Housing Market - The Harsh Reality of Interest Rate Rises

Although interest rates are unlikely to rise before 2015, those entering the housing market in particular, should be conscious of imminent interest rate increases and ensure that they budget accordingly

Source: http://www.whatmortgage.co.uk

On 13^th October 2013 Bank of England Governor, Mark Carney, indicated that interest rates may rise in 2015, a year earlier than expected due to an improving economy and a significant fall in unemployment.  Although the announcement also indicated that interest rates are likely to remain low for several years, it is likely to have raised alarm bells for those who have variable rate mortgages as well as those who are thinking about moving onto the property ladder for the first time.

Over recent years mortgage borrowers have been spoilt by a record low base rate of just 0.5%.  Although the property market has suffered with the economy, we have had the opportunity to borrow money very cheaply for many years. Those who have taken this opportunity may have been lulled into a false sense of security, hoping that this will last for the vast duration of their mortgage loan!  In reality however, it is likely that those who have stretched their budgets or maybe those who are new to the property market will find any interest rate increase a major shock to their finances.

Even a small increase in interest rates will pose difficulties for many with variable rate mortgages, particularly those who have borrowed to their absolute maximum.  As an example the table below provides an indication of the financial impact of an interest rate increase on a variable rate 25 year repayment mortgage loan of £150,000, assuming and existing current interest rate of 3%:

Mortgage amount	£150,000	£150,000	£150,000	£150,000
Current Interest Rate	3%	3%	3%	3%
Interest Rate Increase	0.25%	0.5%	0.75%	1.00%
Existing Monthly Payment	£717.85	£717.85	£717.85	£717.85
New Monthly Payment	£737.99	£758.43	£779.15	£800.15
Increase per Month	£20.14	£40.58	£61.30	£82.30
Increase per Year	£241.72	£486.92	£735.57	£987.61

As can be noted above, for every 1% increase in interest rates on a £150,000 repayment mortgage loan there will be a nearly £1000 annual increase in repayments.  Add this to the fact that energy prices are soaring and in-fact have been predicted to rise for the next 17 years (see BBC News article), and in addition ‘the cost of living – based on the consumer prices index – rose by 2.2% but pay packets have risen by just 0.7% on average in the past year’ as reported by The Mirror online on 12^th November 2013, it is clear that many are likely to find themselves in financial difficulty over the coming years. 

The impact of progressive interest rate increases is starkly demonstrated by what happened in the early 1990’s. The extract below is from a recent article from Guardian Money website :

‘A sudden, sharp rise can have a massive impact on household finances, as Maureen Twiddy is all too aware. Maureen, 49, and husband Paul, 56, owned a house in Carlisle in the early 1990s when interest rates shot up to stratospheric levels. Our mortgage leaped from 6.5% to more than 15% in just 18 months. It was a nightmare and a real battle making our repayments every month. We were lucky to pull through, many others saw their properties repossessed'

Source: http://www.walesonline.co.uk

The big difference between the early 1990’s and now is the value of property. The average house price in the early 1990’s was in or around £52,000 whereas at present this stands at just over £167,000 (Nationwide 2013).  Therefore the amount of money that is needed to borrow is substantially higher and so is the risk to both the borrower and the lender.  Obviously an interest rate increase will have a greater impact with the more money that is borrowed and nowadays the average debt is much larger based upon astronomic capital growth since the early 1990’s. 

The Guardian article above goes on to state: ‘Research by property analyst HML suggests that if rates increased from their current 0.5% to 1.75%, around 30,000 people would fall into arrears within a year. So it could well be time to review your finances and make sure you could cope'

Fixed rate mortgages provide a safety net in terms of financial certainty for a limited period of time, however WHEN interest rates start to increase, as a borrower is nearing the end of their fixed term, they are likely to find that new fixed rate term deals will not be as cheap as they once were.  As demand for fixed rate mortgage products starts to increase, lenders are likely to seize on the opportunity to make more money and increase costs for borrowers.

Over recent years the UK Government have been trying to breathe life into the UK Housing market to try to encourage growth and it appears that we are just starting to see signs of life, fuelled partly by the help to buy scheme.  Although interest rates are unlikely to rise before 2015, those entering the housing market in particular, should be conscious of future interest rate increases and ensure that they budget accordingly.  When interest rates start to increase (and this is only a matter of time), it is likely that the financial burden will prove too great for many.  Sadly, I suspect we will see a sharp increase in re-possessions as lenders start to reduce their burden against potential loss.

