Another Interest Rate Prediction

Procrastinator333

chucky wrote: »

here is where i question you for two reasons but it doesn't mean delaying buying is a bad thing.

1. don't buy, current stagnating prices with higher inflation and lower pay rises means that it's harder for an FTB to save for a higher deposit to get a lower LTV in the future..

2. buy now with a decent tracker (if you can get one) it should allow you to over pay so that it helps you lower your deposit for when you can remortgage to a better rate if rates do go up.

both are slightly contradictory reasons but independently affect your maths medium term.

1) True, more difficult to save in that scenario. But for those that can (and I believe I'm one of those), the benefit will still be there to be had.

2) It all comes back to that rate and pluggin it in to the math.

If prices continue to bobble along where they are, I reckon we will look to buy soon after we have access to sub 3% rates. Until then I will keep chucking money on the deposit pile. Of course maybe it all goes pear shaped, only takes growth of a few % to scupper this plan.

I haven't ever really thought too hard about the 50% equity individual before (being a FTB). But having looked at it a bit more here, unless you think there is going to be another full blown crash, it is hard to see the logic of waiting.

RenovationMan

Procrastinator333 wrote: »

Bot examples assume rental rate is 5.5% of property value - This does vary around, but isn't far off, and can be adjusted for individual locations.

Example 1:

50% Equity sitting in the bank. £200k house.

First bank I look at, hsbc:

2.19% tracker for 60%. :eek:
https://mortgages.hsbc.co.uk/product/188-life-time-tracker-special

So if they buy, £100k mortgage. The interest element is £2.2k per annum. It therefore costs £2.2k to live in that house for a year.

If this person rents instead the rent will be £11k. But on the flipside they may make 3% after tax on their savings. So net cost £8k.

It therefore costs £5.8k more to rent and wait for the year. Prices need to fall 2.8% for this to break even. That is about the bottom end of my ecpectation and with such low interest rates forecast I think I would buy (or not sell).

Example 2:

10% Equity. Mortgage rate is actually lower than I thought. HSBC 10% tracer 4.5% - But it could be brown trouser time sitting on a 4% over base tracker with even mild rises. The other thing to consider and the naysayers will say it doesn't allow like for like, but I believe most FTB rent or share in a house smaller than they buy. We are renting in a property about 50% of the value we are intending to buy in the end. I don't think the person above would do that (probably have a family and own the home a while to have 50% equity).

So the comparison here becomes:

Buy £200k. Ignore deposit for simplicity. Interest cost £9k.

Alternative is rent for £100k, costing £5.5k. So in doing this the renter saves £3.5k. And then a year later or 2 years later they wil have an extra £3.5k or £7k of equity compared to buying.

For them not to own more of their home by renting in this scenario prices need to rise by less than 1.8% per year.


On a seperate point about why the future rate is irrelevant if they can't fix - If they can't fix, then buy now or in 5 years, they will end up on the same rate, the banks won't offer a better rate just because someone has been a loyal customer. They may offer a better rate for a higher ltv. Which if the person believes prices are going to stagnate they will achieve more quickly be renting initially.

Each to their own, but for me this maths speaks for itself and isn't really debateble. The numbers that get put in to it of course are and if in the local area rent is 7% and the person thinks prices are going to rise by 3-5% in line with inflation, it will give a very strong buy indicator for the FTB.

I worked through your figures for example 2 :

Example 2:

Interest only mortgage of £180k @ 4.5% = £8100 or £675 per month.

Rental on similar property = £11,000 or £916.67 per month.
Interest on 20k Deposit in ISA @ 3% = £600 or £50 per month.

So using your rental cost, mortgage cost figures and savings figure for someone with a 10% deposit, it costs £675 to buy and £866.67 to rent. The owner occupier will have a surplus of £191.67 per month to either overpay the mortgage or to put into a savings account. I'd suggest overpayment because his mortgage rate would be more than his savings rate. If his mortgage rate stayed the same for 1 year, the OO could have paid down his mortgage by £2300.

Next year, the calculations will be based on a mortgage of £177700 @ 4.5 = £7996.50 or £666.37 - a saving of £200.30 per month over renting.

Now that I've worked through your figures, I'm completely stumped as to why you managed to calculate that it was better financially to rent than buy. Where am I going wrong?

