Those people currently saving up to buy a home face several dilemmas in 2015 – here are the main concerns.
Owning your own home is a great feeling, signifying maturity and financial ability.
It shows that you are ready to move into a new stage of your life, and perhaps ready to ‘settle down’, as the quaint term goes.
However there are reasons to stay renting, or even stay living with parents. Saving money is the obvious benefit of the latter, and young adults living with mum and dad into their mid-twenties and beyond is commonplace in this age of austerity; results from a Nationwide survey showed a fifth of young adults are staying with their parents until they are at least 26, with little or no financial contribution.
Renting offers drawbacks and benefits. Among the downsides are the fact that your money is being swallowed by a landlord’s pockets, and that you have to suffer regular inspection visits. The pluses are that you do not have to pay for repairs, and that moving out can be accomplished quickly - very useful if you get a new job elsewhere.
If you’re living beyond your means while renting then the worst that can really happen is being thrown out of a house you don’t own anyway, and chalking it off to experience. Defaulting on a mortgage is far graver; not only could your house be repossessed and the money you’ve ploughed in evaporate, but the black credit marks against your name could scar your prospects for years or decades.
Click here for guidance to a simple question before buying: can you afford your mortgage?
This is the toughest dilemma for many serious buyers. A buyer will know that the larger the amount of the deposit saved, the better the terms of the eventual mortgage agreement are likely to be. For example, a 20% deposit is likely to gain more favourable terms than a 10% deposit, in terms of the interest one will have to pay out on monthly payments.
So it makes sense to save longer, correct? At the moment yes, but that’s assuming that the Bank of England base rate stays at its current low rate for an extended period of time. Lenders base their mortgage offer rates on this base rate, so if this rises then interest rates will follow suit, hitting the borrower in the pocket if it is a variable mortgage.
The interest rate of 0.5% surely cannot continue forever, and it is expected to rise next year. So do you attempt to get a mortgage now and avoid that rise, but with a lower deposit, or hang on and garner more cash to put down – and run the risk of not being able to afford higher prices and interest rates.
There’s also the thorny issue of house prices rising, which shows little sign of abating. The annual rate of growth in London is now an eye-watering 10.6%, meaning that the average price of a home could top £1m in just five years’ time. According to Halifax house prices leapt by 9.7% in October compared to the same time last year, to reach a record high of £205,240. The rate of acceleration is less brutal in other parts of the UK compared to London but still continues to rise sharply – leaving buyers with an awkward and risky decision that only they can make.