As rents rise, there may not be a better time to buy
Cheap mortgages can help you, not your landlord, benefit from the market, says Chiara Cavaglieri
Saturday 28 September 2013
Aspiring homeowners plagued by ever-rising rents must be sorely tempted by some of the cheap mortgages on offer today. Government schemes have prompted lenders to slash interest rates and, for those who can scrape a deposit together, buying property is an attractive prospect. With property prices rising in many parts of the UK, it could be the right time to snap something up before it's out of reach, but there are dangers.
There can be little doubt that there are some attractive mortgages on the market with two-year fixes at under 2 per cent and the best buy five-year fixes under 3 per cent.
New research from mortgage provider Halifax has shown that buying a typical three-bedroom property instead of renting it would leave you close to £900 a year better off. Five years ago in 2008 it was tenants who were sitting pretty – the average monthly cost associated with home buying was 49 per cent higher than renting – but today costs for owners have fallen by 37 per cent.
Halifax says that buying a house is now more affordable than renting in all but two regions in the UK (Yorkshire and the Humber and Wales). On average, monthly buying costs in June 2013 were £672, compared to £745 for rental costs, a difference of £73 (10 per cent). The calculations do take into account buying costs, income lost by funding a deposit rather than saving, and spending on household maintenance, repair and insurance, but it is lower mortgage payments that have made the difference.
The Bank of England's Funding for Lending Scheme (FLS) has delivered cheap loans to banks and mortgage rates have consequently been pushed down to historic lows. At the same time, private rents in the UK rose by 1.2 per cent in the 12 months to August 2013, according to the Office for National Statistics (ONS).
"Mortgage rates are at historic lows and are only likely to go up in the medium to long term. Rents are rising in certain parts of the country too which makes a good argument that those in a position to buy should seriously consider it," says Ben Thompson of Legal & General Mortgage Club.
The biggest obstacle to home ownership is still the deposit – mortgages available to those with just 5 per cent of the purchase price are relatively expensive and although there is more choice if you have a 10 per cent deposit, it is a real challenge for many people to save enough money, particularly while rents are high and wages are stagnant. However, there are more 90 and 95 per cent mortgages coming to market and there are more opportunities for first-time buyers (FTBs) to get on the ladder thanks to lenders relaxing their criteria and Government assistance in the shape of Help to Buy.
Depending on circumstances and credit score, borrowers may be able to get a mortgage of four times their income, says Adrian Anderson, director of mortgage broker Anderson Harris, although lenders look more at general affordability now rather than strict income multiples.
"While the best mortgage rates remain available to those with the biggest deposits, rates have fallen across the loan-to-value (LTV) curve which means even those with more modest deposits are paying less," he says.
So does all this mean it's a great time to buy?
No one can predict the future of the UK property market, but most people agree one of the main problems is lack of supply. This shortage of housing stock has pushed prices up and fuelled talk of a new bubble. Critics have said that a rush to buy when the second part of Help to Buy comes into play next year (enabling buyers with smaller deposits to buy a home with help from a government guarantee) will stoke up prices and lead to a "boom and bust".
Prices in England are now 0.8 per cent higher than they were before the previous peak in January 2008, according to the latest ONS figures. Investing in an overvalued asset is a worry, however; if you exclude London (where prices have soared by 9.7 per cent over the last 12 months) and the South-East (up 2.6 per cent), the rest of the UK has seen a far more stable 0.8 per cent rise, while Wales, Scotland, the North-East and North-West all saw prices fall.
Price increases in the capital dwarf those in the rest of the UK and this is driven by huge demand for prime property, particularly from wealthy overseas buyers.
Peter Rollings of estate agency Marsh & Parsons says: "London is a market within a market, where the price of property bears little relationship to earning multiples and affordability. Ultimately it relates to supply and demand, and while there are 18 buyers for every available purchase, property is changing hands in record time and for close to the asking price".
Perhaps what is more relevant than the risk of a bubble is what happens when government crutches are removed and interest rates rise. Would buyers be able to afford the increased mortgage costs? Without improved incomes and job security even borrowers on a long-term fix could be in for shock when more realistic rates are introduced.
The good news is that as a homeowner you are paying off your mortgage every month so that you will eventually own an that can be sold to yield a profit. Overpaying while your monthly repayments are low will enable you to pay off the mortgage quickly and therefore pay considerably less in interest overall. This will also help you build up an equity buffer which could prove invaluable down the line.
"Even so, buying a house is one of the biggest financial decisions of your life so rushing into it because the market looks good today can lead to bad decisions and have consequences further down the line," says Mr Thompson. "You also shouldn't rush when it comes to picking a mortgage. Speaking to an adviser can ensure you pick a product suited to your needs".
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