Monday, January 26, 2015
Changes to the Stamp Duty system puts the cost of buying and selling in the UK below much of Europe
• The cost of the average UK housing transaction as a proportion of the property purchase price has fallen from 6.7% to 5.7%, making it cheaper to move home.
• Despite Stamp Duty reform, ‘Cliff edges’ remain for new properties coming onto the market, as the true impact of the changes take some time to play out
• The amount mortgage borrowers are able to overpay on their mortgage without penalty is now at the highest level for 30 years, and an increasingly important consideration for buyers extending mortgage terms to meet tougher affordability criteria
Stamp Duty: only part of the cost of a housing transaction
The decision of Chancellor George Osborne to revise the Stamp Duty Land Tax system and cut the cost of the average Stamp Duty bill will serve to cut the total cost of the average housing transaction from 6.7% to 5.7% of the purchase price, according to research by Countrywide plc in its Q4 2014 Quarterly Market Review.
This saving makes the cost of buying or selling a property in the UK cheaper than it has been and increasingly competitive in comparison to the rest of Europe. In EU countries where the cost of buying and selling are lowest, more transactions tend to take place. Broadly speaking, for every 1% reduction in transaction costs, the total number of sales grows by 2%. [See Appendix A]
The UK is one of only a few of countries where the cost associated with buying and selling is falling. Post market downturn, and in a bid to increase tax revenue, a number of southern European countries imposed a raft of new property taxes. They are payable on the purchase, occupancy and sale of residential property. In many cases this has been because property taxes have proved particularly difficult to avoid, with the state controlling the registration of property every time a home is bought and sold. Alongside the effect of the recession, the effect of substantially hiking taxes on housing transactions has contributed to the collapse in transaction levels. In Greece, the last 12 months saw transactions running at less than 15% of the 2007 rate.
Commenting Robert Scarff, Managing Director of Countrywide Estate Agents said:
“The new Stamp Duty system is likely to attract more homebuyers to the market and so for those who are thinking of selling their property, there has never been a better time. Equally for buyers, a stable interest rate environment and the availability of a range of attractive mortgage products, means that now is an ideal time to purchase a home.
“In the UK, Stamp Duty will fall from around a quarter of the cost of the transaction, down from a third prior to 4th December 2014. Solicitor, estate agent, surveyor, mortgage and search fees account for the remainder of the cost and by international standards are relatively low. This cut is not only good for the economy by encouraging more people to move home but also for creating jobs in associated services. It is also efficient, as the government benefits if people can afford to move more easily to follow a job opportunity.”
Stamp Duty reform: the early signs
The early signs suggest that the effect of the Stamp Duty reform will take some time to play out, particularly on the lower rungs of the property market. The number of properties coming on to the market immediately above the former £125,000, £250,000 and £500,000 thresholds remain virtually unchanged despite buyers no longer facing a jump in Stamp Duty costs at this point. Agents have continued to price new instructions outside these ‘dead zones’. Prior to George Osborne’s reform, just 0.6% of properties coming onto the market were priced between £250,000 and £260,000. Since 4th January, this figure has risen to just 0.7%. By way of comparison, 5% of new properties were priced between £240,000 and £250,000, a figure which has remained unchanged. [See Appendix B]
Commenting Robert Scarff said:
“The true impact of the Stamp Duty reform will take some time to become fully apparent. After almost two decades, many of the ‘cliff edges’ are established in the minds of both buyers and sellers. The previous Stamp Duty thresholds have also served to set prices with properties coming onto the market at just below or well above Stamp Duty thresholds. The price distribution of new listings since 4th December 2014 shows these ‘cliff edges’ are still very much in existence. It will take months or perhaps years before we see prices reflect these changes.”
The growing importance of mortgage overpayment
Between early 2007 and the end of 2014, the proportion of first time buyers who took out a mortgage with a term in excess of 30 years rose from 24% to 37%. This stretch isn’t simply a product of un-affordability as house prices across two thirds of the country remain below their 2007 peak. By stretching the mortgage term, borrowers are able to show lenders under tighter assessment criteria they can more easily service repayments today and at higher rates.
Longer mortgage terms means the ability to make overpayments is now a feature of mortgages which is more important than ever to borrowers. Mortgage lenders have increased the amount borrowers are able to overpay without penalty to the highest level for over 30 years. While a growing number of lenders now offer fixed rate products which allow unlimited overpayments provided the mortgage isn’t fully redeemed, most make a charge for payments above a certain level. Most mortgage products allow around 10% of the mortgage balance to be overpaid annually. Whether this is 10% of the initial loan or 10% of the previous year’s closing balance, the amount makes a substantial difference to the time in which a mortgage can be paid off. [See Appendix C]
The increased ability to make overpayment is primarily a product of the stable cost of finance. With the Bank of England base rate held at 0.5% since 2009, the cost of accessing finance for both lenders and borrowers has fallen substantially. With the cost of finance remaining relatively static in historic terms, the cost to lenders of borrowers extracting themselves from a mortgage has fallen.
Commenting Nigel Stockton, Financial Services Director, Countrywide plc, said:
“Statistics from the Council of Mortgage Lenders show that in November 2014 the average quoted interest rate for a 2-year fixed mortgage reached a historic low of 2.16%. This, along with recent changes to the Stamp Duty Land Tax system and the fact that the Bank of England continue to keep the Base Rate at an historic low, is evidence that now is a great opportunity for those coming to the end of their initial incentive period to review their remortgage options, for first time buyers to get on the housing ladder, for second time movers and for investors wanting to increase their buy-to-let portfolio. Working with a mortgage broker, such as Countrywide, can help you find the best mortgage deal for your circumstances and save you money both in the short and long term.
“With little interest offered on savings accounts, making overpayments on a mortgage can make financial sense for many. Despite the most generous penalty free overpayment allowances in 30 years, for someone who is in a position to make substantial overpayments, it pays to read the small print of the contract. The difference between being able to make overpayments based on initial mortgage balance rather than the previous year’s closing balance can mean repaying a mortgage in eight rather than 15 years.”
Appendix to the press release
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