Those wanting to move on to or up the housing ladder face a dilemma. The evidence for rising house prices is now overwhelming, and not confined to London.
Data from the Royal Institution of Chartered Surveyors shows prices rising everywhere, including regions such as the Midlands and North, which, till now, have seen little recovery.
Prosective buyers fear that if they do not act swiftly property will drift even further out of their reach. But common sense warns against borrowing too much when mortgage rates are their lowest in history. Whatever happens, the cost of borrowing is going to rise over the medium and longer term.
How fast are prices predicted to rise?
Forecasts vary but most commentators talk of “modest” growth over coming years rather than runaway inflation. Halifax expects prices to “continue to rise gradually through this year” and rival lender Nationwide Building Society is equally cautious. In numerical terms analyst Rightmove predicts 4pc growth this year, broadly in line with other predictions. But forecasts have been edging up.
Savills, the estate agent, last year raised its predicted rise from 0.5pc to 3.5pc. This radical increase was mainly to do with the effects of government initiatives such as Help to Buy and Funding for Lending, both of which have pushed mortgage rates down, Savills said. “A combination of low interest rates and stimulus measures means there is capacity for improved price growth over the next three years or so.”
What will happen to mortgage rates?
In the short term they are likely to remain low or even fall further. Two-year fixed rates are now available at under 1.5pc, the lowest rate ever. Longer-term fixes are also very cheap. According to broker the Mortgage Advice Bureau (MAB), five-year rates average 3.83pc. The best available deals over five years are priced at under 3%.
The MAB predicted: “Many lenders are primed for a busy (period) as they chase ambitious targets. With new lenders entering the market and plenty of capital from the Funding for Lending scheme to bring into play, the range of borrowing options is likely to improve even further across the board.”
What are the risks of a “housing bubble”?
Critics of Help to Buy and the Government’s other policies warn that house prices could be driven too high too fast, leading to the risk of a correction. Home buyers who had taken out large mortgages could then be exposed. The Building Societies Association has warned of this risk.
Some argue that this scenario is unlikely. Increased housebuilding could mop up part of the growing demand, for example. And wider inflation could mean that in real terms house prices are merely “catching up”. Accountant PwC worked out that even with annual price rises of 3pc to 4pc, it would take until 2021 for prices to reach 2007 highs after inflation was factored in.
Cook expects that higher growth in house prices now will moderate as rate rises come in future years. He said today’s growth “comes at the price of lower price growth in 2016-17, when interest rates are expected to start rising. Overall, this means that on an inflation-adjusted basis our revised forecasts indicate that prices will increase by just 2.3pc over the next five years.”
The type of mortgages that borrowers take could also alleviate “rate shock” when eventually mortgage rates normalise. Data about the resurgence of first-time buyers shows the vast majority of first-timers were fixing their rates, giving protection against future increases at least for some years. 86% of all current mortgage lending is on fixed rates.
What is ‘Help to Buy’ and should I use it?
Help to Buy was a policy unveiled by the Government in the March 2013 Budget. The first phase began in April and the second in January 2014.
First phase (new homes only): Those with a 5% deposit can borrow up to 20% of the value of a new home from the Government in the form of a loan that is interest-free for the first five years. The remainder is funded through a mortgage via one of the participating lenders, such as Nationwide, Woolwich, Halifax or NatWest.
Most offer specific Help to Buy mortgages, though Nationwide allows access to its usual product range. Borrowers can get much better rates than those normally available to those with just a 5% deposit, as they effectively have a 25% down payment. Rates start at 2.44% fixed for two years or 2.64% for three years, both from Nationwide and with a £499 fee.
After five years, if the government loan has not been repaid, it will start to incur interest at a starting rate of 1.75%, rising by 1% (of that figure) per year, plus inflation. So if inflation were 2%, the mortgage rate the following year would be 1.8%. Letting out the home is not allowed.
Second phase (new and existing homes): Borrowers still need a 5% deposit, while the lender will be able to buy a guarantee from the Government covering up to 15% of the value of the property. Help to Buy is open to people moving home as well as first-time buyers, so has more scope than previous government schemes. There is no limit on the level of your income but the value of the property must be no more than £600,000.
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