The UK has one of the highest home owning percentage rates in the world. No matter how many times we experience boom or bust, the British like the idea of buying their own home.
Part of the attraction is not just financial, but the sentiment of owning your own home, not worrying about having unreputable landlords, and being able to paint your walls whatever colour you want.
Owning a home does bring more responsibility. But unless we are frequently moving around the country, most people would buy if given the opportunity.
Yet, for first time buyers, the ratio of house prices to earnings means that it is very difficult to buy – unless you can borrow from The Bank of Mum and Dad or be helped by the UK State.
So, is it really worth the effort, or are we better off renting? Does our sentimental attraction to buying our own castle make sense?
Let’s first consider the advantage of buying a property…
The end is in sight
A mortgage may last for 25 or 30 years, but there will eventually be an end to the mortgage payments, which means the hope of being able to live rent-free for your remaining years.
In this way, paying off a mortgage is similar to saving for a pension. If market rent is £800 a month, then finally paying off your mortgage will be the equivalent of saving that cost of renting.
With rising life expectancy, people are living longer. Therefore, the benefit of paying off your mortgage is increasing, too. The old saying that ‘rent is dead money’ is true, of course, it depends how old you are, and how long you imagine you may live. If you are 40-years old, getting a 30-year mortgage may not seem to give much benefit. But, if you live to 90 years, that would still be 20 years of rent free accommodation! Rents also rise with inflation; often in the UK they rise faster than inflation.
What about fluctuating interest rates?
Interest rates are currently exceptionally low. The most likely scenario is for rates to increase to 5% in the medium to long term, though it is not a foregone conclusion – Japan has had pretty much zero interest rates for over a decade.
Clearly, affordability is being helped by these record low rates. When buying however you need to budget for rates of 5%, and bear in mind that rates have risen to over 10% in living memory.
We encourage you to experiment with a mortgage repayment calculator to see how the costs would vary with higher rates.
It may seem the prospect of base rates jumping from 0.25% to 5% would dramatically increase the cost of mortgages, but many lenders have not passed on the full base rate cuts onto consumers. If base rates rise to 5%, the actual mortgage payment you pay is unlikely to go up as much.
As a rule of thumb, look at the cost of the longest fixed rate mortgage and not the variable mortgages.
Housing as investment
There are two types of house buyers. One type buys a house to live in rather than rent. The other type invests in property – usually via buy-to-let – hoping for an equity gain.
The first type, the average householder, is less affected by fluctuations in house prices. The key thing is the cost of mortgage payments and the other bills.
In contrast, the buy-to-let investor is much more concerned with gaining equity in addition to income. And that requires rising prices.
Forecasting UK house prices is a tricky business. The professionals often get it wrong, and some have actually given up trying to make house price predictions.
- On the one hand, house price to earnings ratios are very high compared to previous decades and also compared to other countries.
- On the other hand, the UK has a shortage of housing that is unlikely to be solved anytime soon. This shortage of housing compared to the number of households means property could continue to be attractive for the medium to long term.
It is worth looking at your local area and considering how much you pay to rent versus how much mortgage payments would be (assuming a good fixed rate mortgage).
Mortgage rates are so competitive at the moment and sourcing a good Independent Mortgage broker, like ours, will go an extraordinarily long way in obtaining the one that’s right for you.
For more information on mortgages contact Cy Cotterill, one of our independent mortgage advisers at Temple Mortgages on 01305 213150
The Financial Conduct Authority does not regulate Buy to let mortgages. Your home maybe repossessed if you do not keep up repayment on your mortgage.