Yikes! Mortgage lenders are hiking rates and for a large portion of the population, this is really going to hurt.
It strikes me that the increase in mortgage rates is going to hit homeowners at the weak end of the market especially hard. In fact, according to research by Which?, "one in five will struggle to afford food if mortgage payments rise".
That's tough. But here's the thing not everyone is suffering. Some homeowners have profited handsomely over the last few years. And please don't consider me too callous when I say this, but...
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This could create a very nice profit opportunity for those with a few quid on the hip. What we are seeing here is the emergence of a two-tier housing market. And today I'd like totalk about why I am thinking of positioning myself to potentially benefit from this.
The weak hands get shaken out
Today the banks use teaser rates to sucker in savers. You know the Amazing 4.99% introductory offers from the banks. Of course after a little while, the teaser rate disappears. The bank assumes you're loyal/dumb enough to stick with them even after the teaser expires.
And before the credit crunch, the banks used teaser rates to sucker in borrowers. Cheap mortgages fixed for one, two, three, orfive years were the bait. The rates were below cost and the banks even waived their administration fees too.
They assumed that over the long run, borrowers would stick with their mortgage, even when teaser rates vaporised.
And to a certain extent they were right. The pre-crisis teaser rates have now mostly expired. Borrowers are now on the more expensive standard variable rates (SVRs). And today the banks are starting to turn the thumb screws on these borrowers.
But there are two types of borrower here. Those that can shift away from their lender and get a better deal, and those that can't.
There are two reasons why many poor old souls can't afford to shift out of a bad deal. First, most of their properties are in sub-prime' areas areas well away from the banker classes. House prices in these areas have fallen hard.
That puts many of these guys in negative equity and puts the kibosh on any idea of finding a new lender.
Secondly, the goal posts have shifted. Today, to get a decent mortgage, you'll need a decent slug of equity, a robust (and proven!) income and the funds to pay any administration fees associated with moving your mortgage. It's not free anymore!
But for others, the pasture is much greener. For well-to-do homeowners the sun has been shining and many have been making hay.Countless homeowners have been busily over-paying their mortgages while rates have been low.
And as the teasers come/came to an end, they've simply moved to another mortgage provider. Anyone with a decent slug of equity can get a great deal on a mortgage. For instance, the Co-operative's ten-year fixed rate at 5.1% looks pretty good to me.
And there's another reason for this two-tier market...
The amateur and the professional
It seems to me that there are two types of landlord. The amateur and the professional.
The amateur (and I don't mean this in a derogatory way) dabbles with properties in their comfort zone. Wealthy amateurs that have the means, tend to stay within the wealthy areas they understand call it prime' if you like. Often they're dealing with legacy homes, be it through inheritance or just keeping their old home as they buy a new one (perhaps with a partner).
And with the financial markets as they are, I can't say I blame them for keeping hold of their bricks & mortar" this is a tangible investment after all.
The point is, amateur landlords are helping to foster this two-tier housing market. Prices in wealthy areas have remained remarkably resilient throughout the credit crunch.
But as we've mentioned, sub-prime is suffering. And I suspect that to continue for at least another year. Homeowners who can't afford to put food on their tables are hardly likely to be able to afford their mortgages.
Weak hands will get shaken out and I think it'll give contrarian investors an opportunity.
Three reasons to buy subprime
As I say, we'll probably see at least another year of divergence in the property market. But there are forces at work to bring this divergence to an end.
First, the government has put a cap on benefit payments and that includes rents to private landlords. This will impact rental yields in the prime residential market. Stories are already circulating in the press about families being asked (or paid) to move out of prime residential areas. This will put downward pressure on prime and could help stabilise sub-prime.
Second, I suspect that investors will continue to be disillusioned with the financial markets. Low rates on cash and volatile returns in the stock markets could lead many savers to bricks & mortar investments. As repossessions start to creep up, you'll find deals on subprime housing offering yields upwards of 10%. That's going to be tempting when compared with prime yields of around 4%, or 5%.
Third, life is getting very expensive, even for the prime-dwellers. We're back in recession, and inflation is hollowing out people's wealth. Even prime London rents have stabilised over the last year. I guess we've reached a point where renters just can't pay any more. But many sub-prime properties have a very good tenant. And that is local councils/government, call it what you will. In the good old days, you'll have found many landlords insisting No DSS' (Department of Social Security).
But with a decent yield on offer, I suspect many landlords will look more favourably on rents paid directly into their bank accounts from local councils. And with councils insisting that tenants rent at the cheaper end of the market, it'll help underpin this area of the subprime market.
Sub-prime may not be quite as ugly as it first looks.
The time to buy is not quite yet. But I think it could be coming. I'm getting on the mailing lists of some property auctioneers. It'll certainly be interesting to see where prices go as repossessions start to hit the market. SVRs are only creeping up at the minute. Imagine what happens if a banking crisis launches them out of the park?
This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.
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