Procrastinator333

RenovationMan wrote: »

I have a number of problems with your example, the main one being the amount of time the person would have to continue to rent in order to turn a 10% deposit into a 50% deposit. I'm sorry, but the whole point of having a mortgage is so that we dont have to save up for 25 years before we get a house.

I must admit though I do enjoy the huge amount of analysis and calculations that go into some forum members house buying decisions. In my day we just bought a house because we wanted our own home and own space, we didnt sit down and work out the financial pros and cons for the 25 year mortgage duration.

The reason that this isnt debatable isnt because its an open and shut case, end of story, its because its not debatable for you as an individual because your goals are to build up a 50% deposit before you buy and you're happy to live in rented accomodation for years to achieve your goal. Other people have different goals and so its not quite such an open and shut case for them.

As an aside, where can someone make 3% after tax on £100k? Especially a high-rate tax payer? You gave examples for mortgages, but not for savings products. The interest on your deposit formed a large part of your calculations yet the example interest return is wooly at best.

I may have not protrayed my reply in the way it was intended.

The underlying theme is that while it depends on local circumstance and the individual rates, most FTB's will own more of their home at the point of purchase than someone who buys today IF prices are flat.

That I don't think is debateable. It is just a function of the maths. Now I'm not saying this saving in itself is huge, my example only saved £3.5k a year on a £200k property and the renter lives in a smaller property in the meantime.

I'm not saying all FTB should wait to save a 50% deposit. Plenty other factors come in to play. But if they do wait in a stagnat market they are saving, not wasting money as is the conventional view.

I apply this to my circumstance. Beyond the saving outlined, my wife and I can save at quite a high rate. We have a real prospect of breaking in to the 20, maybe 25% LTV band in the next 18-24 months.

If we bought, it would be a lot lot longer till we get there. It would mean we pay the higher rates for significantly longer. E.g. Buy today and pay 4.5% for 4 years while we reduce the LTV to 80% and get the better rate.

Buy in 2 years straight in at the lower rate. Not only is there the initial saving, but also the fact that we will have accessed the lower rates sooner on the balance. I might even work this through as a proper example later.

But am I saying all should do this? No. There are many factors that over ride such savings. Just that the waiting FTB actually saves a bit of money in a stagnant market, they don't waste it - so may people just churn out the phrase "renting is dead money, must buy property" - which is simply nonsense in a stagnant market.

If I was a few years down the line, jobs had settled and we had kids on the way I wouldn't deem this saving worth the effort. But right now with location a bit up in the air and enjoying being DINKS we will just bank this extra - Though of course that depends on the central assumption of prices being flat.



On the 3% after tax. Until now I had been sticking all my cash in NSI index linked, they are going to be over 3%. Not looked too hard yet, bt I have seen threads that talk about 4% on lloyds vantage accounts. I don't know, maybe bit less, but if you want to tweak the math then of course do. It doesn't chnage the result for someone sitting with 50% equity.

Procrastinator333

RenovationMan wrote: »

I worked through your figures for example 2 :

Example 2:

Interest only mortgage of £180k @ 4.5% = £8100 or £675 per month.

Rental on similar property = £11,000 or £916.67 per month.
Interest on 20k Deposit in ISA @ 3% = £600 or £50 per month.

So using your rental cost, mortgage cost figures and savings figure for someone with a 10% deposit, it costs £675 to buy and £866.67 to rent. The owner occupier will have a surplus of £191.67 per month to either overpay the mortgage or to put into a savings account. I'd suggest overpayment because his mortgage rate would be more than his savings rate. If his mortgage rate stayed the same for 1 year, the OO could have paid down his mortgage by £2300.

Next year, the calculations will be based on a mortgage of £177700 @ 4.5 = £7996.50 or £666.37 - a saving of £200.30 per month over renting.

Now that I've worked through your figures, I'm completely stumped as to why you managed to calculate that it was better financially to rent than buy. Where am I going wrong?

I would first say don't worry about chopping in to monthly figures, makes no difference, just do annual, makes this sort of thing easier.

The FTB (like we are doing) typically lives in a property smaller than what they end up buying so the 5.5% rent is on a smaller value, I used £100k. I did note this in the example. As I said I'm sure people will debate this point and fair enough. But the FTB who does this ends up owning more of the £200k home they end up buying.

