Why we avoided the tie-in mortgage trap

The scourge of all householders - mortgages that lock borrowers into high interest rates after a special deal has come to an end - is making an unwelcome comeback.

In recent years, these much-criticised loans had all but disappeared. But as lenders struggle to shore up profits in the wake of the credit crunch crisis, the deals are starting to emerge again to haunt homeowners.

A number of high-profile lenders have reintroduced the deals - known as loans with 'overhanging redemption penalties' - that offer low initial fixed-rates for a set period.

Borrowers are tied into paying a higher standard variable rate for years after that special rate has expired. And the only way they can extricate themselves is by paying a stiff redemption penalty.

Barclays-owned Woolwich and building societies Norwich and Peterborough and Market Harborough are among those offering these mortgage deals.

Market Harborough tempts borrowers with a rate of 2.85% fixed for two years, but they are then tied in for a further three years during which they must pay the lender's SVR - currently 7.55%.

This means a homeowner taking out a £100,000 interest-only mortgage would pay £237.50 a month for two years. But then, assuming the mortgage rate has not changed, monthly payments would nearly treble to £629.

A borrower trying to get out of the loan in years one to five would be required to pay a penalty equivalent to between four% and seven% of the outstanding mortgage sum borrowed.

The £100,000 borrower would pay a penalty of £7,000 in total in years one, two and three, falling to £5,000 in year four and £4,000 in year five.

Market Harborough says the loan appeals to many first-time buyers looking to keep down initial mortgage costs. It also says that borrowers are left in no doubt about the length of time that early redemption penalties apply.

But David Hollingworth, head of communications at mortgage broker London & Country Mortgages in Bath, Somerset, says: 'This deal is prehistoric in structure. We rarely, if ever, recommend mortgages with such costly tie-ins.

'Borrowers considering such loans must be aware of their inflexible nature and question their real value.'

How To Get The Right Flooring For Your House

Everyone dreams of living in a beautiful house. Once you have the house, you're often bewildered with different decorating ideas. It's a good idea to start at the basics. Good flooring forms the foundation of any decorating theme. So it's vital to get the flooring right. One aspect is selecting the right materials.

The various rooms in your house may need a different kind of flooring. You have to pick the flooring depending on the use for the room, your lifestyle and your finances. Before you get floored by the number of choices available in the market, it's a good idea to know what youre looking for:

Your location

The location of your house is an important ingredient in your purchase decision. Do you live in a warm or cold climate? Do you have flooding or fires near your area? Studying these factors will help you make the right decision. Here's an example. Knowing that your house is situated in a moist area will give you a wide choice of flooring to choose from. You should probably pick material that will not rot away like stone, granite or marble. However, if you live in colder climes, then you can use a carpet or plain linoleum for the kitchen.

Your tastes

Your house should reflect your style and tastes. Do you like contemporary designs or a more traditional look? If your budget allows it, a hardwood flooring goes with almost any interior decorating idea. Bamboo floors or laminated floors are a cheaper option. Youll find it easy to clean a laminated floor as a good wipe will take care of it. You dont have to use oil or excessively scrub it.

Check the foundation

You need to check the foundation of the house before you buy the flooring. You will want your flooring to remain firm and stable and not cracked or chipped. Firstly, fix the foundation of any defects. Only then will the new flooring look good. If there is going to be quite a lot of family traffic you will want to ensure that it is resistant to wear and tear.

Mortgage approvals still falling

The number of new mortgages being approved for home buying fell again in November, says the Bank of England.

Its latest figures show that just 83,000 new mortgages were approved for home buyers last month.

That was down from 89,000 in October and was the lowest monthly figure since the start of 2005.

The further drop suggests that the recent slowdown in the UK housing market is likely to continue well into the New Year.

"This is further evidence of a sharp downturn in activity in the housing market," said Simon Rubinsohn of the Royal Institution of Chartered Surveyors.

'Generally fall'

Although house prices in the UK ended 2007 roughly 5-8% higher than they started, prices started falling towards the end of the year under the impact of higher interest rates.

Soaring prices have also pushed the cost of homes out of reach of many potential first-time buyers.

As a result, many experts and commentators now expect that prices will fall generally this year or, at best, stay level over the course of the next 12 months.

Although the Bank of England recently cut interest rates, and is widely expected to do so again this year, the housing market is now feeling the effect of the increases in borrowing costs that the Bank imposed from the summer of 2006 onwards.

However, the Council of Mortgage Lenders (CML) warned that it was still unclear if lenders would have enough funds to meet the expected demand from borrowers this coming year.

"The credit crunch has resulted in funding difficulties for a number of mortgage lenders, reducing their capacity to lend," said the CML.

"[But] the softer tone to house prices in recent months and uncertainty over the future course of house prices is likely to deter the demand for house purchase.

"Indeed, this factor is probably already at work," it said.

