beginning to improve.”
Many property owners have battled hard to stay in their homes; it would make sense to allow them access to cheaper loans rather than penalise them and making a bad situation worse.
Independent Financial Advisers (IFAs) can help up to a point, by demonstrating alternatives and options. However, there is not always a financial solution to every problem. The past six years have shown that.
It is hoped that the hard lessons of the recession have changed attitudes and behaviour, especially in the financial world.
Unfortunately, there is little evidence of that. The Financial Conduct Authority (FCA) has never been busier and because we (the taxpayers) own 82% of the Royal Bank of Scotland (RBS), we are effectively funding Fred (former Sir Fred or Fred the Shred) Goodwin’s defence that shareholders were “conned” into buying £12 billion of new RBS shares in 2008.
This week the FCA revealed that more than £340billions of savers’ cash remains in bank accounts that pay a pittance in interest. The FCA blames us for not being more proactive in moving the money around, but surely the banks have a duty of car to their customers.
The average interest rate over the past two years is 0.8%, but the rate on accounts opened in 2009 is 0.3%, even lower than the base rate of 0.5%.
The FCA claims that those who shop around can find rates of 1.85%. The FCA’s investigation was launched last September over concerns that millions of savers either fail to switch or do not realise their rate has been cut.
Christopher Woolard, director of policy, risk and research at the FCA, stated: “Competition does not appear to be working. We want to look at what is inhibiting the majority of consumers from getting better deals.”
But Sylvia Waycot, an analyst at Moneyfacts, felt the onus should be on those offering the rates. “We all have to accept low interest rates when the Bank of England rate is so low, but there is no need to offer savings accounts that shift and change.”
“We shouldn’t have to be cunning to get the best rate and it shouldn’t be a reward for the most observant fans of T&Cs (terms and conditions). Saving is a straightforward concept and accounts should be straightforward, too.”
Unfortunately, the FCA has not gone as far as banning “teaser rates” – those than offer a higher rate of interest for a limited period. Again, it’s up to us to remember when that rate takes a dive. The “rate chasers” were the only saving beneficiaries, by changing providers frequently and benefiting from the higher rates they offer temporarily!
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