Phil Whitehouse blog

Friday 15th July 2011

The first-time buyer market and the problems attached to it certainly account for a good deal of column inches, but a big, if not bigger problem are the issues facing the second-time purchaser.

I was reading an article recently which suggested that one in three home owners – an estimated 3.5 million – may be mortgage prisoners, unable to move or find a cheaper deal.

It also reported that the Council of Mortgage Lenders estimated that 3.2 million of the 6 million people who took out a mortgage since 2005 would not be able to get a new deal.

The term mortgage prisoner is one that does the industry no favours, but there is no getting away from the fact that some home owners continue to be hampered in their options.

Some are restricted by having very low levels or even negative equity as a result of falling house prices or from being on interest-only deals without having a sufficiently robust repayment plan in place. Indeed, Lloyds Banking Group were reported to admit that around 150,000 home owners who have a mortgage with the Group are in negative equity, which really illustrates the potential numbers involved in this issue.

There are also the problems facing self-employed people to consider as well as for those with a less than squeaky clean credit rating, albeit even if this was just one missed credit card payment. Added to this frustration is the fact that we are in the midst of an extended period of historically low interest rates, which means such home owners are missing out on some highly competitive deals.

This is obviously the legacy we face as a result of shall we say some over-zealous lending, but it’s not all doom and gloom.

There is some movement in the complex or near-prime market with more and more lenders looking even closer at this area and specialists such as AToM reporting good levels of business. LTVs are gradually rising whilst remaining sustainable and lending criteria are loosening ever so slightly, again whilst adhering to the strict risk boundaries set in place that it’s vital for lenders to observe.

So the question for this proportion of society remains, what do such mortgage prisoners do?

Well, it appears that many are considering or undertaking home improvements.

According to a recent report from the Royal Institution of Chartered Surveyors (RICS), 48% of chartered surveyor estate agents revealed that the slow sales market is prompting people to improve their properties rather than move. Across the UK, this was most prevalent in areas where the property market is more depressed, such as Northern Ireland, where 75% were improving rather than moving, and the West Midlands (71%).

However, even in more buoyant areas such as London, buyers are facing high property prices which are also prompting them to stay in their homes.

For those undertaking work to their homes, 44% of surveyors said additional bedrooms were the improvement which added the most value. Traditional improvements such as adding a new bathroom or kitchen were the next most valuable, at 18%. Adding a conservatory or reinstating period features were seen as desirable optional extras but not ones which add value.

However, it was also noted that costs incurred for improvements will not always be covered by the potential increase in a property’s value, as this also depends on the quality of work and other features of the property, such as its style and location.

To echo the sentiments of RICS, whatever home owners decide to do with their property, it is vital to seek professional advice and ensure all works are carried out by qualified contractors.

This professional advice should certainly extend to the intermediary market, and at a time when house sales are relatively slow, firms should be speaking to home-owner clients about the best form of financing option available to them. This could be through a secured loan or from remortgaging the property and taking advantage of some highly competitive deals that are available within the marketplace.

The remortgage arena continues to offer more options than home owners think and provides the perfect opportunity to sit down with clients and if nothing else at least update their fact-find in response to their current circumstances. This may not always lead to refinancing options but could result in the opening up of a range of potential ancillary sales opportunities.

The fact is that a decent proportion of mortgage prisoners do have options available to them, which emphasises the importance of the advice process and having a good client / adviser relationship.

All is certainly not lost, and despite some lingering market pessimism, more avenues remain open than many home owners realise, especially for those with a market specialist on hand to guide them in the right direction.