Cautious lending

This week the Bank of England reported that the recent financial crisis in the banking system had led banks to be more cautious and cut back their lending, whether it be to home buyers, companies or people with credit cards.

Part of that process has seen a drop in the number of people cashing in on the increased value of their homes to borrow more money.

In November there were just 60,000 such loans secured on a property, the lowest number since the start of 2001, and exactly half the record number of 120,000 that were lent in October 2003.

This suggests that consumer spending generally will slow down this year as much of this borrowing, known as housing equity withdrawal, goes to subsidise people's general spending.

"Housing market activity is now slowing markedly in the face of stretched affordability as well as the tightening lending practices resulting from the credit crunch," said Howard Archer of Global Insight.

"This ongoing evidence that the housing market is currently slowing markedly maintains pressure for another interest rate cut sooner rather than later," he added.

First-time buyers 'at fresh low'

The number of first-time home buyers in the UK has dropped to its lowest point since 1980 as house prices soar, mortgage lender Halifax says.

An estimated 300,000 first-time buyers entered the market in 2007, 15,000 fewer than a year earlier.

The average house was out of the reach of a typical first-time buyer in 96% of UK towns, Halifax found.

The average price paid by a first-time buyer for a property increased by 15% during this year to £175,093.

Priced out

The price has soared 82% over the past five years, it added.

"Rising property values have priced many potential first-time buyers out of the housing market," Martin Ellis, chief economist at Halifax.

"When they do enter the market, first-time buyers are now more likely to be in their 30s rather than their 20s and buy a flat rather than a terraced house."

Henley-on-Thames was the UK's least affordable town, with an average property price of £642,672 - more than 13 times the average income of first-time buyer households in the area.

The big council house sell-off

Camden council has announced plans to sell off 500 of its existing rented properties, in order to pay an estimated £242 million repair bill for the rest of its housing stock because the Government is refusing to provide the cash. The news emerged as the Queen’s Speech in Parliament promised the building of millions more homes and an increase in council-house stock.

Under the headline Investing in Camden’s Homes, the council is advertising its intention to sell vacant homes to private buyers to raise money for the repairs. But tenants are opposed to the plan. Members of the Defend Council Housing campaign are now busy knocking on doors and getting people mobilised against it.

Liberal Democrat council leader Keith Moffitt said there was no option but to sell, as the Government would not give Camden the funds needed to bring council homes up to its own decency standards. It is estimated that £242 million will be required for this. The Government has made financial support conditional on the council privatising the management of its housing stock.

A spokesman for the Department for Communities and Local Government said: “We have not yet taken a view on Camden’s proposals. Our policy in general is to make it easier for councils to build homes, and we are expecting all areas to increase the number of social homes.”

Liberal Democrat housing spokesman Paul Holmes MP said: “This is the Government’s fault for refusing to give Camden the money it needs for repairs unless it privatises the management. The tenants are sensibly opposing this, and the Government is punishing them for not toeing the line.”

Surge in 100% mortgages means thousands risk negative equity

Thousands of first-time buyers could find themselves in negative equity following a big increase in the number of 100% mortgages available, according to new research issued yesterday.

An estimated 33,000 first-time buyers borrowed the full value of their property, or in some cases more than it was worth, between January 2006 and August 2007, said the mortgage website mform.co.uk. Such deals are allowing people to get on to the housing ladder without having to raise a deposit.

But earlier this week, the body representing mortgage lenders warned that the housing market was about to stall, and some commentators believe this has already begun. A report from the website Hometrack, published on Monday, claimed house prices fell by 0.1% during October - the first fall for two years. There has also been a warning that home repossessions could rise by 50% next year.

Homebuyers who have recently taken out 100%-plus loans are particularly vulnerable to price falls, as they have no equity to cushion them if there is a drop in the value of their home. In some cases, even a small fall in house prices would leave them owing more on their mortgage than their home is worth.

Rising property prices have meant that people need to borrow even more money to get the property they want, and lenders have responded by dramatically increasing the number of 100% mortgages available, according to mform.co.uk

"In April this year, our research showed there were 92 different 100% mortgages to choose from, but by October 1, this had increased to 160," said Francis Ghiloni, the site's marketing and business development director. "If house prices fall, as some commentators predict, those homeowners with these mortgages are likely to encounter negative equity."

The high-street bank Abbey recently began trialling the "100% Plus Mortgage", which, in addition to allowing people to borrow the full value of their property, enables them to borrow up to a further £25,000, secured on their home. Abbey suggested the money might be used for "renovating your home, buying a new car or consolidating all your debts".

Property viewed 'safer than cash'

A majority of British people believe buying property is now a safer place to put their money than saving with a bank or building society.

Research for the BBC Two series, The Truth About Property, found 53% of respondents believed owning property was safer than cash.

The poll took place in the aftermath of the Northern Rock crisis, the first run on a British bank in nearly 150 years.

The findings come despite mounting evidence of a slowing housing market.