Stick or twist: is now a good time to buy a property?
Posted: 01-03-2024
Reading Time: 14 minutes
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Tentative. That’s one word I’d use to describe the current housing market. And with good reason.
Homeowners are stuck in limbo, waiting to see where interest rates and house prices are heading. Homemovers and first-time buyers are waiting to see if the predicted drop in house prices has plateaued. (it has!)
Those looking to remortgage are also undecided. They’re all too aware of the potential jump in interest rates they face with a new fixed-rate deal.
So, there’s a dam of activity waiting to break. The question is: should you paddle with the flood, or row against the imminent tide and try to sit tight?
The ideal scenario for first-time buyers to buy their first home
What does it take to make the perfect time to buy a house? You’d need:
- house prices to have hit the bottom of a trough;
- interest rates as low as they have been in a while;
- a surplus of housing stock, making buyers keen to sell.
First-time buyers can tick the first two boxes straight away. House prices have gone through a mini-correction. In London, there’s been an even greater drop in prices.
Interest rates today are also considerably lower than they were for most of 2023. But, time is of the essence.
Whilst swap rates were consistently lower than the BoE base rate, they have started to climb this year. As a result, lenders who went hard to capture business with low interest rates are now beginning to increase them.
Only last week, we saw the last sub-4% mortgage disappear from the shelves as HSBC, Natwest and Virgin all hiked interest rates.
Supply vs demand is maintaining property prices
But the bugbear is that last criterion: affordable housing stock. More precisely, the lack thereof.
So, despite everything else going in a buyer’s favour, vendors know there’s more demand than supply. If they’re sitting pretty on a desirable home, they needn’t reduce their selling price without good reason.
The good news for buyers is that house sales are slow. In October, for example, HMRC estimates that 90,000 homes were sold. That’s down 17% compared to October 2022.
It’s also taking longer to sell a home than last year. So, while vendors in general hold the aces, there will be avenues of opportunity for buyers who go the extra mile.
Try not to get hung up on the investment part of homebuying
Zoopla’s November 2023 figures report that buyers achieved 5.5% discounts on asking prices compared to 3.4% earlier in 2023. So, don’t overlook any opportunities to buy your home for the best possible price.
But also, don’t let the future value of your property be your only criterion for buying. Until we see more affordable homes, the potential for rising house prices is omnipresent.
If you see a home, know you can afford it and the repayments, and have a deposit, you need to give it serious consideration.
The good thing about property searches
You always have the safety net of your lender’s valuations and solicitor’s searches.
If something in their reports rings an alarm bell, your lender may disagree with the vendor’s valuation. At that point, they’ll counter-offer with a maximum amount they’re prepared to lend. This is called a ‘down valuation’, and they’re on the rise in the UK.
According to Benham and Reeves, lenders down-valued some 400,000 properties in 2023. Affected buyers saw, on average, discrepancies in the vendors’ selling prices between £5,000-£10,000.
What to do in the event of a down valuation
You have two options when faced with a down valuation:
- approach the vendor with the lender’s counter-offer;
- appeal to the lender direct.
Talk to the lender
Lenders will have good reasons for making the counter-offer they do. They may not reveal them, but any ceiling they put on lending against a property is usually inflexible.
What you can do is look at properties similar to yours in the area you’re buying that have sold close to the lender’s asking price recently. Then present that as ‘evidence’ to your lender to see if they’ll reconsider.
Sale prices of similar houses may not tell the whole tale, though. The houses you’re comparing may have had new kitchens, conservatories or other improvements that your vendor wasn’t aware of when setting their asking price.
Appeal to the property vendor
If the lender is resolute and won’t budge, you should then take your findings to the property vendor. They may acquiesce, take on board your findings and drop their asking price. But they don’t have to.
So, the sale will fall through if:
- the vendor refuses to come down to the lender’s valuation, or
- you can’t raise the difference (as a deposit) between the maximum you can borrow from the lender and the vendor’s asking price.
Either way, if the sale falls through, at least you won’t be burdened with an overpriced property. That may not be a consolation right now, but it could be a blessing if you have to sell further down the line.
Research is key
Do your research first, ideally before you put in an offer. Ask your estate agent how long a property has been on the market.
The agent may even tell you:
- the vendor’s mood,
- whether they’ve reduced the price already,
- or if they’re willing to negotiate.
A home that, at first glance, is too expensive may yet fall within your budget. Always ask the question!
Don’t rely on one lender to gauge interest rates
Many of you reading this will have waited patiently in recent months to refinance. Or, you realise your fixed rate term is due to expire and you need to remortgage to avoid your lender’s SVR.
Many of you will have read that interest rates are coming down. So, I get it if you’re holding out further, waiting to see where they’ll drop to.
Indeed, Moneyfacts reported a 0.37% fall in average two-year fixed mortgage deals between January and early February this year.
But, at that point, swap rates were still falling. Now, they’ve stabilised and are even on the way up. This means new money for banks is costing them more.
Dynamic pricing has led to confusing interest rate headlines
Whatever lenders’ recent pricing strategies were, they’ll also dictate which way their interest rates will head now.
You will still see headlines reporting reduced interest rates. But, you’ll also see lenders increasing their rates.
That’s because lenders constantly review their rates, based on:
- their ‘mortgage book’, i.e. the type of mortgage business they have;
- the cost of the money they’ve borrowed;
- marketplace trends and competition.
The combination will be unique to every lender.
