This is the second article about dubious dealings within the discount property market-place and we aim to keep you away from that sunrise knock-on-the-door.

 

The first article covered Double-Dealing (Blog 01/02/12). This one covers what is known as No-Money-Down or No-Deposit purchase.

 

Too many unscrupulous property agents and discount websites lull the investor into a false sence of security claiming they can buy something-for-nothing!

 

Our aim is not to scare you away from discount property purchase, but to get you thinking critically, making sound business decisions, and learn to ask the right questions at outset. 

 

This is when a mortgage applicant declares they have paid more for a property than they actually did, usually stating the open market value as the purchase price. The intent is to obtain a mortgage loan for the actual price paid (sometimes even more) to end up with a no cost purchase. This is clearly an unlawful transaction as lenders would not grant a loan on these premises, if they knew.

 

The Fraud Act 2006 clearly defines the offence that will implicate any mortgage applicant(s), mortgage broker and legal adviser who failed to provide information, whether requested or not, that would influence a lending decision.

Penalties for a convicted fraudster can be devastating and may include any or all of: a heavy fine; up to 10-years imprisonment; plus, property may be confiscated under the Proceeds of Crime Act. In each case the individual will bare a criminal record!

 

It is unfortunate that too many property and discount websites promote the benefits without fully explaining unlawful methods of acquiring discount property with a mortgage. 

 

Provided the actual purchase price is declared at the time a mortgage is applied for, most lenders will allow re-mortgage of a property at its open market value after 6-months (even if it is a change of lender). Assuming the property's open market value at time of remortgage is at least the same as it was when purchased 6-months earlier, it is possible to withdraw one's original investment hence, provide a lawful no-money-down or no-money-in opportunity.

Once the original investment has been released, another property may be purchased using the same capital. This process is known as Rolling Capital and is a lawful and normal business transaction when trading in property.

 

 

Property is a medium (5-15yrs) to long-term (over 15-yrs) investment. When compared with traditional insured investments such as pensions (long-term) and bonds (medium to long-term), property represents a sound investment, with well chosen discount property even more so.

 

Pensions and investments do have a place in a balanced investment portfolio however, unlike property the investor cannot enjoy an income (from excess rents) at the outset together with capital appreciation and, direct control of the asset.

As former mortgage intermediaries and as property investors, we have learned much about investing in property in general and discount property in particular. Some investors who come to us discover they could face serious problems because they entered into prior loan applications without full disclosure.  But solutions are available to those who accept our advice. 

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A financial adviser was fined £95,200 and banned by the Financial Services Authority (FSA) for knowingly submitting mortgage applications containing false information.

Gareth Flanagan, formerly the sole-owner and director of GMF Marketing Services, also had his approval to perform controlled functions withdrawn by the FSA who said his actions misled lenders regarding income, residence, employment status and proposed use of funds.

Between Dec'05 and Nov'07, Flanagan submitted 9-mortgage applications to lenders in respect of 5-properties. Five of the mortgage applications completed and mortgage funds obtained amounted to £1,325,722. The other four applications did not proceed to completion.

The FSA said Flanagan did not establish and maintain adequate systems and controls such that GMF took reasonable steps to ensure it made suitable personal recommendations to its customers and he also failed to ensure that the competence and performance of GMF's advisers were adequately monitored.

A review of past business in Nov'10 found that, of 24-client files originating from the period Dec'06 to Aug'10 where Flanagan gave investment advice, 84% were unclear in terms of suitability of advice.

Meanwhile, of 14-client files from the same time period, but not relating directly to Flanagan's advice , 72% were unclear in terms of suitability of advice.

Patrick Durkan, MD says, The company has assiduously addressed issues raised by the FSA and has fully implemented its recommendations ... We offer our clients a quality financial service and seek to grow the business.

What We Say ~ Mortgage fraud is a crime and includes any applicant(s), as well as advisers involved in it. Ignorance of what was being submitted on a mortgage application is an unreliable defence. Any adviser encouraging or allowing other than accurate and full disclosure in your mortgage application should be avoided and reported to the local police. Be especially alert to advice to declare other than the actual purchase price on your mortgage application form, often referred to as no-money-down or no-deposit. As well as imposing a heavy fine and prison sentence, under the Proceeds of Crime Act, a court may confiscate an entire property portfolio proved to be obtained through committing crime. 

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It is reported that First-time Buyers have saved more than *£300m in tax since the Stamp Duty holiday began in March 2010.

Not only that, but because they are buying at **25% off, they save more than £40,000 against its market value as well as the Stamp Duty (£1,650).

