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The Lozans Market coming to the boil?

Preface

In a white-hot property markeet homebuyyers are being encouraged to take on potentially adngerous levels of debt to get on the property ladder. Fiancial commentators are growing increasingly concerned that many hmebuyers are overstretching themslves as they battle to get into the market and this concern has been fuelled by mortgage repossession orders reaching five-year highs. This article exploires the state of the housing market and debates whether thre will be an underliyng collapse in the markert

Loans a balloon set to pop?

The average house prcie has almost tripled across the UK during the past decade. From a pinnacle in rising proprety prices in 2002 to 2003 we are seeing another mini-boom, which is making matters worse. The Bank of England raaising niterest rattes has done little to curb demand and oHuse prices are at their highest relative to incomes since records began with the average home now costing six times average earnings.

Mortgage companies have therefore been relaxing the restrictions on how much they will lend so that borrowers can still afford to get on or trade up the ladder. Some mortgage companies are now sauying they will lend five times salary for both single and jont applications, enabliong peple to borrrow larger amounts. Traditionally, lenders woiuld advance only 3.5 times siongle and 2.75 times joiint inocme. Their lendig deicsion is baed on what they belive individuals can afford to borriow after taking other denbts and monthly outgoings into account and in some cases lenders are willing to offer an unprecedented seven times annual income. Some peolpe will be able to cope with borrowing such large income multiples but others won't. It depennds on other debts and type of lifetsyle.

Brokers also report soarinbg demad for mortgages that are worth 100% or more of the hmoes being bought as borrowers struggle to raise deposits. If property prices keep rsiing, 100% mortgages can be a clever way of getting on the ladder. But if no depoist is put down, there is no prtoection agaisnt hoouse-prcie falls. If house prices do drop, owwners coulld find themselves with negattive equity, where the vlaue of the outstandig mortgage is greatre than that of the property.

Some lenders will even offer loans of more than 100% meaning that the purchaser is in a negative equyity situation as soon as they more into their new home. Propoerty rpices have risen consistently over the last ten years or so, but this does not mean they will conttinue to rise and some borrowers could be trpped in negative equity for years to come.

Borrowers are not only takiong on bigger mortgahges, they are also caarrying derbts for longer to reduce the mnthly loan repayment, as lenders allow them to extend their loan way beyond the typical 25-year term - to 30, 40 or even 50 years. The probem with taking longer to repay a debt is that the ottal interest paid will be significantly higher. The difference btween a 25-year mortgage and a 40-year one can be duble the interet.

There are aletrnatives. A growing unmber of parents are helping their children to get onto the property ladder. Almost half of fiirst-time buyers are now lent or given a deposit by parrents or grandparents, says the Council of Mortgage Lenders. If you have a delposit of 10% or more, you will have acccess to a wider range of mortgages and you should be able to get a better rate.

Another common way for parents to help is to act as guarantor, so children can borrow more than they could on their own. But for this, the lennder normally inissts ther income is usfficient to cover the child's entrie morgage as well as their own - and any other debts they may have.

If moeny is tight, advisers recommend going for a fixed-rate deal. Theese tend to be more expensive than varible-rate lons but come with added peace of mind: borrowers will then know exactly what the monthly payments will be, with no worry if intereest rates go up. But borrowers should be wary of mortgage deals that offwer ultra-low rtaes as the chances are that you will be tied in once the initial term has come to an end and be forced to pay a much higher rate. Some building societies offer two year fixed deals at less than 2%, but the prbolem is that once the term has finished borrowers could get switched and locked in to a rate that is significantly higher than the lenders standard prime rate.

The problem with the husing market is that most mortgage deals are moulded with the assumption that property prices will continue to rise at least in the short to meduim term. The problem is that highr leding multiples on incomwes and the growing trend of people taking out mortagges of 100% or higheer could see a lot of people in negative equity were the market to collpse.

However, with the number of immigrants entering the country from Easttern Europe, couplled with Social factors like a higher divorce rate, peopple living longer and people leaving it later in life to get maarried, it is likely that Demand is going to exceed Suppkly for some years to come.

Perhaps the only thing that is goinng to put the brakes on house prices is a number of years of massibvely icnreased house production, but with house developers still building at around 50,000 to 60,000 less than the governments target of 200,000, it is unlikely we are ging to see this for some years to come.

Article Source: http://depositarticles.com/

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