Should I buy A House Now?

Readers Question: as a first time buyer, is it worth to have a mortgage this time with a 6.67% interest rate for five years (ending 2013) from abbey, some are saying that houses are falling down but we don’t see the effect of that in having a mortgage this time and what if this economy crisis will be resolve within 3 years does it mean that interest rate will come down?, thanks

Firstly, I should say congratulations on getting a mortgage in the current climate!

I imagine as a first time buyer, you are buying a house to live in (as opposed to buying a house to let, hoping to make income from renting and capital gains). If you are buying now, falling house prices are not necessarily a reason to stop buying.

If you wait 2 years, it is likely that house prices will be lower and the cost of buying a house will be cheaper This will reduce the cost of your mortgage in the long term. 2 years may also give a chance to save a bigger deposit.

However, falling house prices are not a disaster. Suppose house prices do fall 20% and in the next 3 years time you want to sell your house. If you are moving to another house then you will get less for selling your house, but, it will also be cheaper to buy another house.

A problem could occur if house prices fall 20% and then you want to sell and switch to renting. This could leave you with a capital loss. However, most people who buy a house do not want to switch back to renting after 3 years.

Buying vs Renting

The other important issue is the alternative to buying which is renting. If you rented for the next 3 years, the cost of renting would probably be similar to the cost of paying a mortgage. The difference is that with paying a mortgage, you are working towards buying your house and being able to live ‘rent free’ in the future. In this regard the sooner you can buy and start paying off a mortgage the better. See: Abbey report which says buying is better than renting

Monthly Payments and Interest Rates

As a homeowner I feel the most important thing is not house prices buy monthly mortgage payments. Falling house prices doesn’t affect my disposable income in any way. What is important to me is what happens to interest rates.

It is widely predicted that the economy is heading for a slowdown and possibly recession (negative economic growth). This lower growth is because of

1. falling house prices
2. fall in consumer confidence
3. increase in costs of living which reduce disposable income

Lower growth, usually leads to lower interest rates. This is because lower growth reduces inflationary pressure. Therefore, it is highly unlikely that interest rates will rise significantly in the next 3 years; it is more likely they will fall. However, at the moment it is complicated because oil prices are pushing up inflation meaning the Bank of England can’t cut rates as much as they would like to. However, once (if) oil prices stop rising, then the Bank should be able to cut interest rates (perhaps in 2009).
Ironically falling house prices can be good for homeowners because falling house prices reduce domestic demand and inflation - leading to lower interest rates and lower mortgage payments.

Fixed Rate vs Variable Rate.

As a first time buyer there is a great advantage to having a fixed rate deal for 5 years. It enables you to plan ahead for the next 5 years, knowing what your monthly payments will be. Therefore, I would be reluctant to advise against a fixed rate mortgage. However, I feel that fixed rate deals like the Abbey do not reflect particularly good rates at the moment this is because:

1. Credit crunch has increased banks mortgage rates
2. Base rates are more likely to fall in the medium term than the long term.

However, it is always difficult to predict anything more than 2 years hence. It could be in 4 years time, your fixed rate provides good value.

• A Variable Mortgage may offer cheaper mortgage payments in the short run, but without the security; therefore it is more risky.

• Is it a Good time To Buy?