Is now the time to step onto the property ladder?
At the time of writing, in early August 2020, the UK is gradually emerging out of the coronavirus pandemic into the so-called “new normal.” How long it will take to get back to normal, nobody knows. Judging by past pandemics in history it seems likely that we will experience another one, two or even three new waves of Covid-19 as pandemic resurgences are common. I, for one, certainly expect this pandemic to last for at least another couple of years. Will we ever return to normal? Somehow I doubt it.
Whatever your view of the government’s handling of the crisis you cannot say it hasn’t given a lot of financial support to the economy in an effort to kick-start it again. One of the potential beneficiaries of this financial support is the first-time buyer. Why is this?
Well, for starters, the threshold for stamp duty to apply has been increased from £300,000 to £500,000. So first-time buyers can now buy their first home for up to £500,000 and avoid stamp duty altogether.
Base rates have been reduced from 0.75% to 0.1% which means that mortgage rates are now very low for first-time buyers. For example, if you were to buy your first home for £250,000 and pay a 10% deposit of £25,000 the monthly repayment on a £225,000 mortgage for a 5 year fixed rate mortgage would be £1,037 for the first 62 months at a fixed rate of 2.74%. For the next 238 months the monthly repayment would rise to £1,113 at a variable rate of 3.54%. These figures are from a well-known High Street bank. You could, of course, remortgage after 5 years if there are more competitive rates available at the time.
Should you opt for a 5 year fixed rate mortgage? Well, the choice of course is yours, but with interest rates highly likely to rise, a fixed rate mortgage gives you certainty that you can afford the repayments over the first five, critical years of your first mortgage.
What about house prices? Well, unfortunately, Rishi Sunak’s emergency stamp duty holiday has sent property prices up to an all-time high in the short term. The average cost of a home in the UK increased 1.6% in July alone to £241,604, according to latest figures from Halifax. That pushed the annual rate of gain to 3.8% after four months of falling prices. Britain’s biggest mortgage lender said that property was in the throes of a “surprising spike” driven by a wave of demand since the end of lockdown.
Whether this rise in house prices is sustainable is debatable. Personally I doubt very much that house prices will remain high for long because of my comments in the first paragraph. If there is a second wave of the coronavirus in the UK, house prices are likely to suddenly fall again. Traditionally valuations tend to fall in the autumn and winter months anyway as buyers tend to dwindle at this time of the year. So if you were to get onto the housing ladder now I expect you would be able to negotiate a good price for your first home. The key is to exchange contracts and complete your first house purchase before 31 March.
Another reason for buying your first property now is because inflation is predicted to rear its ugly head again. Many expert commentators have stated that this is very probable at this stage of the long term economic cycle. The last time we had such a torrid time with the economy during my lifetime wasn’t the 2008 great financial crisis but in the early seventies when oil prices quadrupled and caused a severe global recession. Inflation soared and averaged in the teens every year during the seventies. The best assets to own were real assets such as shares and property because they rose strongly with inflation. So if history repeats itself, and let’s face it that always appears to be the case, then buying a home now gives you a fighting chance of securing the most valuable asset of your life, inflation proofing that asset and building your property wealth.
Whether my prediction of inflation and house price growth actually occurs or not, most people would agree that it makes sense to step onto the property ladder especially if you are young. Why waste your money on rent when you can spend it on your own house instead? After all an Englishman’s home is his castle, isn’t it?
So what are you waiting for? This is an unprecedentedly good time to buy your first home. You are unlikely to ever get such a good chance to buy one so affordably, well at least in terms of paying no stamp duty and securing a low mortgage interest rate.
So don’t hesitate. Take this opportunity. Go buy that first house. Set yourself up for life and reject Generation Rent once and for all. You know it makes sense.*
*The value of property may rise or fall and you may not get back the full amount you invested. Interest rates may rise and fall over the mortgage term. All mortgages are subject to the applicant(s) meeting the eligibility criteria of lenders. This is a case study only and does not constitute personalised advice and that advice should be sought before taking any action. Make an appointment with a mortgage specialist to receive mortgage advice suitable for your needs and circumstances.