Five questions to ask yourself before you take out a mortgage
Are you thinking about buying a house for the first time, or moving house? You’ll have lots of questions to ask – not least about the housing market and the future outlook for those all-important interest rates. We focus on just five key questions that you need to consider before making a decision.
1. Will I be able to get a mortgage in the first place?
It’s been getting harder for first-time buyers in particular to find competitive interest rates on mortgages without a hefty deposit of at least 25%. But there are fears that this will get worse, especially if the Financial Services Authority’s proposals to reform the mortgage market go ahead in the form they’ve been suggested in the Mortgage Market Review. That’s likely to lead to higher levels of deposits being required, along with three years of accounts for the self-employed and the removal of interest-only deals. All that seems to suggest that now is a relatively good time to get a mortgage.
2. Can I really afford it?
This is a question lenders are also keen on asking at the moment, with credit conditions tighter than they have been in years gone by. When you apply for a mortgage, lenders are highly likely to consider affordability – and you’ll also want to be sure that you can afford to keep paying the repayments even if interest rates go up. So get there first. Work out your monthly budget, including the cost of any financial commitments that you have. Bear in mind that the number of children you have can also make a difference to the amount of money you’ll be able to borrow. Check how much the monthly repayments on the amount you want to borrow would be using our mortgage calculator. You may also find your prospective lender has a mortgage calculator showing how much, in theory, they would lend you against your income and existing financial commitments. Or take advice from an IFA who has experience of the market.
3. Will I continue to be able to afford it?
Part of the answer to this question will depend on your work prospects. Depending on the sector you work in, and as long as you haven’t been notified of redundancies by your company it may be worthwhile insuring your mortgage repayments against the possibility of redundancy. If you do lose your job and are claiming benefits such as Jobseekers’ Allowance and Income Support, you may receive government help with your mortgage payments in the form of Support for Mortgage Interest (SMI), which is paid direct to your mortgage provider. This doesn’t kick in for 13 weeks after you claim the benefit, though, and is pegged to an average interest rate of 3.63%.
But the other part of the answer to the question will depend on interest rates. At the moment the Bank of England base rate, to which tracker rates are tied, is at a historic low of 0.5%. If it stays low for “an extended period” as the Halifax’ housing economist Martin Ellis has predicted, then a tracker is likely to prove the cheaper option. But some point they’re certain to go up. The only question is when that will be.
4. Fixed or tracker mortgage?
Of course, if we knew the answer to the question of whether interest rates will rise we could say for certain whether to opt for a fixed or tracker mortgage. In the absence of certainty, the question you’ll want to consider is how you would prefer to deal with the risk of rates going up. If you’re happy to keep a weather eye on the Bank of England monetary policy committee decisions and reporting leading up to that, you’ll get an early idea of when they’re likely to go up and can then opt for a fixed rate rather than a tracker rate before that happens. A number of lenders are offering Switch & Fix deals that allow you to opt for a tracker and then fix when rates rise. In the meantime, do the maths on how much you’d be paying on a tracker, compared to a fixed-rate deal and work out which makes you better off.
But if you’d prefer the certainty of knowing what your rate will be for, say, the next four or five years, then there are fixed rate deals available at less than 5% for those with a large deposit – and prices seem to be coming down. Santander, for example, reduced its rates last week, bringing the cost of a five-year fixed 75 per cent loan-to-value (LTV) to 4.99% with a £995 fee for remortgage customers. It also has a five-year fix at 70 per cent LTV for homebuyers at 4.35 per cent with a fee of £995. Five years ago, when rates were at 4.5%, that would have seemed a good deal. But remember that even if you choose a longer-term fixed rate mortgage, the term will eventually come to an end, and you need to be sure you could then afford higher repayments.
5. If I buy now, might I end up in negative equity?
Or, in other words, are house prices going up, or down? Through the early part of this decade the fear of not getting on the housing ladder at all spurred many buyers on to buy as prices rose swiftly. Prices fell after the financial crisis of 2007 before starting to rise again thanks to a shortage of houses on the market. Now, however, the house prices indices are suggesting prices are levelling off, if not falling slightly. Halifax’s latest house price survey, for October, showed a slowdown in house price growth. It showed that over the three months to the end of October, prices fell by 1.2%. In October, however, they were up by 1.8% compared to the previous month. In October, it said, prices were down 2.3% compared to the end of 2009, leading it to conclude that “the underlying pace of house price growth has turned moderately negative in recent months.” Nationwide’s figures, produced a few days earlier, showed a 1.5% fall over the last three months. However, some areas, especially in the south east, are still seeing house price rises, while other areas, including the West Midlands, are seeing them fall – so it’s important to look at the figures for your region.
That property prices are no longer shooting up quickly is good news for those who want to take their time in finding the right property and don’t want to worry house prices are getting beyond their reach. If you’re selling to buy a bigger house, a fall in prices arguably benefits you since it means the larger house you buy will also have gone down in price, resulting in a lower mortgage. The losers in a falling market are those who are selling to realise their pension. All of this may also mean that the days of a house being seen primarily as an investment are being consigned to history, and once again we’ll start to buy houses simply because they make good, dependable homes for us and our families. Today there’s no mileage in going into property ownership expecting to make a quick profit. But if you are buying somewhere that’s going to be right for you for several years, you’ll reduce the risk of negative equity.
Remember that everyone’s circumstances are different and it’s always worth getting some expert advice about your own situations and the options available to you. We recommend getting impartial advice from an FSA-authorised adviser