The immediate future of lenders’ interest rates
Even so, despite fluctuations now, pricing strategies will find common ground and level out across the industry.
Experts predict rates to settle around 4% by the end of the year. The caveat here is that the Bank of England begins bringing its base rate down in summer.
So, if you can get rates around 4.5% today, you’re not doing so badly. Yes, it may mean a hike from your current rate. But, you’re unlikely to get much better rates this year.
First-time buyers will pay more than lenders’ averages
A last note on interest rates. If you’re a first-time buyer with only a 5% deposit, chances are your rate will be higher than the average.
The main reason homebuyers with smaller deposits pay more is down to perceived risk. I’ll explain.
The risk of negative equity
Late last year, Halifax predicted house prices would drop between 2% and 4%. If you only put down 5% and prices fall by 4%, that’s sailing awfully close to negative equity.
Should anything happen to your income and you can’t afford to repay your mortgage, ownership would then revert to the bank. They’d need that house to make back the money they lent you. If it’s in negative equity, they’ll struggle to do that.
That’s the ‘risk’ from their perspective, which is why they charge higher interest rates on low-deposit mortgages.
If there’s any way you can stretch to a 10% deposit, you’ll see a considerable difference in the interest rate lenders offer.
And talking of stretching…
Not so long ago in the dim and distant past, mortgages’ durations were 25 years, end of. But not so now.
‘Marathon’ mortgages (as if 25 years wasn’t a slog enough) of 35-, 40-—and even talks of 50-—year mortgages are now a thing.
Initially, lenders only considered the youngest borrowers for these lengthier terms. But, according to recent reports, people without familial help don’t secure a mortgage to the value of the average UK house until after they’re 37.
That meant lenders had to revise their opinions. Some are now offering marathon mortgages up to the age of 80.
Managing your ‘marathon’ mortgage over time
Stretching the mortgage term over a longer period is a great way of reducing the initial repayment amount. But, it does mean you’ll repay more over the term compared to a regular 25-year mortgage.
The trick here is to remortgage onto a more regular-term deal once you’ve saved enough or built up enough equity. But do beware of early repayment charges.
When you reach that point, an unbiased broker will be able to break down the costs for you. You can then determine if (or when) remortgaging makes financial sense for your situation.
Where are house prices heading for homemovers?
Whilst there’s no need to undersell your property, you should know where to pitch its price if moving is your priority.
What you want to achieve from the sale of your home will depend on your next step:
- If you’re upsizing, you’ll want to get the maximum from your home sale to compensate for the larger mortgage and new, higher repayments;
- If you’re downsizing, selling your current home for top dollar will help you feel that you got the most out of the years you put into it.
Overall, house prices have shown a modest improvement over the last two years. Their future projection, based on Savills’ forecasts, is for much of the same.
The estate agent’s current prediction is for houses to rise 3.5% in the short term (by 2025). Beyond that, they’re estimating accumulated property price growth of 17.9% by late 2028.
Depending on where you sit, those figures may encourage you to sit tight or act now.
If you’re unsure, talk out your options with a broker. They’ll help you see what you could get for your home now so your reasoning has a solid foundation.
Generating interest when moving home’s the right thing for you
Turnaround on housing is still slow, compared to previous years. Plus, buyers are beating selling prices down in certain circumstances. This means pitching your home at the right price is crucial.
Competitively pricing your home will attract greater interest at the estate agent’s. With more interest comes higher bids.
You can then start negotiating with the highest bidder. When they try to knock the price down, as is the trend, you have wiggle room. Plus, if you don’t budge and they walk away, the additional interest generated has left you with a list of other interested parties.
Ensure your home pays for moving and remortgaging costs
Whilst we’ve said not to get too hung up on your house’s sale price, you don’t want to be out of pocket, either. Factor in any potential moving costs or what it might cost to remortgage.
According to Which?, moving home costs around £14,000 (Oct 2002 figures). The three biggest individual costs are:
- SDLT: £6,500;
- Your estate agent’s fees: £4,700;
- Legal and solicitors’ fees: >£2,000.
Higher interest rates and Early Repayment Charges
The FCA estimates that 1.5 million homeowners’ fixed-rate deals will expire in 2024. Many of those will have taken out their current deal anywhere between 1% and 2%.
With today’s average two- and five-year fixed deals ranging between 5%-to-4½% respectively, that’s a huge jump.
There’ll also be homeowners who, partway through 2023, couldn’t bear paying their lender’s SVR at around 8%, so remortgaged at around 6%. They may also be looking to ditch that deal for something closer to the new, more competitive rates.
It might seem unlikely, but such a move could be financially viable. Ask a broker to see what remortgage deals are out there and compare the ERCs with the potential savings over a new fixed term. You might well be surprised.
That’s it for today. Look out for our deeper dive into house price trends next week. Good luck!
John Yerou is the owner and founder of the award-winning Mortgage Quest Ltd and its subsidiary brands.
In 2004, John began his career in financial services as an independent mortgage advisor and broker. He's since been instrumental in negotiating bespoke mortgage underwriting criteria for professional contractors with many high street lenders.
As such, John's one of the most respected and recognisable names in securing mortgages for the UK's flexible workforce, incorporating independent professionals and the self-employed.
His recognition as the go-to mortgage expert has grown exponentially, reflected in citations and his own publications in both national and contractor-oriented press.
Posted by John Yerou
on March 1st, 2024 11:07am in Latest mortgage news & opinions.