Home valued at £165,000 less 25% equals a purchase price of £123,750 (under Stamp Duty Threshold of £125,000). 

Deposit required £30,937 (25%) [NB:Some lenders allow 95%LTV mortgage for FTB e.g. only £6,187 deposit]

Mortgage at 75%LTV equals £92,812 requiring income(s) of c.£27,000pa

Mortgage Repayment £309pcm @ 4%APR (Interest Only), or £345pcm more for Capital & Interest over 25-years.

*source Santander

**typical discount 

The CML is among housing experts calling on Government to extend its Stamp Duty concession for first-time buyers.

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First-time Buyers may enjoy as low as a 5% deposit! 

 

Although 95%LTV products are at a 4-year high, First-time Buyers are still failing to get on to the housing ladder unaware a 5% deposit is sufficient.

Add to this that FTB's are eligible for discounted property purchase, they could buy a £165,000 house for as little a deposit as £6,187.

There are more than 50 mortgage schemes available from over 20 lenders (source the Mortgage Advice Bureau).

This converts to £210m worth of mortgage finance available to first-time buyers with a 5% deposit right now.

Dispite all this, First-time Buyer numbers have plummeted, down from a high of 1,350 applications-a-day, to just 520.

It seems the word needs to get out that First-time Buyers have not been forsaken.

Brian Murphy, Head of Lending at Mortgage Advice Bureau said, Well over 85% of young renters aspire to become homeowners but the vast majority of these say the fact they cannot raise a deposit is the key reason for not buying. There is a widespread perception that a minimum 20% or 15% deposit is required and they just don't realise that there are now a lot more competitive 90% and 95% LTV mortgages back on the market ... The first port of call for prospective borrowers should be to a mortgage broker as they can best assess which is the best product for their needs, but the fact that lenders are open to first-time buyers again is a really positive sign."

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More than one-third of UK property currently for sale has had the asking price cut at least once during the past year with the average discount now around *7.5%.

This means the average reduction from the original asking price is a £1,000 greater than this time last year.

On a popular estate agency website, the better discounted properties are in Glasgow, Blackpool and Maidstone with Stockport having the highest proportion of discounted properties. 

 

Nicholas Leeming of Zoopla.co.uk says, The current average discount of £19,580 is a new high indicating that sellers have come to terms with the market realities. Pricing correctly remains key when selling a home and whilst there is a shortage of sale stock currently, buyers are more discerning and more informed than ever before ... Serious sellers must do their homework and follow the advice of their agent before settling on an asking price, otherwise they may well find their property on the market for longer than they’d hoped.

So, a similar £100,000 property would be sold by an estate agent at £92,500, or via a BMV agent for £75,000. You choose!

*source zoopla

** regional variation applies 

Gross mortgage lending in January rose 10% year-on-year to £10.5bn as market sentiment improved, but was down 14% on December’s total of £12.2bn, according to the CML.

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Buying a Below Market Value home can be a whopping 56% (£407) a month cheaper than renting.

The typical monthly cost to buy a £165,000, 3-bed house at 25%BMV in the UK is *£309 pcm, compared with the average £716 per month to rent the same type of property.

This contrasts with the peak of the property market in 2008, when a mortgage on the average valued home cost around 29% more than renting.

A recent Halifax report reveals that home buying costs have fallen dramatically, driven down by the decline in the average monthly mortgage payment which is due to the fall in mortgage rates and house prices (11% over last 3-years), whilst the average cost of renting has risen by 9% since 2009.

So, why pay 33% more than you have to to acquire a decent family home. And, if you can't find a BMV deal where you want to live, simply buy BMV anywhere and enjoy the excess rental income to support where you do want to live.

 

*75%LTV @ 4%APR 

 

Heavy fines or a long jail term for the boss of fraudulent Oxford letting agent Charles Lawson.

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All indications are that rental demand in the UK will rise for the foreseeable future.

If you are seeking the best return for a £15,000 investment, did you know you could legitimately acquire a *Below Market Value property every 6-months rolling over the same cash investment? 

Excess rental income can be between £2-300 on each property, every month too.

This can be very handy for those concerned about their financial future.

*minimum earned income requirement applies for BTL mortgages

Platform has increased its maximum buy-to-let mortgage loan size from £350,000 to £500,000, with the launch of its Premier range.

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Did you know £450pcm rent could service a mortgage on a property worth £240,000?

 

Or, £187pcm could service a mortgage on a property worth £100,000! 

Assumptions:

25% Below Market Value Property Purchase (BMV)

75% Loan To Value (LTV)

4%   Buy To Let Mortgage (BTL)

 

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