Think carefully before joining the rush to beat the house price boom
With interest rates so low, Simon Read explains the pros and cons of jumping on the mortgage ladder now
Worried about rising house prices? Want to rush to get on the housing ladder while interest rates are at a record low? There's a growing fear among potential homeowners that they could miss out if they don't move quickly. But is it being generated by commission-hungry estate agents? Or are we really in a crucial moment that means now is a really good time to buy?
Rather than being persuaded that you must rush to buy, maybe it's better to start by understanding some reasons why you shouldn't rush to buy now. For starters, there's the risk of a property bubble. That's based around the idea that prices have risen too much too quickly and if the bubble bursts, prices could soon fall dramatically.
Will there be a property bubble?
Some experts think so. Last month the majority of economists asked in a Reuters poll put the chances at 50-50 or higher over the next five years. Some 20 out of 29 economists said the prospect of another house price bubble is evens, likely or very likely.
The consequences for anyone buying a home now could be stark: they could quickly end up in negative equity, where they owe more than their home is worth.
“There's been a lot of talk about the formation of a housing bubble and fears over when it is set to burst. But the fact remains that due to the nature of the housing market you will always be, to some extent, taking a risk,” points out Andy Knee, chief executive of conveyancing experts LMS.
In short, fears of a bubble shouldn't deter you from buying a home that you plan to remain in for some time. Negative equity will only affect you if you need to sell quickly.
“You should bear in mind that each monthly payment you make reduces your overall balance and goes some way to offsetting any reduction in the property price that may occur,” says Andrew Hagger, personal finance analyst from moneycomms.co.uk.
For instance if you borrow £130,000 against a property worth £153,000 your £23,000 stake represents 15 per cent, he says.
If you repay the £130,000 over a 25-year term – initially at 3.79 per cent (First Direct with no fee) fixed for the first five years – your monthly repayment will be £672.
At the end of the five-year fix your remaining mortgage balance will have reduced to £112,750.
Even if there is a severe drop in property prices during this period of 20 per cent your property will be worth £122,000, so even though your equity will have reduced so has your balance, and you won't be in negative equity, says Mr Hagger.
What other reasons are there not to buy a home now?
The accepted wisdom about buying a property is only do so when you can afford the mortgage repayments and have found a home in which you are going to be comfortable. Panic buying could mean ending up with a property you soon hate or can't afford to maintain.
“The overarching rule has to be that no-one should rush into buying a property unless they are really sure that it is the right home for them in the medium term, and, of course, that any mortgage borrowing will be affordable,” advises David Hollingworth of brokers London & Country Mortgages.
“Buying a property is much too big a commitment to rush headlong into without getting a real feel of what's available. That's certainly true when there are so many different options and Government-backed initiatives in play, the ins and outs of which really need to be understood before going ahead.”
Other experts echo that advice. Mark Harris, chief executive of broker SPF Private Clients, says: “Don't overstretch yourself financially. Take independent advice when it comes to getting a mortgage, and if you are buying an investment property make sure you do so in an area where it will be easy to find tenants, rather than buying something because you quite like it yourself.”
Brian Murphy, head of lending at Mortgage Advice Bureau, adds: “Ultimately buyers need to make the move to purchase a property when the time is right for them. If they're close to being ready to embark on a property purchase then the current market is an attractive one to get involved in, but encouraging those not yet ready to rush would be a foolish endeavour.”
Is there an argument for buying a home now?
If you have a decent deposit saved, then borrowing while rates remain low could be a good idea. If you have already found your dream home and are ready to move, buying now before prices climb any higher could also be beneficial.
Jonathan Harris, director of broker Anderson Harris, says: “If you have found a property you wish to buy, the price is right and you can afford it, then now is a good time. There are some excellent mortgage rates available and prices in some parts of the country continue to rise, so now is as good a time as any to get on the housing ladder or move up.”
Depending on your current situation, there's an argument for waiting until January for the introduction of the mortgage guarantee element of the Government's Help to Buy scheme. Then new borrowers will only need a 5 per cent deposit and will be able to buy older properties as well as new-builds.
“However, there are fears that property prices may rise because more people will be in a position to buy,” warns Mr Harris. “So it's important to weigh up whether it is worth waiting or taking the plunge now, assuming you can afford to do so.”
Andy Knee says: “Increasing levels of activity and rising demand in the housing market are driving house prices up, so you should take the attitude of the sooner the better. Although the cost of buying a home can be high, with interest rates so low mortgage repayments in many cases can be a cheaper option than renting.”
Mr Hollingworth adds: “The more-competitive mortgage market has made finance more affordable and borrowers can fix at very attractive rates. That will also protect against future rate rises and give them budgeting security if they find the right place and make the decision to take the plunge.”
What's the best mortgage deal?
That obviously depends on your situation. Fixed rates are low at the moment and can give you certainty in the future. In short, if you can afford repayments now, then you should be able to in coming months and years.
But a variable rate deal also has advantages, not least that you're not locked into a five-year term and penalties. If you need flexibility, then variable could be a better answer for you.
“One of the biggest problems is working out which is the best mortgage based on the total cost; not just the interest rate but also the associated fees which can vary enormously between lenders, deposits and individual products,” says Mr Hagger.
“Selecting the most appropriate mortgage isn't a two-minute job because it's not a case of one mortgage fits all. The best deal will also depend on your own personal circumstances including the length of the term and the amount you're looking to borrow.
“When you consider that your mortgage is likely to be the biggest financial transaction you'll undertake in your lifetime, it makes sense to seek advice to ensure you don't make what could be a potentially expensive mistake.”
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