In this first of a series of articles revolving around the rather underrated (in my opinion!) subject of personal finance I wanted to explore the mortgage market, particularly for first time buyers, and then answer the question above.
As we go along we will do a bit of jargon busting, you know how much financial services companies like to confuse all of you out there!
So what is a tracker mortgage? Well it is a variable rate mortgage and the rate is set at a percentage above the Bank of England base rate. This means that the amount you repay each month will go either up or down depending on the base rate. The Bank of England base rate is currently 0.5% and has been at this all time low since March 2009. So when the Bank of England decides to increase the base rate, as it surely will do in the next year, the overall rate for your mortgage will also increase and so will your repayments. It’s a bit like the price of petrol, it goes up and it goes down depending on the price of crude oil.
Therefore, if you are a first time buyer and thinking of purchasing at the moment you will need to take into account the fact that your repayments are likely to increase within the next year when deciding how much you can afford to pay for a property. Don’t let an interest rate increase fool you into thinking that purchasing a property is too expensive as rental payments can also increase year on year.
Loan-to-Value; the amount you can borrow as a percentage of the value of the property
Even if you decide that you can cover a hike in the interest rate you may still find that as a first time buyer you may not get your foot on the property ladder due to the size of the deposit required. Whereas in the good times lenders were willing to lend up to 95% LTV in most cases the deposit required now is significantly higher than 5%. There are a small number of deals available requiring a 5% deposit but these can be expensive in terms of interest rate. Much better deals are available with a 20% deposit but that is not easy to find.
Before moving on to the question posed above let’s have a brief look at the housing market in general and see if there are any trends that can help us come to an answer.
The Council of Mortgages Lenders June survey shows that; “Current indications are that the overall housing market is pretty flat and shows little change in activity levels nationally, with muted buyer appetite and sellers holding off from putting their properties on the market. House prices and house price expectations continue to drift down modestly. London is a notable exception, thanks to the stronger recovery of its economy from recession and its attractiveness to international buyers”.
That’s good news for London home owners, particularly if you are looking to sell and retire to the sun! But what does it mean for first time buyers? The honest answer is that no one really knows although the consensus of opinion appears to be that house prices in general across the country are as likely to go down over the next few years as they are to go up.
Today the adage; location, location, location is even more relevant than it has been in the past as property in quality areas is more likely to maintain its value than property in less desirable locations.
So returning to the question – should you buy or should you rent? From 1996 to 2007 there was only one answer to the question above; buy rather than rent. Now the answer isn’t so clear – it really depends on individual circumstances.
If the cost of the mortgage payment is lower than the rent, the choice is simple. If the mortgage payment is more expensive, the answer is more complex. Where you live is not just a financial decision, it’s an emotional choice. In the current economic climate buying property may not be an investment for a quick profit but it will be a home. When it is your home you can paint the walls orange with purple spots, if you like!
However, before you write off buying a property, remember, it pays to shop around and take advice. If you would like to chat to one of our independent mortgage advisers and let them help you find the deal that is right for you please call 0208 4475592 for a free, no-obligation assessment.
Lyndhurst Financial Management Limited
Authorised and regulated by the Financial Services Authority.
“Your home may be repossessed if you do not keep up repayments on your mortgage”
Geoff Newman, Director