For those with a mortgage, whether repayment or fixed rate it would be wise to consider your options now rather than wait for interest rates to start to rise.  You may find that you already have a good deal, however there is no harm and no cost in looking around to see what is available.  Although there is no certainty in life, we can be fairly certain that interest rates will increase in the near future, which allows us to make provision for this in our finances. 

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Information/opinions posted on this site are the personal views of the author and should not be relied upon by any person or any third party without first seeking further professional advice. Also, please scroll down and read the copyright notice at the end of the blog.

1940’s Prefab Houses – Simple but effective!

Despite a desperate need for housing it is interesting that a planned, strategic approach was taken to the design and functionality of prefabricated housing in the 1940’s  

Prefab at Avoncroft Museum - Source: Own

A number of years ago I visited Avoncroft Museum of Historic Buildings, which is situated near junction 1 of the M42 in Bromsgrove in the West Midlands.  The Museum currently has over 27 different structures which have been rescued and re-built over the last five decades including a timber framed merchant’s house, a windmill, a church and a granary to name but a few.  Although these and other buildings are absolutely fascinating, the building that really interested me was the 1940’s prefab.  There was something about the speed of construction and the simplicity and layout of the structure that made the building stand out from the rest.  For those reading this article who are unfamiliar with prefabricated buildings, these are basically factory built components that are assembled (put together) on site.

Kitchen within Avoncroft Prefab - Source: Own

Nowadays, prefabrication is something that is commonly used for new build construction, and offers efficiencies in terms of thermal performance, speed, improved quality as well as cost efficiencies. In the 1940’s very little consideration would have been given to any of these factors, with the exception of speed of construction.  Originally designed as temporary structures with a maximum lifespan of 10 years, prefabs were identified in the 1944 Housing Act as a means of providing accommodation quickly in towns and cities that had been bombed heavily by the Germans in World War II.  Prior to the introduction of the Housing Act in 1944 the UK Government identified the need to provide temporary houses and set about achieving this through an initiative called the ‘Temporary Houses Programme’ (THP).  The summary below from http://www.epsomandewellhistoryexplorer.org.uk/ explains the planned approach to housing shortage and how design played a key part in its success.

'As early as May 1943 the Government decided to invest in a prototype, temporary steel bungalow, which became known as the ‘Portal Bungalow’, named after the then Minister of Works, Lord Portal. The Prime Minister, Winston Churchill, promised 500,000 temporary new homes, although only 156,623 were actually produced  (between 1945 and March 1949). The houses would be prefabricated in sections, in factories no longer needed for war production, transported to where they were needed and ‘bolted’ together on site, in a fraction of the time it would take to build a conventional house.

As steel was needed for the war effort, and therefore in short supply, no steel prefabs were actually made. Nevertheless, the steel ‘Portal’ prototype, used as a starting point, provided inspiration to private firms who were then commissioned to design and produce their own versions, but within specific guidelines.

All were to have two bedrooms, the floor area was to be 635 square feet, and to allow transportation from the factory, each component part could be no bigger than 7½ feet wide. The most important stipulation was that they all had to make use of the government-approved ‘heart-unit’. A back-to-back kitchen, bathroom, fire place with back boiler, airing cupboard and toilet. The design of the unit kept plumbing to a minimum. Only the relatively few imports (8,462) from the USA did not use the ‘heart-unit’. 

There were thirteen types from eleven different manufacturers (one from the USA). Although they were all based on the same concept, each manufacturer had their own detailed designs, and decided which materials they would use. The materials were chosen from concrete, asbestos-cement, steel, wood and aluminium or a combination of several, as decided by each manufacturer'

Bedroom within Avoncroft Prefab - Source: Own

Despite a desperate need for housing it is interesting that a planned, strategic approach was taken to the design and functionality of prefabricated housing in the 1940’s.  If you ever have the privilege of visiting a 1940’s prefab you will be able to see for yourself how this speedily constructed dwelling was able to provide a functional layout incorporating basic facilities for a family at that time.  Granted, there would not have been the level of thermal comfort or possibly space that most modern houses can offer however, I am sure that those who lived in prefabs in the 1940’s would have been more than happy with their living conditions. 

Although many prefabs have long since been removed and replaced with more modern structures there are still many of examples of prefabs that remain, of which many are now listed (protected).  This really stands as a testament to a well thought out approach to meet an urgent need for housing at the time.  Given our current need for new housing I wonder if our current decision makers could learn any lessons from such an approach?

