Mortgage clinic: 'Should we carry on renting until prices drop?'

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The Independent Online

'My partner and I spend a total of £650 a month on rent. We'd like a place of our own, but a mortgage on a similar house would cost hundreds more. Should we carry on renting until prices come down? Or is there a particular type of mortgage that might make things easier for us?'

SH, by email

It is hard to say whether you should rent or buy, as it is very hard to predict whether house prices will rise or fall over the next few months.

The Halifax's most recent house-price index put average prices down by 0.6 per cent in September. But Nationwide suggested that prices rose in October. Both agree that annual house- price inflation is running at around 10 per cent.

The national house-price surveys also only provide average figures. But the picture where you live could be different. Using Halifax figures, house prices rose 18.6 per cent in London in the 12 months to September, against just 4.7 per cent in the West Midlands.

Research how the market is faring where you are – talk to neighbours, look at property adverts and ask estate agents. If several agents tell you their clients are open to offers on a property, it could suggest that prices are heading downwards. As a first-time buyer, you could negotiate a good price on your new home.

More important is your longer-term attitude to home ownership. Rents have not kept up with house-price inflation recently, which is why it will cost you more to own than to rent. But if rents start to rise, that gap will close.

You might also prefer to buy, because you want stability, or to redecorate or alter the property to suit your needs, or to update somewhere and sell on at a profit. And if you do decide to buy, there are several ways that you can maximise your spending power.

According to Katie Tucker, technical specialist at mortgage brokers John Charcol, your rent of £650 a month would give you an interest-only mortgage at 5.5 per cent of £142,000.

If you preferred a repayment mortgage, you could borrow £121,000 with a 35- year term. You might find better deals if you have a big deposit; Tucker suggests asking relatives for a lump sum, perhaps in return for a share of the property.

Another way of easing the burden of buying is to opt for a stepped mortgage. Tucker suggests a stepped rate from Norwich and Peterborough, currently 4.98 per cent in year one (£589 a month for a £142,000 loan), rising to 0.65 per cent over the Bank of England's base rate after that. This could give you some extra money to cover moving or redecorating costs in the first year.

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