Time to cash in?
With widespread reports of falling house prices, is this the moment first-time buyers have been waiting for? Kate O’Raghallaigh takes a look.
First-time buyers have had something of a raw deal here in the UK, with house prices having increased at warp speed over the past decade. According to Halifax, the average house price in January 1997 was £66,376 - nearly £131,000 less than January 2008’s average house price of £197,244. Furthermore, figures from the Council of Mortgage Lenders (CML) have shown that first-time homeowners were contributing 20.7% of their income towards mortgage interest in 2007, compared with 17.9% in December 2006.
The credit crunch’s impact on the UK housing market has caused existing homeowners some concern, with house prices having fallen for three consecutive months since November 2007 and the current rate of house price inflation representing the lowest figure since 2005 (according to Nationwide). Given this, some might be forgiven for thinking that a softer housing market brings with it improved opportunities for those looking to get on the property ladder.
Mixed bag
Unfortunately, recent falls in house prices have been accompanied by mortgage lenders tightening up their criteria – in some cases reducing the amounts people can borrow, and being more stringent with credit checking. Figures from price comparison site Moneyfacts have shown that 11 mortgage lenders reduced their loan to values (LTVs) – the percentage amount of a property’s value you can borrow – since December 2007.
Lenders including Alliance & Leicester, Scottish Widows Bank and Britannia Building Society have all reduced their LTVs from 95% to 90%, meaning that anyone applying for their products will now have to have a deposit of 10%, rather than the previous 5%. If you apply to any of these lenders for a mortgage of £195,000 for example, (rounded down from Halifax’s average house price quoted above), an LTV of 90% will mean your deposit, which formerly would have been £9,750, now has to be £19,500.
So, does the combination of falling house prices with tougher lending conditions mean first-time buyers are in a catch-22 situation? David Knight, mortgage analyst at Moneyfacts, says lenders’ reductions to LTVs signal a concern for people borrowing more than they can afford. He says: “It is not hard to understand why this pattern [of falling LTVs] has emerged. With mounting evidence that housing prices are cooling, combined with the increasing number of borrowers facing debt problems, it is not welcome news for those consumers with only a small amount of equity.”
Personal choice
However, making the decision to buy your first property really depends on your individual circumstances, according to Fionnuala Earley, chief economist at Nationwide. She explains: “Deciding when to get on the property ladder is such a personal thing. People, however, need to have contingency for a weakening economic environment.”
Earley also points out that, while people might find lower house prices more appealing, this still doesn’t solve the general affordability problem in the UK, which has in part been affected by five interest rate rises since August 2006. She continues: “As far as the wider issues are concerned, if house prices are stagnating, as the past three months’ declines would appear to suggest, then that will clearly approve affordability for those looking to buy. Having said that, even if affordability improves, is still quite stretched, and borrowers should be aware of this before entering the market.”
While there have been definite falls in UK house prices over the past few months, buying a home remains a sizeable investment which shouldn’t be taken lightly, no matter how many reports seem to advocate jumping head first into the market. If you are thinking of taking that first step on to the property ladder, make sure you do your research and commit to a budget. That way, you stand every chance of benefiting from your investment.
Tags: brokers, Credit crunch, lenders, mortgage, mortgages, News
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March 2, 2008 at 4:30 pm
Hi,
The problem for me, the customer, remains which type of mortgage to choose and then where to find the best rate.