Could it still be the right time to take out a mortgage?

Interest rates are high compared to the last few years, and consequently you may be thinking of dropping the idea of taking on a mortgage altogether. Cleerly William Coe has talked over all the issues with concerned clients over the recent roller-coaster period, and here he suggests five factors you may want to consider, because it could still be the right time to take out a mortgage…

One of the most satisfying things about being a mortgage consultant is advising clients on the best course of action for their future. A mortgage is the single biggest financial commitment anyone will have in their lifetime and it is clearly important to seek professional advice.

With significant changes predicted in the housing market and the current “turbulence” in the mortgage market, there has never been a more important time to seek that advice from a specialist mortgage broker.

Some of my clients at Cleerly have come to the conclusion that now is not the right time, however there are still good reasons to press on and opportunities to take advantage of the current situation…

Property prices are dropping

Although rates are high there is a chance that property prices may fall, which for many may be a huge advantage, potentially bringing attractive home options into reach. During the pandemic the Bank of England reported that house prices increased around 15% , but a lot of the increase was driven by market incentives such as stamp duty discounts and rock bottom interest rates, some rates as low as 0.9%. Following almost 2 years of lockdown many wanted to upsize, downsize, or refinance and as a result, there was heavy demand for property, resulting in a ‘seller’s market’.

A year later finances are very different: inflation has hit double figures, recession is looming, government spending cuts are on the horizon and many other economic factors have resulted in interest rates rising. However a consequence of this is that property prices are now falling 

So why is this happening? There are several reasons. Given the huge rise in energy and food costs on top of high mortgage rates, some owners are selling because they simply cannot afford the payments on their home any more.

Another consideration is that a natural correction in property prices was due after the temporary factors in play during lockdown. Furthermore, the type of market we are entering now is what we would describe a ‘buyers market’.

A further reason is the declining popularity of But-to-Let. Some BTL investors may be wanting to sell off parts of their portfolio because of changes in the BTL tax regime, second property stamp duty rates and forthcoming EPC rules.

Finally a natural correction in property prices is due after the all temporary factors in play in lockdown (the requirement for work from home spaces, the move away from cities and the market incentives listed above) are removed from the equation. Consequently, the type of market we are entering now is firmly a ‘buyers market’.

Traditionally in a buyers market, a property is placed on the market at an asking price but potential buyers would place an offer below this price, with the offer closest to asking price likely to be accepted. Zoopla suggests that asking price reductions have currently hit the highest levels since autumn 2019. So whilst it is true interest rates are rising, house prices are also falling. Therefore you could buy a larger property at a lower price than in the preceding sellers market.

In a falling housing market with increasing interest rates, your net monthly repayments are often the same –  i.e a buying at a lower property price but paying a higher mortgage rate can result in similar, if not the same, monthly payments of a higher property price at a lower mortgage rate.

Be fully prepared to pounce

While prices are falling, for many there are other plenty of other factors involved in wanting to buy a house. Ultimately, potential first time buyers may toy with the idea of buying a property at some stage in their lives but will not know exactly what is required to obtain a mortgage.

For example many of my contractor first time buyer clients are not aware of how much deposit is needed; how much they can borrow; how sensitive their income maybe to changes; how a mortgage works; the house buying process; other costs like SDLT (Stamp Duty); conveyancing fees; lender charges and the impact of their credit history and other borrowing such as loans, credit cards and overdrafts.

Ultimately, obtaining a mortgage as a contractor is complicated because of all of the intricacies involved in a lender making the decision, but a well-informed broker can help explain these in a way that you can easily grasp. The benefit of at least having a conversation with a broker is to get a feel for what is possible at this point in your working life.  At Clerly, we pride ourselves on taking the time to understand your situation in depth, researching what could be possible and feeding all the information back to you clearly, so you know your options.

The benefit to you? There is no commitment on your part, you are not applying for a mortgage at this point and there is no credit search undertaken. Put simply, you will have confidence in what can and cannot be achieved in your circumstances, so when the timing is right you will know exactly your budget, the chances of the loan being approved and consequently avoid disappointment when the right property comes up at the right price.

Keep an open mind to the full range of mortgage products

When I hear interest rates are high, my first reaction is ‘which rates?’. For the past 10 years overall lending rates have been so low for so long, that fixed-rate mortgages have been the default product that most buyers apply for. This was the right thing to do when you could fix at a low rate for the longest period possible – often for five years or even longer.

