Timing is something first time buyers often get hung up about. Is now the right time to buy your first property in London? Should you wait to see whether house prices go down or the market crashes as some scaremongers are predicting? If the market does crash, what happens if you want to sell in five years?
So many ‘what ifs’ and I haven’t even got started on interest rates yet!
At the end of the day, the best time to buy your first home – whether in London or elsewhere – is when you’re ready. Naturally you should pay attention to what’s happening in the market and economy in general, but it’s your personal circumstances and objectives that matter most.
Do you have a deposit? Can you afford the mortgage repayments – have you stress tested these against possible further interest rate rises? What area do you want to buy in, and what type of property? What about the future? Do you plan to sell and move up the property ladder in the next 3-5 years? All these questions will help you decide whether now is the right time to buy.
First Time Buyer In London
Take for example a first time buyer in their late 20s planning to buy a small flat in London with some cash available from savings and a mortgage offer in principle. They’re fed up with paying rent to a landlord and would like somewhere to call their own.
However, they hope to outgrow that small flat in the next 5 years. Hopefully they will meet someone and want to settle down, start a family etc. Their ‘what if’ is “what if house prices go down and I can’t sell when I want to?”
One thing we should establish is that although the housing market has slowed, property prices in London still remain higher than a year ago. Prices may remain sluggish for the next few years, but most economists agree that a crash is highly unlikely. Credit ratings agency Moody’s has also forecast that if prices did fall by 10% only 0.3% of borrowers in the South of England would go into negative equity.
Even if we did see prices dipping, or a crash on a similar scale to 2007, historically it didn’t take long for prices to recover in London. The national average after the 2007 housing crash was 7 years and 7 months, whereas in London it was 4 years and 7 months before price were back to pre-crash levels.
What About Interest Rates – Can I Afford A Mortgage?
Another ‘what if’ for first time buyers is interest rates. Many people who are considering buying property for the first time have never experienced an interest rate rise in their adult life – which makes it a bit worrying.
Having bought, sold and paid mortgages on properties during periods of much higher interest rate rises I’m not unduly concerned about the latest rise to 0.5% or the forecast that we will see another couple of hikes in the next 2 years. When I took out my first mortgage the base rate was at 7%! However, I appreciate that we’ve had a decade of very low interest rates so any increase may be alarming.
One answer to this ‘what if’ is stress testing. Once you’ve found a mortgage deal that you can afford at 2.0%, for example, see whether you can afford it at 3.5%, 4% or even 6.5%. By law mortgage lenders have to stress test whether you can afford your mortgage repayments if base rates were 3 percentage points higher than they currently are. While this regulation has come into some criticism for ‘locking out’ potential borrowers as 3 percentage points is viewed by some as too high and unrealistic, it does help illustrate how interest rates could impact on your ability to repay your mortgage.
The other solution is, of course, a fixed rate mortgage. With Mark Carney clearly stating that he plans to increase the base rate again in the next two years, securing a fixed rate mortgage now may be a good idea for many first time buyers*.
Another consideration that I think people can lose sight of, is that for most first time buyers the plan is to buy a property and sell in the next 3-5 years. Although a typical mortgage term is 25 years, you may only have that mortgage for a few years before selling up and shopping around for a new house and a new mortgage product.
So in answer to whether now is a good time to buy your first home in London, I would suggest that you start looking at what mortgage lenders would be prepared to allow you to borrow and whether that could secure you a first home. With a better idea of how much you’ve got to spend and how much your repayments will be, you’ll also have a much better idea of whether the timing is right.
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If you are struggling to find a mortgage, give me a call and we can explore your circumstances in more detail. Call 020 3355 4841 or email email@example.com
* subject to your own personal circumstances