The Daily Telegraph - Saturday - Money

Low-deposit mortgages could spark buying frenzy

Discounted loans for first-time buyers will allow many renters to finally get on the ladder in London, says Melissa Lawford

- Darren Caproli, a first-time investor

‘Many first-time buyers believe prices have bottomed out’

New Government- guaranteed mortgages will provide a lifeline for would-be first-time buyers locked out of the property market. Chancellor Rishi Sunak announced in Wednesday’s Budget that from April, first- time buyers would be able to purchase homes worth up to £ 600,000 with only a 5pc deposit mortgage, using a government­guaranteed loan.

The move will reopen the market to entry-level buyers who do not have large cash stores and have seen mortgage options shrink dramatical­ly in the past year.

In March 2020, there were 391 5pc deposit mortgages on the market, according to Moneyfacts, the data provider. By May 2020, this number had plunged to 41. At the beginning of March 2021, there were only five – and these were highly restricted.

Neal Hudson, of BuiltPlace housing analysts, said: “This scheme is very much about fixing the problem of the credit crunch in the mortgage market at high loan-to-values since the pandemic began.”

Low- deposit mortgages are typically expensive, with rates of about 4pc. Analysts are divided over whether the government guarantee will help to bring these rates down. SPF Private Clients, a broker, expected a five-year fix to be available at 3.5pc to 4pc. Others argued that if there are more deals on the market, lenders will need to become more competitiv­e.

Aneisha Beveridge, of Hamptons Internatio­nal estate agents, said: “We think lenders will probably base the interest rate around what is currently offered on a 75pc loan-to-value loan instead.” This means the rates could drop to 1.75pc.

Hamptons calculated the monthly repayment under the mortgage guarantee scheme for the average-priced property in each local authority area in Britain, assuming buyers had a 5pc deposit and paid interest at 1.75pc. It then measured this against average inner London rents to map where London’s first-time buyers – those who are most constraine­d by affordabil­ity – would soon be able to buy.

Parts of London and the South East will still be wildly out of reach. In Kensington and Chelsea, the average monthly mortgage repayment would be £4,416. In a quarter of London local authority areas, the average property price exceeds the £600,000 cap for the government-backed loans.

But some expensive parts of outer London and the commuter belt will open up for first-time buyers currently renting in central London.

Of these, South Buckingham­shire, the area which includes the market towns of Beaconsfie­ld and High Wycombe, is the most expensive. The average home here costs £ 579,290, meaning monthly mortgage payments with a 5pc deposit at 1.75pc interest would be £1,966. It is followed by the London boroughs of Haringey, Hackney and Merton, where the respective monthly repayments would be £1,960, £1,934 and £1,906.

The arrival of the guaranteed mortgages is well timed for first-time buyers to take advantage of big discounts. John Ennis, of Foxtons estate agents, said: “We have a one- bedroom garden flat in Haringey that is under offer at £335,000; before coronaviru­s it would have been north of £400,000.” Flat prices are about 12pc below their prepandemi­c level, he added.

Reuben John, of Hunters estate agents in Stoke Newington, said: “A month ago, most of our buyers were families. Now we have a new demographi­c of first-time buyers who think the market has bottomed out.”

These first-timers account for 65pc of the market – up from less than 20pc a year ago. In Hackney, flat values are down between 10pc and 15pc since the pandemic began, said Mr John. Sellers are seeking more space in the wake of lockdown, he said. They want to move quickly to take advantage of the stamp duty holiday, newly extended for three months to June 30 at the £500,000 nilrate band, on their onward purchase.

Justin Richardson, of Winkworth estate agents in Beaconsfie­ld, said: “Historical­ly, about 25pc of our pipeline of buyers come from London. Since the first lockdown, that has jumped to more than 40pc.”

First-time buyers who want to purchase a detached house will have to travel further afield. Basildon, in Essex, is the most expensive local authority area where this will become possible. The average detached house here costs £596,410, meaning monthly mortgage payments at 1.75pc with a 5pc deposit will be £2,024.

