This is probably quite a tough call for you at the moment. Do you find a home you can afford and purchase the property or do you wait, hoping prices will come down and you can get on the ladder for less money?
The only way to answer this is to run through some scenarios so you can think through your own circumstances. Ideally talk to local agents and particularly an independent mortgage broker.
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SCENARIO ONE: Prices fall, rates rise
This is probably the worst case scenario that you buy now and prices fall and the mortgage you took out goes up, too. If this gets really bad, it may mean you end up selling your home for less than your mortgage (negative equity), meaning you still have to pay back the lender the money you owe.
During the credit crunch – which was one of the worst house price crashes we’ve seen – house prices in Northern Ireland fell by up to 50% and, after eight years still haven’t recovered. In contrast, take somewhere like Barnet where prices fell by around 14% for 17 months. Now, eight years later, property prices are 45% higher than they were at the height of the market.
From a mortgage rate perspective, you can fix these with the help of an independent mortgage broker so that you can afford them on-going and you can also protect yourself against job loss and sickness should something go wrong during your ownership.
What’s the downside?
One potential problem is if you buy now with a partner, split up later and the other one cannot afford to buy you out. This is especially a problem if you have bought under the Help to Buy scheme and can’t rent the property out as an alternative.
Also if you are in an area which currently hasn’t recovered pre credit crunch property prices, it may mean you are stuck in the property for years waiting for prices to recover. For example, areas such as Liverpool, Bradford and Sunderland are still seeing prices not move much and may see falls into the autumn.
What’s the upside?
If buying a property now means you lock in great mortgage rates and spend less each month owning a property than you would renting, as long as you can hold onto that property until prices recover, it’s still a cheaper way (long-term) to put a roof over your head, irrespective of what’s happening to property prices.
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SCENARIO TWO: Prices fall, mortgage rates increase for first-time buyers
If prices for properties do fall, then this could spook lenders who may then increase their rates for high loan-to-values (LTV) of 90-95%, making your monthly payments a lot higher. So if you wait for prices to fall so you can buy for less, you may then end up losing a great mortgage deal. This means that, although you paid less for the property, the cost of the mortgage may not be much less.
For example if you buy a property for £110,000 with a mortgage of £100,000, repayment at 3% will cost you £478.56 per month.
However, if you buy the property for £100,000 with a mortgage of £90,000, repayment at a higher rate of 4.5% will actually cost you £505.79.
Of course if you buy in at a lower rate and prices rise rapidly when the economy recovers, the property rises to £120,000, it would have been worth spending more on mortgage finance as your deposit for the next property would be higher.
What mortgage should you choose? Read - How to Secure the Right Mortgage for You
SCENARIO THREE: Prices dip temporarily then rise quickly
What you might find is that, as buyers are currently spooked over the next few months, prices do start coming down, but if markets and confidence recover, the property you could have bought now may come down in price temporarily or just remain the same. But if people’s confidence returns in September, when the buying season often rallies, then prices may rise rapidly – meaning they rise out of your reach or you end up paying more and taking out a higher mortgage.
What should you do?
It really depends how long you want to stay in the property and what protection you can secure so you are never forced to sell it. Another way of protecting yourself is being able to have a spare bedroom you can rent out for up to £7,500 per year, free of tax.
Whenever you buy a property for the first time, you are buying into the ‘market’, probably for the rest of your life.
Often during your property-owning life, you will buy one property that you don’t make any money on, or even lose some money on. The first property I bought, I didn’t make any money at all as I bought it during the 1990s recession. I did though make money on subsequent properties. Other people might make money on their first property, but then lose a bit on the next one or make nothing.
The key is the cost of putting a roof over your head – will it be more expensive to rent for the next few years than buying or vice versa? Do you want to live with the fear of negative equity or having to move regularly depending on how long you can rent from a landlord for? Or are you happy just living with mum and dad or mates for now while you watch what happens to the market?
Take advice, speak to a mortgage broker, ask me questions and consider which of the above scenarios you are most comfortable with.
Whatever you decide to do, you need a roof over your head and to sleep at night without worrying about it!
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