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Is a ‘friends’ mortgage’ a good idea?

August 31st, 2010

In the past most people that were buying a home either did so alone or with a partner/husband, which was the traditional way of getting a first home. However, things have really changed over recent years, and these days many people cannot afford to buy a home on their own.

This means that many have had to look at alternatives when it comes to moving out from their parents or from rented accommodation and trying to get their foot onto the property ladder, and things aren’t always easy, particularly given the difficulties that many face when it comes to raising a deposit and getting a mortgage in the current financial climate.

One of the solutions that some people have considered is to get a mortgage out with a friend, whereby both friends – or a group – are all in on the mortgage and they buy the property between them. This can certainly solve a few problems, such as being able to raise the amount needed for the deposit and being able to borrow the amount required for the property.

However, this can cause issues in the event that one of the friends involved wants to sell up and move on, as it means that they would have to get rid of their share of the mortgage. Another problem is if there is a falling out, and whilst most friends hope that they will never come to blows to a degree where things cannot be resolved this can happen.

Whilst a friends’ mortgage can be a good way of getting onto the property ladder in the current financial climate it is important for anyone getting involved to ensure that they consider both the pros and cons before making any firm decision or commitment, as things otherwise turn very sour very quickly – and it could end up being a costly mistake.

For those that do not really want to get involved in a mortgage with someone else but do want to get onto the property ladder another solution is to look at shared ownership, where only part of the property is purchased and the remainder is rented through a housing association and can be purchased in stages at a later date as and when the buyer is in a financial position to buy further shares in the home. The buyer then has the choice of buying the remainder of the home until it has all been purchased or remaining a part owner and selling their share when they decide to move on.

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Did You Know?

August 31st, 2010

Tax Benefits of Owning Versus Renting

Existing tax laws allow homeowners to itemize and deduct the mortgage interest and property taxes from their taxable income. In addition, for First-Time Buyers purchasing a home between Jan. 1 and Nov. 30, 2009, the Homebuyer Tax Credit substantially elevates the tax benefit of buying a home this year. For example, consider two households earning the same income—$48,900 a year—which is also the minimum income needed to purchase the statewide entry-level home price of $248,000. The household that purchases a home (First-Time Buyers) at this price along with the prevailing market factors will give that household a tax deduction of over $15,800 in the first year of ownership  as well as the one-time tax credit of $8,000 at that home price. The other household that continues to rent (Renters) will most likely only be eligible for the IRS Standard deduction of $10,900, less than that of their home buying counterparts without even factoring in the $8,000 tax credit. In the first year, the taxable income for the First-Time Buyers is roughly $5,000 lower than that for the Renters, and the difference in the tax liability totals over $8,700 in favor of the First-Time Buyers, mainly due to the Homebuyer Tax Credit in 2009. (C.A.R. News)

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Class action on Nufarm

August 30th, 2010

TWO years of profit downgrades and poor continuous disclosure have left Nufarm facing an imminent shareholder class action over what lawyers have described as ”blatant” misleading and deceptive conduct.

Nufarm’s management credibility has taken a beating after five consecutive profit downgrades in the past two years, punctuated by two cut-price capital raisings. Most recently, it halved its earnings guidance in July to between $55 million and $65 million, despite reassuring investors in March it was on track to meet expectations. Shares in Nufarm have fallen 60 per cent since then, closing at $3.50 yesterday.

Ben Slade, a principal at law firm Maurice Blackburn, said Nufarm had intentionally misled the market by providing unreasonable guidance to ensure the success of its April $250 million capital raising, in actions amounting to ”egregious wrongful conduct”.

”Nufarm has fairly clearly breached its continuous disclosure requirements by making wholly misleading representations about its profit capacity,” Mr Slade said.

Ben Phi, a senior associate at Slater & Gordon, said the earnings guidance Nufarm provided in March ”lacked a reasonable basis” and had therefore misled the market.

Mr Slade said Nufarm would have been aware of the impact of sharp falls in glyphosate prices and tough competition provided by Chinese competitors producing low-cost generic product alternatives. He said Nufarm had failed to update its investors despite numerous opportunities, including when competitor Elders announced a heavy downgrade of its own in June.

Both law firms said they were advanced in preparations to file respective actions, and have ”significant” support from institutional and retail shareholders.

The action is likely to focus on whether Nufarm had intentionally misinformed investors in March to ensure the success of the April raising, as well as the smooth sale of a 20 per cent stake of the company to Sumitomo Chemical in March. The Japanese chemicals giant paid $14 a share for its stake, structured as a tender offer to shareholders which enabled Nufarm’s chief executive, Doug Rathbone, to sell $19.7 million worth of his own holdings.

Nufarm has maintained it has informed the market during the same period and that difficulty with its forecasting systems and the bias of the company’s full-year results towards its final quarter result meant it could not release its profit update earlier.

Nufarm revealed on Tuesday that its net debt had ballooned to $620 million as of the end of July, 37 per cent higher than it forecast on July 14. The blowout has put the company in breach of its second banking covenant, its debt to gearing ratio, having already been in breach of its interest cover ratio.

The company failed to mention the interest cover breach in its initial announcement on July 14, only revealing the breach after fielding a question from the media during a conference call. The company issued a ”clarification” the next morning, and blamed the omission on an ”oversight”.

Nufarm has been forced into talks with its banks to obtain a temporary waiver from its covenants. Nufarm has appointed Deloitte and Gresham Advisory Partners to carry out a review of its business operations.

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Charts: College Tuition vs. Housing Bubble vs. Medical Costs

August 30th, 2010

This chart from (via ) shows the cost of college tuition comparison to historical housing prices and the Consumer Price Index (CPI) over the same period. The CPI is designed to track our cost of living by estimating the average price of consumer goods and services purchased by households. Everything was normalized to 100 starting in 1978.

While housing went up 4x at its peak (~400), college tuition has gone up over 10x. Instapundit Glenn Reynolds says the :

It’s a story of an industry that may sound familiar. The buyers think what they’re buying will appreciate in value, making them rich in the future. The product grows more and more elaborate, and more and more expensive, but the expense is offset by cheap credit provided by sellers eager to encourage buyers to buy.

Buyers see that everyone else is taking on mounds of debt, and so are more comfortable when they do so themselves; besides, for a generation, the value of what they’re buying has gone up steadily. What could go wrong? Everything continues smoothly until, at some point, it doesn’t.

Yes, this sounds like the housing bubble, but I’m afraid it’s also sounding a lot like a still-inflating higher education bubble. And despite (or because of) the fact that my day job involves higher education, I think it’s better for us to face up to what’s going on before the bubble bursts messily.

The college tuition prices being tracked in the chart was done by the CPI for US cities for “College Tuition and Fees”. According to , this tracks actual expenditures by households, and not some measure of median college tuition, which is often just the “retail price” before various forms of financial aid and/or scholarships.

Another hot topic is the rapidly rising cost of health care. Well, college tuition CPI beats that too, from this :

I know that I’m scared to imagine what college will cost in another 20 years. Dealing with this issue will be tricky, with huge amounts of easy government credit being given to 18-year-olds that are being told by everyone (including parents) that it is totally worth it. For many people, it will indeed be worth it. For others, not so much.

In my humble opinion, it also seems obvious that this trend can’t survive forever. But will it burst like a bubble? Perhaps if the government turns off the loans suddenly, but that seems unlikely. I like Reynold’s idea that there may be an educational revolution with the internet, online coursework, and changing educational standards.

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