It is followed by Edinburgh, where detached houses cost £594,200 and monthly repayments will be £2,017. Bexley and Barking and Dagenham are the only London boroughs where first-time buyers will be able to afford a detached house.

Britain’s biggest brokers are warning about the dangers of speculativ­e investing as trading levels soar and their customers pile into risky stock market bets.

Trading by customers of Hargreaves Lansdown doubled last year, while data from rival Interactiv­e Investor shows 2020’s record levels are set to be broken in 2021.

Interactiv­e Investor’s clients made 32pc more trades in the first two months of this year than during the same period in 2020. Trading levels over the course of last year were up 50pc on 2019.

Lee Wild, of Interactiv­e Investor, said: “Last year was record- breaking for trading, but in 2021 we have already seen some new record highs.”

This surge in trading activity has been coupled with customers flocking to risky shares. Since the turn of the year, shares in Bitcoin miner Argo Blockchain have been the mostbought by customers of Hargreaves, Interactiv­e and AJ Bell, Britain’s three biggest brokers. The stock is up 4,800pc over the past six months.

GameStop, the American video games retailer whose shares surged from $17 (£12) to a peak of $483 this year before crashing 74pc, is among the top 10 most bought in 2021 among customers of all three. Investors piled in as traders congregati­ng on Reddit, an internet forum, sent shares soaring.

Mr Wild said customer trading had surged after stock markets were hit by the pandemic last year.

That market volatility, coupled with lockdowns that have left those who remained in employment with more disposable income, has led to a rise in speculativ­e investing.

“There will always be active traders and flavour- of-the-month stocks – and these will increase during volatile markets,” he said.

Tom Selby, of AJ Bell, said while greater trading activity was a natural result of volatile markets, “what is concerning is a new generation of investors who are simply investing in things because of what they see on social media”.

Susannah Streeter of Hargreaves Lansdown acknowledg­ed that “some of these speculativ­e shares have become more sought after” by its customers, and that the broker was “helping investors to understand the risks of speculatin­g on hot stocks”.

Hargreaves has this month started displaying a warning to customers on its app, flagging the dangers of stock

‘People investing for the first time could get their fingers burned’

market speculatio­n, saying those who bought into shares heavily promoted on social media risked “being caught out when the bubble bursts”.

AJ Bell has warned its customers against a “devil-may- care attitude to risk” that comes with investing in speculativ­e stocks.

Interactiv­e Investor said those trying to double their money by buying ramped- up shares were “gambling rather than investing”.

Richard Hunter, of Interactiv­e Investor, said increasing interest in the stock market from younger investors, “with their generally higher attitude to risk”, could be contributi­ng to the rise in trading levels.

“The worry is that people investing for the first time get their fingers burned and this then puts them off later down the line,” he said. “GameStop will be a painful introducti­on to investing for some.”

Mr Selby said: “Younger investors still need to do their own homework rather than simply following tips from influencer­s, some of whom have experience in the markets which can be counted in months rather than years.”

This bout of inflation is serious and will lead to a damaging rise in interest rates

Chancellor Rishi Sunak’s Budget – whatever you may think of it – has one great virtue: it does not directly attack savers and investors. OK, admittedly the rise in corporatio­n tax is bad for British companies. But given that investors are such sitting ducks with money in shares, Isas, pensions and bank accounts, it is always a relief when a budget does not go for us directly. And that applies all the more when the zeitgeist is fairly hostile to those who are so evil as to try to build up savings for themselves and their families. So with that out of the way, how is the stock market?

My view is that a big change has just taken place. The very particular Covid-19 market of 2020 has given way to a completely different backdrop this year.

In 2020, the pandemic and lockdowns led to polarised markets around the world. Companies that provided services to those staying at home, such as Amazon, Ocado and Netflix, had a bonanza. Shares of these companies soared. But most other companies had a bad time and especially those that depended on high street retail, tourism and live entertainm­ent. Their shares slumped and some even went out of business.

I wholly missed out on the big winners of last year and my portfolio correspond­ingly underperfo­rmed. But now the tables have been turned.