Second Bedroom within Avoncroft Prefab - Source: Own

Bathroom within Avoncroft Prefab - Source: Own

Iconic World War II image - Source: http://fortiesknitter.blogspot.co.uk/

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Property Investment – Why an Investment Appraisal is so crucial for Buy to Let Investors

The formulae to successful buy to let property investment will depend on a range of different factors, which will vary from investment to investment.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return. 

Source: http://www.bridgingmortgage.co.uk

Even during times of recession when property prices are stagnant or possibly even in decline, wily property investors will find opportunities to make a good return on their initial investment, particularly in the buy to let market.  Generally, there are two primary ways in which investors will make money from property, either through capital growth or through rental income. For the purposes of this article I will focus on the latter, where I suggest a number of ways in which a buy to let investor can help to make, and maximise a return on their investement.

The formulae to successful buy to let property investment will depend on a range of different factors, which will vary from investment to investment.  Before taking the plunge to invest, careful consideration should be given to weighing up or calculating what the likely costs (outlay) will be, balanced against the likely return.  Failure to undertake this initial assessment or be tempted to ‘take a chance’ is extremely unwise and can result in significant losses being made. 

Once a property has been identified for potential investment an appraisal should be prepared, which will assess the likely costs required, balanced against the likely return.  If, through research, an investor calculates the likely annual rental income, and then divides this into the purchase cost of the property, which will include any costs associated with purchasing together with any repair or renovating cost, and any professional fees, then this will give something referred too as the ‘net rental yield’.  As an example, if the net rental income of a property is estimated at £15,000 per annum and the total investment cost of the property is calculated at £200,000, the net rental yield will be £15,000 divided by £200,000, which equates to 0.075 or 7.5%.  You will often hear investors and those involved with property comparing the net rental yield to the returns on a similar investment if placed in a bank account. Inevitable with low bank interest rates over recent years it is not difficult to understand why investors are choosing to put their money into property rather than letting it sit in a bank account.

Source: http://www.buckinghams-residential.co.uk

In order to do establish the net rental yield an investor will need to understand property prices and rental values in the areas that they plan to invest, to consider the condition of a property and the amount of money that they will NEED to spend (notice the terminology) and establish how they will finance the investment.  All of these factors have different variables based upon location, size and nature of the building and the amount of money that may need to be borrowed.  Every investment will be different and investors will need to be thorough in every appraisal they carry out to help them to maximise their rental yield.

If, following an investment appraisal a property is then purchased, then the investor needs to ensure that they stick too and keep control of costs, based upon their budget, which would have been a key part of their appraisal. From this point onwards any unexpected costs will start to impact on the return and if this is allowed to get out of control the investment starts to become less and less attractive.  In order to minimise this happening the investor should have reviewed and understood the legal pack (auction purchase) and understood any specific legal responsibilities applicable to the property.  Once contracts have been exchanged the investor will not be best pleased if they find out that the building is listed (protected), or there is a right of way running through the middle of the rear garden, or there is a restrictive covenant preventing certain types of development, all because they have not taken the time to read a legal pack or to get appropriate legal advice.  This can prove very costly and has the potential to wipe out any investment return and could actually result in a loss.

Experienced property investors will realise that an investment is business and not personal, and they will therefore keep a tight control of what they are spending.  They realise that costs of any work to a property will depend on the likely rental income and they will not make extravagant alterations and purchases that are not going to add anything to their investment return.  It sometimes takes newer property investors a number of years to grasp this, where they will often ‘personalise’ a property to their tastes, assuming that everyone else likes and appreciates the same as them.  Renting in certain areas will not demand high quality fixtures and fittings, therefore including these because an investor wants the building to ‘look good’ does not make any business sense whatsoever.  

Making a profit from buy to let property investment is often portrayed in the media as something that is reasonably straightforward.  Why this may be true for some, the truth however is that success will very much depend on how the investor assesses each investment to calculate the likely outlay and return and this will depend on how well they research a property before making the decision to purchase and how well they keep control of their budget.  Of course, there is also managing tenants including collecting rents, property maintenance and repairs and complying with statutory requirements to consider once any works have been completed and tenants are in occupation. All in all there is money to be made from buy to let property investment however there is much more to it than people often realise.  If you are considering a buy to let investment for the first time then hopefully you will find the content of this article of use.

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Professional Fees - Cheapest price very rarely represent best value!

