The Council of Mortgage lenders has said that government schemes to keep mortgage lending afloat end in 2014, leaving a funding gap of £300 billion.

Before all the economic problems of the last few months, the gap between what the banks took in savings versus what they lent out was covered my the wholesale market in mortgage debt. However when the world financial markets were hit in 2007, the UK government was forced to plug this gap with the special liquidity scheme and credit guaranteed scheme.

Once these schemes have expired, many experts believe that the wholesale mortgage market will not have returned to previous levels thus leaving a funding gap. This means that mortgage lenders are likely to not be able to offer mortgages to as many people and first time buyers are likely to be the ones who miss out.

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The rent-to-own scheme, sometimes also known as lease-option, works well for both parties. The buyer normally puts in around 5% of the purchase price of the house plus pays slightly over the odds for their rent. The standard amount of rent goes straight to the home owner, whilst the additional rent is used as a down-payment for the property.

This means that the home owner gets rent for their property plus buyers for the house in the long-term. The buyer saves up a deposit for their home, particularly useful if they are struggling to find a mortgage. Because a rent-to-buy property scheme is normally contracted for between 1 and 3 years, the buyers also get a chance to get a feel for the property and the local area.

The Rent-to-Buy Contract

Normally, the contract is written in for between 12 and 36 months, with renters often given the option to exercise their options after a 12 month period. If the renter decides to walk away from the property, they lose both their deposit and the ‘extra’ rent they have paid each month.

Rent-to-Buy Pitfalls

Naturally, there are potential pitfalls associated with this sort of contract.
Not meeting rental payments: If the buyer fails to meet all their rental payments over the course of the contract, they stand to lose all the money they have put towards the property.
Financing the purchase: If the buyer is unable to find a mortgage at the end of the contract and the home owner does not wish to renew the agreement, the buyer will probably stand to lose all the money they have invested in the property. If the buyer is struggling to find a mortgage now, there is no guarantee that the money put towards the property in up-front fees and rental payments will be enough to let them find a mortgage at the end of the contract term, particularly if the housing market continues to fall.
House Prices: Normally, the prices of the house will be negotiated at the start of the contract. If house prices fall or remain the same, the buyer may not want to buy the property at the end of the contract term. However if they walk away from the property, they lose all their money already invested so it becomes a toss-up between whether it is cheaper to buy the property at inflated cost, or to walk away from the deal.
Repossessions: If the home owner has their property repossessed before the end of the contract term, the renters may find they will not be able to reclaim the money that they have paid in up-front fees and extra rent, thus they may stand to lose all their investments.

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The base rate has tumbled and those who overpay their tracker mortgages may find the interest they pay over the term of their mortgage is significantly reduced. Home owners with a mortgage of £150,000 may have seen their mortgage payments fall by as much as £500 a month over the last year leaving them with £500 extra money per month.

By using this ‘extra’ money to overpay the mortgage, it reduces the mortgage debt and also reduces the interest paid on that debt. When rates go up, the interest will be calculated on a smaller balance. The term of the mortgage will therefore either be decreased, or monthly payments will be reduced. If you do overpay your mortgage and you get into trouble later on down the line, mortgage companies are far more likely to allow you to take a ‘payment holiday’ for a few months so paying a little extra in each month is no bad thing.

If you had a mortgage for £150,000 at a rate of 4% and you overpaid by £2.50 a day, you would pay your mortgage off three years and four months early, saving you £13,517 in interest.

The only thing to watch for is some lenders stipulate that you can only overpay by a certain percentage each year, so check your terms and conditions to make sure that you don’t put too much money into the mortgage.

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Around 565,000 homeowners have equity of 5% of less in their property and another half a million have under 10 percent equity in their home. All these homeowners may find it difficult to remortgage as many mortgage products now require 10% equity of more on new mortgage deals.

Many of those who are currently sitting on a house with negative equity are those who were tempted by the 100% plus mortgage deals that were readily available before the current financial troubles. Lured by the thought of rising house prices, these mortgages seemed a good idea at the time even though some meant home owners would be in negative equity at the start of the mortgage, however with prices falling or stagnant, many have found that these 100% plus mortgages were not such a good idea after all.

For those who are unable to remortgage, it means either being faced with a massive loss if they choose to sell their property or they must stay in their property on their current mortgage deal for the foreseeable future.

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