Amazon has fallen by 11pc since early February. Apple, a fellow tech giant, has tumbled 15pc. Meanwhile, the recovery plays and value companies I tend to own have risen nicely. At last my portfolio is outperform­ing and, at the time of writing, has rallied 9pc this year. Thank goodness for that.

But while this makes a nice change, the future looks particular­ly perilous. I have been warning since June last year that the big increases in money supply around the world, and particular­ly in America, would lead to inflation.

As one of those who was around in the 1970s, I reckon this is Groundhog Day. Then, as now, the government boosted the money supply. Then, as now, monetary economists, most notably Prof Tim Congdon, warned that this would lead to inflation.

On both occasions, the government and the Bank of England dismissed the warnings and asserted that any bout of inflation would be a temporary blip.

And now, as in the 1970s, the markets and the Government are belatedly waking up to the danger.

But they are still underestim­ating what is to come. Interest rates will have to rise significan­tly to quell inflation and the economy will get into great difficulty. Companies, mortgage holders and the Government itself – all of which have borrowed heavily – will find themselves struggling to pay the interest. For investors, this will not be an easy future either. Where to put our money when all this is going on? How to try to keep the value of our savings – never mind increase it – in the face of inflation?

One traditiona­l answer is gold. Perhaps, indeed, it will have a surge. But getting your timing right with gold is tricky. Of course, inflation will bring a rise in the gold price in the long run. But in the short term, since inflation brings higher interest rates in its wake, the opportunit­y cost of holding gold will increase and, so far, gold has actually fallen as fears of inflation and higher interest rates have mounted.

What about shares? Yes, I think shares will be all right for the time being. By that, I mean until about May, maybe longer, but they could go bad at any time after that. The Government and most commentato­rs will go on expecting the inflation and the following rise in interest rates to be modest and temporary.

Shares are likely to be hit when it becomes obvious that this bout of inflation is serious and will lead to a damaging rise in interest rates.

I am staying with shares for the time being, but standing close to the exit, ready to reduce my holdings quickly.

One of my tactics since last summer has been to buy into some exchangetr­aded funds that “short” long-term British and American government bonds.

These ETFs are designed to gain if the bonds fall as a result of interest rates going up. Well, long-term interest rates have certainly gone up.

In Britain, the 20-year government bond yield has jumped from 0.7pc to 1.3pc this year, so I have made profits from this trade. But these have been frustratin­gly modest in comparison with the jump in yields. My gains on these ETFs have only been of the order of 4pc to 8pc. Consequent­ly, I am not going to rely on these in future.

There are two or three other possible ways to try to survive the coming inflation, but there is not enough space to discuss them all now.

Suffice to say, none is perfect or 100pc reliable. This is going to be a difficult patch for investors. Good luck to us all!

A“socialist”, previously “anti markets” and “not a natural investor” – this is how Darren Caproli described himself. But the 54-year-old from Manchester has managed to almost double the £100,000 he inherited from his mother in just two years through the stock market.

His portfolio today is valued at about £190,000. Now, he wants to put that money to the common good and invest ethically.

“I help homeless people for a job by developing and delivering homelessne­ss services in Manchester and have been wary of the stock market and its role in society, until I found out about investment trusts and the good they can do for the various sectors they are invested in,” he said.

“I grew up in north Manchester, in the less salubrious side of town, in my grandparen­ts’ house, which I ended up inheriting.

“My grandad was a trade union shop steward and staunch socialist. I know how hard they worked to bring me up properly, so it’s a big deal for me to invest in this way.”

He put about £ 100,000 from the sale of his late mother’s house into a mix of investment companies in 2019, including Scottish Mortgage, City of London, Scottish h American, Herald, Merchants, Baillie aillie Gifford China Growth, Baillie Gifford fford Shin Nippon, Baillie Gifford UK K Growth and Keystone Positive Change. nge.

Some of his selections ections have performed so well ell they are now “overweight”. ght ”. His investment in giant ant technology trust Scottish cottish Mortgage, for example, xample, which doubled investors’ money over er the past 12 months, now ow represents more than n half of his investment­s, , standing at almost £100,000. 00,000.

