How does Equity work?

The concept of equity is quite simple and in practice is a great way to see a return from an investment.

Whether you are purchasing a family home or a buy to let property for rental purposes, the location and aesthetics of the property are crucial for its potential.   

E.g

2016
Purchase Price £220,000 
Mortgage Attained £198,000 (10% Deposit)
4 Bed property bought just outside of the M25 
Walking distance from station
Local supermarkets not far
Good school catchment area
En-suite Bathroom

2020
The same house sells for £300,000
The Mortgage balance has been decreasing repayment after repayment for the last 4 year
Mortgage Balance (guesstimate) £188,000 (Dependent on interest rate)

This means that on the property you bought for £220,000 in 2016, you have made £80,000 as the value has gone up by this much across the 4 years.

When you sell the property for £300,000 you will clear the remaining Mortgage balance of £188,000 and be left with £112,000

You will then have other fees like solicitor fees, capital gains tax (on the *gain, not the sale price) and if you sold your property before the fee free period on the Mortgage product you are locked in to, you may have to pay an exit fee.

*The gain here is £80,000

All in all, worse case scenario you are left with £90,000. That is a profit of £68,000 when you take away the £22,000 deposit you initial invested for the property.

This is why many people buy properties well outside of London, fix them up and then sell them on. The money that can be made is mind blowing. However, that is only possible if you get it right!

Next week I will be speaking about what questions to ask and what to look out for when you go for a house viewing.

Does having bad credit mean that I can’t get a Mortgage to assist in the purchase of a property?

No.

Great news. Bad credit doesn’t mean that you can’t obtain a mortgage, nor does it mean that you won’t be accepted for a loan or credit card. 

However, what it does mean is that you will be hit by higher interest rates and less favourable products. 

What is a product and an interest rate?

Interest rate – this is the rate a bank or other lender charges to borrow its money. The current Bank of England base rate is 0.75%

The Bank of England base rate is the UK’s most influential interest rate and its official borrowing rate. It is currently 0.75% – a historically low figure. The base rate impacts all other interest rates. When the rate is low, it costs you less to borrow money, however lenders are free to make their rates as high or low (no lower than 0.75% otherwise they will not make profit – just break even) as they see fit.

Product – lenders bundle their interest rates and incentives in to something called a product. For example a product for a first time buyer with Halifax could mean a 1.68% interest rate over a 2 year fixed period with a 2% early repayment charge and £500 cash back to assist with legal fees. Products vary and can be packaged with multiple or no incentives.

Expanding on the above example, this means that over the 2 year fixed period, your monthly payments will reflect the 1.68% interest rate. If you decide to Remortgage or sell your property earlier than when the 2 year fixed period ends, you will have to pay a 1%+ fee (% depends on the terms) of your remaining mortgage to do so. 

Interest Rates & Products – These are things you need to take in to consideration. Some people would rather go with a lender that has a product with a slightly higher interest rate which allows them to exit the deal early without a penalty. 

These kind of products are good for those that are Remortgaging due to their current product expiring, but wanting to keep their options open and not be fixed in to a lengthy deal as they have the intentions of selling/moving in the near future – within the year or so. 

Does having bad credit mean that I can’t get a Mortgage to assist in the purchase of a property?

No.

Having good credit means that your options are limitless. You can get favourable deals from high street lenders with low interest rates and great package deals.

Having bad credit, defaults and missed payments means your options are limited. You are limited to specialist lenders who lend to people with a less favourable credit file. Due to this, the interest rates are high, come with a product fee and little, but mostly, no incentives. An example of this kind of Lender is Pepper Money.

Someone with “bad credit” will be offered a Mortgage with a 5% interest rate at a specialist lender opposed to someone with “good credit” who has more options and can get a Mortgage from a high street lender with an interest rate as low as 1.42%.

Why do specialist lenders have such high interest rates?

This is because they’re offering something that you can’t get anywhere else – they can take advantage. Having “Bad credit”, you are also a liability. How do they know you are going to pay? How do they know that you aren’t going to continue with the same behaviour pattern seen on your credit file? Interest rates that are 3x higher than their high street competitors mean that a specialist lender reclaims like for like funds 3x quicker than said high street lender. Remember the Bank of Englands base rate is 0.75%. Most lenders have accounts with the Bank of England so benefit from a low base rate whilst also benefiting from the profits of a high interest rate when lending to others.

Bad Credit: County Court Judgement, missed payment, default, settlement of unpaid debt within the last 6 years etc.

Good Credit: Active credit card with less than 20% limit in use, none of the above.

Exception: Sometimes a high street lender will want an explanation for a negative marker on your credit file.

For example, “Why did Mr X miss a payment on his mobile phone bill 2 years ago twice?”

Reasonable explanation would be: There was confusion with the Direct Debit dates and account the funds should be retrieved from. This was resolved with the mobile phone company and won’t happen again.

Be responsible with your credit. Your future house buying self will thank you.

My property has been valued at £0 because of Cladding – HELP!

Stay away from flats with ACM material and/or flammable cladding.

Think with me: If you are having difficulty obtaining a Mortgage to buy it, you will have difficulty Remortgaging and selling it!

You can usually spot the flats that may cause you issues with a naked eye. 

A flat with cladding

If the surveyor that goes round to value your property is cautious of the material on the exterior of the building, this hesitance alone causes a delay for you. 

This delay is caused as you will be required to prove that the material on the exterior of the flat is not flammable. This is in the form of a fire report that the Estate Agent, Managing Agent or vendor should have. 

Valuers have become increasingly concerned, because Advice Note 14 means the owner has to say the building’s material is fully safe, which is very difficult to do while the building waits for inspection results and while everyone waits for the government’s cladding test outcomes.

Surveyors and mortgage lenders are requiring building owners to demonstrate that cladding meets Advice Note 14’s criteria. If they can’t, the properties are valued at zero.

Most building owners cannot immediately provide these assurances, so they are having to get trained professional engineers to carry out lengthy and costly checks, holding up sales, purchases and Remortgages.

If you’re currently suffering this issue as a Home Owner Remortgaging your property, then the best person to speak to regarding this kind of report is the leaseholder/the managing agent. If the building hasn’t undergone a fire and risk assessment since the Grenfell tragedy, then this is probably currently in the works and you will not be able to do much until you have the results of this report back.

Grenfell Tower

It is extremely inconvenient and disheartening, however you have to understand that there are hundreds, maybe even thousands of buildings nationwide that have to adhere to this new advice note since the multiple lives lost in the Grenfell fire due to the deadly flammable materials used on the block of flats. 

As you can imagine, a surveyor is not going to deem your property as suitable security for a Mortgage if they cannot prove that it adheres to relevant legal requirements. 

Advice to those wanting to Remortgage a property with cladding issues Stay with your current lender and do a rate switch. This is simple, you choose a new product from their latest Mortgage product range and avoid going on the variable rate. A valuation is not required for this. You can make this kind of switch in branch, over the phone and sometimes online.

Advice for those wanting to Buy a property with cladding issues
Avoid avoid avoid. Don’t do it. Walk away.