Suicidal fee bidding does not do Clients or Consultants any favours and in fact serves just to undermine the credibility of the built environment professions

Source: http://luxuryactivist.com

We live in a very competitive world and in recent years due to the global economic downturn it is fair to say that businesses have had to adapt, diversify, and often downsize just to survive.  A successful business will also adopt a similar approach on an on-going basis, as a growing business will face similar challenges, all be it from a more positive perspective.  Gaining new and regular business is the key to the success of any business no matter where we are in the economic cycle and a key part of this is trying balance our professional fees so that they are competitive enough to attract new business and at the same time make a profit.

Businesses may be in a position to offer very competitive fees if they can tailor their services to be ‘lean and mean’, however, like myself, I am sure many reading this will have come across examples where they have submitted what they feel is a very competitive fee proposal only to find out that the Client has selected an alternative bid, for a fee that seems ridiculously unsustainable.  There comes a point where a Consultant has to question why they are doing certain things and working for ridiculously tight margins is not good for the long term viability of a business as well as undermining the value of good professional work and advice generally.  Clients should however be vary wary of selecting Consultants on the basis of lowest fee as they will often find that cheapest price very rarely represents best value.

Clients are perfectly entitled to expect as much as they can for their money, but Consultants do not do themselves, their Clients or indeed their professions generally, any favours by trying to undercut their competitors by submitting unsustainable fees.  One may argue that the sustainability of a fee will vary from business to business as overheads will also vary depending upon the size of a particular business.  A Client will therefore be well advised to carefully scrutinise all fees, particularly the lower fees, to establish precisely that their brief will be met, within the timescales provided with the resources needed including the level of personnel necessary. The adage, ‘you get what you pay for’ comes to mind.  A Client who selects a Consultant’s fee without suitable analysis, particularly a fee which is considerable lower than other bids, may be faced with a Consultant who is continually struggling to make the fee work for them, possibly resulting in a poor quality service, missed deadlines and disputes. 

There are a number of ways in which a fee can be calculated, from a percentage fee based upon the projected cost of the project to a lump sum fee which will be calculated based upon the amount of time likely to be spent on the project and the level of personnel and resources needed.  Either way carries an element of risk to the Client and to the Consultant. This emphasises why fee calculation and fee bidding is such an important part of a business. 

Source: http://www.123rf.com

Arguably the success of any project can be measured by time, cost and quality, none of which are mutually exclusive.  By selecting a Consultant based upon cost alone (lowest fee), no account may be taken of the impact of time or quality.  So for example lowest fee (cost) may impact on the level of personnel that will be allocated by a Consultant to the project, which could be inexperienced/junior member of staff, which can effect (quality) and deadlines (time). Nowadays, savvy and may I suggest sensible Clients do not rely on fee value alone for selection of their Consultants but adopt a much more robust method of cost AND quality. 

A cost and quality approach to procurement of Consultant services provides a Client with a much more thorough way of ensuring that the selected Consultant helps them to achieve value for money.  Granted, this approach is more time consuming than inviting fee bids alone, as it often requires a quality submission and interviews as well as assessment of fees. The advantage however is that through the quality assessment and interview, the Client can review the Consultant’s track record of similar projects, discuss and meet key personnel, discuss deadlines, establish how best value will be provided and so on.  This will enable to Client to understand exactly what each Consultant will provide and give them the opportunity assess which Consultant they feel will give them best value.  Therefore a Consultant who submits a fee which may be higher than other fee bids, still has the opportunity of being selected as the Client, through the cost and quality procurement procedure may decide that the higher bid represents better value than a lower bid.

To conclude, Clients need to take time when procuring the services of Consultants to understand what the Consultant will provide for their fee and to establish whether they are getting best value.  Consultants on the other hand will always remain competitive with their fees however this should not be at the detriment of their bottom line.  Suicidal fee bidding does not do Clients or Consultants any favours and in fact serves just to undermine the credibility of the built environment professions.  If the general public want and expect high quality Professional Consultancy services then we should not give the impression through the fees we charge that they can buy these services from a high street discount store.  There is nothing wrong with healthy competition, however if Consultants continue to undercut each other and submit unsustainable fees, then this is not healthy competition but professional suicide, which is not in the interests of the general public because as we have seen, lowest price very rarely represents best value.

Please feel free to share this article and other articles on this site with friends, family and colleagues who you think would be interested

Information/opinions posted on this site are the personal views of the author and should not be relied upon by any person or any third party without first seeking further professional advice. Also, please scroll down and read the copyright notice at the end of the blog.