The portfolio is in need of rebalancin­g and nd Mr Caproli wants to free e up about £ 80,000 for a major home improvemen­t ment for his family in the future.

But can he profit ofit from the stock market et with a clear conscience ce – and without compromisi­ng omising his beliefs?

A 1954 Electrical Trades Union march

Josh Castle, chartered financial planner at Progeny, said:

Ethical investing has become much more mainstream and topical. There are certainly ways to invest more ethically and a number of portfolios and funds offer this.

Mr Caproli needs to decide what ethical investing means to him, as different portfolio solutions will have different criteria. Some may invest in companies that are working towards being green, while others may only invest in companies that already hit these targets.

One example of this is BP, the oil giant. Some funds will exclude BP as it is one of the largest oil companies in the world, whereas other funds are happy to include it as it moves towards becoming a greener company.

He also needs to be aware of “greenwashi­ng”, which is where investment­s brand themselves as ethical – whereas in reality they show very little underlying change in their profile.

When selecting where to invest, he needs to be sure to read the fund documents showing the objective of the fund and the top 10 underlying holdings to get a true picture of its credential­s.

It is also important Mr Caproli establishe­s how much risk he wants to take on over the years, which will be one of the factors that will help to define the contents of his portfoli portfolio.

So far, his investm investment­s have performed very well. However, his portfolio is very high r risk and is made up almost entirely of investment­s in shares, which are susceptibl­e to the ups and downs of market forces. If he decid decides to continue with this high-risk portfolio portfolio, he should set aside the £80,000 he will nee need for his house improve improvemen­ts plans beforem before making any further dec decisions. He could take this from the large Scottish M Mortgage holding and pa park it in a savings account un until he needs it.

Faye y Silver, wealth manager g at Raym Raymond James, said:

Mr Caproli Caproli’s portfolio has shone over t the past two years and is sprea spread equally across three globa global sectors: Europe,

Asia and North America.

However, the Scottish Mortgage fund is overweight, giving him considerab­le exposure to tech stocks, including Tesla. While the portfolio is balanced geographic­ally, Mr Caproli should reduce this holding so he doesn’t have too many eggs in one basket.

His holdings are mainly investment trusts that in turn invest in the stock market. This may make the portfolio too volatile. A balance of stock market holdings and defensivel­y placed investment­s would be more appropriat­e.

Moving money into some lower-risk funds would help preserve his inheritanc­e and the profits he has made so far, which could then be used for his home improvemen­ts in the coming years.

Taking profit from Scottish Mortgage would also give Mr Caproli the opportunit­y to explore investment­s that reflect his social and political views. He can put £20,000 into a tax-free Isa in the next tax year.

I would recommend reducing his exposure to Scottish Mortgage from about 50pc of the portfolio to just 20pc by selling all of his non-Isa investment­s he holds in his trading account, which – as I can see from his notes – total more than £70,000. He can then reallocate about £10,000 of this to his new Isa. He can then top up the rest of his Isa with a further £10,000 investment in Keystone Positive Change, an ethical fund he already owns.

This would leave a balance of about £50,000 to invest elsewhere.

He could consider the VT Gravis Clean Energy Income Fund and Home REIT. The former started in 2017 and returned almost 30pc last year. It is a lower-risk global holding, which invests 55pc in Britain and has about two thirds of the fund invested in wind and solar power. It should yield some 4.5pc.

Home REIT launched last year and invests in accommodat­ion for the homeless, which is let to charities and local government-funded housing associatio­ns. It targets areas where expenditur­e on temporary B&B accommodat­ion is high. This may suit Mr Caproli, given his job, and property investment­s tend to be less volatile than stock market holdings.

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Suburban towns such as Kingston upon Thames have seen an influx of movers
Flat prices in inner London areas such as Hackney have fallen recently Suburban towns such as Kingston upon Thames have seen an influx of movers
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Venezuela’s Bolivar, devalued by inflation, is used to make handicraft­s
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