However now that the interest rates on fixed-rate mortgages have increased in the medium term, it has drawn our attention to other mortgage products that might have been forgotten. Variable rate mortgages are an alternative that were previously popular when rates were higher, because of their flexibility and the potential for significant reductions in repayments as rates drop in future. Variable rate products fall into two categories: tracker mortgages and discount mortgages. However, these are not suitable for everyone and not everyone is eligible, but a standard fixed rate for 2 years maybe in the region of 6% at the time of writing this article whereas a tracker is in the region of 4.5%.

Equally I will often ask my clients the question ‘why does a high-rate concern you? The obvious answer is that it could mean repayments would be unaffordably high, but it could be worth looking into an interest-only mortgage options. Interest-only or “part and part” mortgage options (where one segment of a loan is interest-only and the other on a repayment basis) could dramatically reduce monthly repayments. The long-term implications of these types of mortgage need careful consideration, so a conversation with an experienced mortgage broker to get professional advice is a must.

Finally the term of the mortgage is another significant factor in determining the monthly payments, as the longer the term, the smaller the monthly payment will be. Some lenders now offer terms as long as 40 years, even on fixed rates, but again the intricacies of such deals will require a full understanding of the product that only a specialist broker can give.

Learn from the history of the market

At present many commentators are saying that ‘interest rates are high’, but equally you may ask yourself ‘compared to what?’. If we look at the facts in a historical context it can tell us an awful lot.

Bank of England Base rates

The graph below shows the Bank of England base rate since 2013. What is evident is that the base rate has been lower than at present for almost 10 years! As brokers we have been advising that as rates have been kept low by our central bank for such an extended period, that they will surely rise – and now they have.

However, if I was to tell you that the base rate in 2008 was half as much again as now at 4.5% you might not believe me, but if you look even further back to the early 1990’s the base rate was as high as 13%! The important thing to learn is that we have become very accustomed to low rates of interest for a very long period of time and we are now simply reverting closer to the long term average over the life of a mortgage.

Long term Bank of England base rates

Lenders interest rates

Lenders rates are a little harder to track because of the sheer number of mortgages products and financial institutions to take into account, however we know that  UK mortgages averaged 5.62 percent from 1995 until 2022.

Looking even further back, for that generation of people buying properties from the 1970’s to the 1990’s, property prices were significantly lower in real terms. I remember my parents buying a 3 bed house in Portsmouth in 1993 for £24,000, now in 2022 that same property is worth £297000. Many of this generation will reminisce about high rates at 15% plus, but I quickly remind them that property prices were far cheaper!

The overall point here is that there is a clear link between house prices and interest rates, as high rates have a fairly direct impact on dampening prices. We should bear in mind that we have been enjoying a long period of historically low interest rates which is likely to be ending. Could these two key factors cancel each other out in terms of the overall affordability of your property plans?

Remember your motives for buying

And finally, if you have made is this far, thank you. Sometimes everything we see on TV and in the papers can make us unsure about big financial decision like buying a house. However, we also need to remind ourselves of the motivation and the reasons why we are looking to buy a property:

Rent is dead money – you are simply paying someone else’s mortgage
Just over 4.4 million households live in the private rented sector in England, 19% of all households. By comparison, 17% (4.0 million) live in the social rented sector and 65% (15.4 million) are owner occupiers.’

If you are renting privately, you are one of these 4.4million. For many in this position they would like to buy their own home because:

  • They want to have a place to call their own
  • They want the security of a roof over their head without threat of rent rises and potential evictions
  • Buying a property is an investment (and a relatively safe investment in comparison to many others)
  • You are paying for some else’s investment when you could be paying for your own and getting the benefit of the long-term rise in value of your home

Start “adulting”!

Another big reason for people wanting to buy their own property is that they want independence. Many of my clients are first time buyers and are thinking of buying a property with their long term partners and have outgrown the the family home. As one first time buyer client recently put it to me, ‘this is full on adulting’.

Although I cannot argue that society hammers the message that buying a property is one of life’s big milestones, I can also say as a homeowner that having a place I call my own brings a degree of satisfaction.

Let’s talk when it’s the right time for you
Ultimately, current market conditions don’t have to hamper your motivations to buy your own place. It’s important to take advice from those that know and then make a well informed decision when you have all of the facts. 

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