Reader Question:
My wife and I are almost ready to buy a house. We currently have a 10% deposit and are looking for a house around £170-180,000. We want to move out ASAP but wonder whether it's worth saving more and buying in 2012. I just wanted to know if mortgage interest rates/house prices will fall by a substantial amount in 2012 or if we're better off buying now?
My response:
It's an interesting question but unfortunately it requires a bit of crystal ball gazing. The short answer is no one knows for sure.
Where are house prices headed?
First of all if we look at house prices - then yes they are likely to continue to fall, if you believe most analysts, but it depends on where you are buying. As you know London prices have stabilised while prices in other parts of the country prices have plummeted. One thing for certain is that you will never catch the bottom of the market. I guess your main concern is falling into negative equity once you've bought a place (i.e. your house becomes worth less than the amount you owe on your mortgage) but that' the chance you take.
One way to stave off negative equity
One way to potentially combat this is take out a 'repayment mortgage 'rather than' interest only'. While it will be more expensive, each month you repay some of the money you have borrowed as well as clear some of the interest accrued. With an interest only mortgage your monthly mortgage payments only clear the interest on the amount borrowed. So if you borrow £150,000 over 25 years on interest only, at the end of this term you will still owe £150,000 to the bank. All you've done is clear the interest. With a repayment mortgage you will have higher monthly repayment costs but on the flip side after 25 years you will not owe any money to the bank as the loan has been repaid.
Now, let's say you bought a house for £170,000 with a mortgage of £150,000. And let’s pretend that the price then fell to £140,000.
If you had an interest only mortgage then your house would be worth £140,000 but your outstanding mortgage would still be £150,000. Consequently you wouldn't be able to move home again unless you paid the bank £10,000 as the sale price wouldn't clear your debt
If however you had a repayment mortgage. Then when the house price fell to £140,000 your mortgage might only be £130,000 as you had repaid some of your loan through your monthly mortgage repayments. Consequently you'd have £10,000 equity left in your property. Admittedly a lot less than what you had when you bought the house but at least you'd be able to move.
Will mortgages get cheaper?
In answer to your other question on mortgage rates. As you probably know mortgage rates are at historic lows because the Bank of England's Base Rate is at only 0.5%. But mortgage rates are at historic lows for those people with large deposits or equity in their homes. As you allude to, the lower the deposit you have the worse the mortgage deal you get. So it pays to save up as much as possible.
But there is a trade off. Take me as an example. I bought my house at the top of the market (mid 2007). Since then my house price has fallen to below what I paid for it and possibly below what I initially borrowed as a mortgage. But as I have a repayment mortgage my outstanding debt is probably less than the value of the house. So the upshot is that I won't have to wait until my house goes back up in price if I need to move (of course the other alternative would be to save/find money from elsewhere). But while the fall in price is a bummer had I not bought when I did I would still be renting now. That's because no one would have lent to me (at least on affordable terms) with the deposit I had. So while my house price fell I don't really care as it doesn't mean too much unless I plan to sell. But on the flip side I have a house.
I suppose what I'm getting at is that the biggest decider for you will probably be if you can get someone to lend to you and how much and at what rate. These days things have eased a bit so you might be OK. But there's nothing to say that lenders won't tighten up again. In order to make sure you get a decent mortgage deal speak to an independent mortgage adviser. If you can get a cracking deal and find a house you love then that will be a clincher. My view is a home is a home rather than an investment as such. Just be mindful that you might want to move after a few years to a bigger place if you have kids. So you might not want a tiny flat.
Try this affordability test
Oh and one more thing. Any rate you borrow at i.e. 5% etc is based on the Bank of England Base rate being so low now. If this soars (which it will eventually) then so will your monthly mortgage repayments (assuming you are not still on a fixed rate deal). In the bad old days of the early 90s interest rates went up to over 13%! So do a damage limitation exercise to see how much your mortgage repayments would be if rates shot up to these high levels. Could you cope? This handy mortgage calculator will help you.
Summary
I hope that all makes sense. To sum up, you will never buy at the right time (if there ever is such a thing) but if you know the potential pitfalls and allow for them then that's the best you can do.
Remember to keep an eye on my Latest Interest Rate Predictions for the latest on interest rates. Or better still sign up to my newsletter to get all my articles and analysis delivered to your inbox every fortnight.
Finally, for more information on the different costs and to find out ways you could make buying a home possible and less daunting (including home ownership schemes) then visit this useful page on the directgov website.
Good luck
Damien
Money to the Masses
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