BASE RATE HELD FOR SECOND MONTH

In a recent review of the UK economy, the Bank of England held Base Rate at 5.25% following the announcement that inflation has fallen significantly. This is great news and a step in the right direction for mortgage borrowers, although it is unlikely that the effect will be felt until the economy stabilizes further.

High interest rates continue to have a huge impact on the Jersey housing market which has virtually stalled, although the reality is that the unsustainably low lending rates we have seen for more than a decade have not become the new norm. In reality the norm is the interest rates that were in place in the lead up to the financial crash in 2009. History tells us that 5.75% or 6% is not a ‘’high’’ rate. It is a perfectly normal rate for a well-functioning economy. High enough to attract savers and investors and low enough to be affordable for borrowers.

Affordability comes with a sacrifice, which means that for existing borrowers, there will have to be a lifestyle change in respect of expensive holidays, a new car, home improvements- in fact all of the things that borrowers need to be mindful of if they wish to have their own home.

 

FUNDING A DEPOSIT

Most mortgages will require a deposit to make up the shortfall between mortgage amount and purchase price and it is here that many dreams grind to a halt, when aspiring buyers realise the almost insuperable challenge of saving sufficient funds to cover not only the deposit, but also the cost of legal fees, valuation and any other associated costs.

If people want to own their own home, they need to accept the necessity to make serious sacrifices in the short term and to save hard to accumulate their deposit. This can be too great a burden for some, who have become accustomed to using their available income to maintain a comfortable lifestyle.

There are, however, a number of ways in which this could be achieved, whilst still making life bearable.

Not everybody is fortunate enough to have parents or grandparents who can gift funds to contribute towards, or even pay the deposit, so the sooner they start saving, the sooner that dream flat or house could become a reality.

Our team at the Mortgage Shop regularly encounter First Time Buyer clients who deserve a medal for their thrift, and who, even on modest salaries, have been able to save considerable sums in just a few years.

 

WAYS TO SAVE TOWARDS A DEPOSIT

The first step is to review any existing debt, hire purchase arrangements or personal loans, and to ensure that no further debt is put in place.

Saving a part of one’s salary, sees some of the biggest savings. Should they put aside £10,000 pa, they can build £20,000 in just two years and £30,000 in three, which is an important contribution towards a deposit.

This can be difficult when also paying rent, so we have seen a trend of people deciding to move back in with their parents or in laws, or choosing to remain at home and then buy, avoiding the rental market altogether.

A saved rent of £1,400 pm, can achieve a saving of £16,800 pa. Although we appreciate that this option isn’t realistic for everyone.

For those forced to rent, it is widely accepted that accommodation in the Island comes at a premium, but considerable savings may still be available if you choose somewhere less expensive, or to flat share. While it might not be the modern, spacious home you would like, if it provides you with a safe, comfortable space, while you are saving towards your deposit, a reduction in rent of £500 pm, could save you £6,000 pa.

Some people decide to sell expensive items such as a car. A possible saving on a car finance deal of £450 pm could generate an extra £5,400 pa. The additional savings on fuel costs, insurance and parking, could easily mount up to over £5,000 pa.

Looking at daily expenditure, a simple switch from a fancy cup of coffee at a town café, to making your own in the office canteen could possibly save £3 a day, but factor in a daily sandwich, packet of crisps or a chocolate bar, that could be switched to a packed lunch you bring from home, could see further savings of up to £6 a day. Combined, these amount to £2,340 pa.

The couple of pints of beer or glasses of wine after work several times a week could be restricted to just Friday nights – resulting in savings easily reaching £30-£50 per week, generating another £1,560 to £2,600 pa.

Holidays, while important, could be switched to a staycation in Jersey, with beaches, cliff walks and historic attractions on offer for a fraction of the cost.

Ceasing your gym membership and instead accessing the many great workouts available at no cost, on social media could mean another £900 pa saved.

Finally, check your wardrobes, cupboards and garage for things that you no longer use or need and advertise them for sale on the online marketplace. This can generate additional cash and also help you to declutter, ready for your eventual move!

While these suggestions as a whole may sound too great a challenge to some people, even if only a couple are put into action, goals will be achieved a little faster.

The important thing to remember is that the savings regime won’t last forever and that once you have moved into your new home, you can relax and start to loosen the reins a little.

 

PROTECTING THE RISK

Everybody subscribes to motor, household and holiday insurance, even cover for pets, although it is surprising how many house buyers do not have life assurance in place to repay the mortgage should a borrower die. Unlike most other forms of insurance, you won’t directly experience the benefits of a policy to cover the mortgage, but it does provide peace of mind and reduce potential financial hardship at a reasonable cost.

Mortgage protection comes in a number of forms and can be put in place to cover just the outstanding mortgage debt, provide income protection in case of illness or accident (particularly important for self-employed people) critical illness cover or to pay out a lump sum if the borrowing is interest only.

 

Apart from pure common sense, life cover is particularly important where one borrower works only part time, where there are children or older dependants, or where maintenance payments are in place following divorce.

 

BEST INTEREST RATES FOR DECEMBER

Bank of England Base Rate 5.25%

2-year Tracker rate 60% LTV 6.04% - January 4.44%

2-year Fixed rate 60% LTV 6.09% - January 5.79%

2-year Fixed rate 90% LTV 6.64% - January 5.49%

5-year Fixed rate 60% LTV 5.59% - January 5.29%

5-year Fixed rate 90% LTV 6.14% - January 5.49%

 

RATES CORRECT AT 28/11/23