Procrastinator333

The other factor is a 4% over base rate tracker. That is the only way the FTB gets 4.5%. 4% over base is scary. I'm also not sure I have the stones to take that on.

RenovationMan

Procrastinator333 wrote: »

I would first say don't worry about chopping in to monthly figures, makes no difference, just do annual, makes this sort of thing easier.

The FTB (like we are doing) typically lives in a property smaller than what they end up buying so the 5.5% rent is on a smaller value, I used £100k. I did note this in the example. As I said I'm sure people will debate this point and fair enough. But the FTB who does this ends up owning more of the £200k home they end up buying.

Your now in danger of massaging the figures to make them fit your scenario. Yes, example 2 could rent a smaller place at a much reduced price but then he could also buy a cheaper house. I used your own figures for annual rent, annual savings return and annual mortgage payments and it came back that by buying a house, example 2 could save £2300 annually.

Procrastinator333 wrote: »

The other factor is a 4% over base rate tracker. That is the only way the FTB gets 4.5%. 4% over base is scary. I'm also not sure I have the stones to take that on.

Then you should look at other mortgage products that match you risk profile. Yorkshire BS do a 4.9% 2 year fixed rate or you could get a 3 year tracker from The Co-op bank at 4.29%.

Procrastinator333

RenovationMan wrote: »

Your now in danger of massaging the figures to make them fit your scenario. Yes, example 2 could rent a smaller place at a much reduced price but then he could also buy a cheaper house. I used your own figures for annual rent, annual savings return and annual mortgage payments and it came back that by buying a house, example 2 could save £2300 annually.

Yes, if they bought the same size that they rented and were willing to take a 4% over base rate tracer, they could save £2.3k a year on a £200k property all other assumptions being correct.

But who rents the same size place they buy as a FTB? Many live at home with parents, share with friends, rent a amaller flat. Surely that is what most FTB's do?

I have thought about the buy a cheaper house in the mean time, but then you have 2 moves instead of one to get to the end property. That will more than eat up probably 3 years of the saving and be a lot of hassle. Plus once you own somewhere you start spending on doing it up.

I don't give my examples as hard and fast rules, I just think people should use such information, applied to their personal circumstance as one part of the decision. I don't think many do that, the number of times people say renting is dead money or buy now and you save all of your rent.

And really your points just go to show that whatever you plug in to this, it is pretty marginal for the FTB. Renting is not dead money in stagnant market when the mortgage rates are restricted to the FTB.

Procrastinator333

RenovationMan wrote: »

Then you should look at other mortgage products that match you risk profile. Yorkshire BS do a 4.9% 2 year fixed rate or you could get a 3 year tracker from The Co-op bank at 4.29%.

2 year fixes are pointless in my opinion. They are more expensive, but don't offer protection from the real danger which is interest rate hikes 2, 3, 4 years down the line.

And again, this just comes back to the fact people should use their own circumstances. I don't really like a 4% over base tracker, so for myself, it makes even more sense to wait as using the 5% plus rates you get on 5 year fixes gives greater savings.

RenovationMan

Procrastinator333 wrote: »

Yes, if they bought the same size that they rented and were willing to take a 4% over base rate tracer, they could save £2.3k a year on a £200k property all other assumptions being correct.

But who rents the same size place they buy as a FTB? Many live at home with parents, share with friends, rent a amaller flat. Surely that is what most FTB's do?

I have thought about the buy a cheaper house in the mean time, but then you have 2 moves instead of one to get to the end property. That will more than eat up probably 3 years of the saving and be a lot of hassle. Plus once you own somewhere you start spending on doing it up.

I don't give my examples as hard and fast rules, I just think people should use such information, applied to their personal circumstance as one part of the decision. I don't think many do that, the number of times people say renting is dead money or buy now and you save all of your rent.

And really your points just go to show that whatever you plug in to this, it is pretty marginal for the FTB. Renting is not dead money in stagnant market when the mortgage rates are restricted to the FTB.

Well I dont want to argue about it, I used your own example data and came back with a £2k per year saving. It all comes back to my original point (which seems to have vanished for some reason, but you luckily quoted it in your reply) which is that in the real world you cant sit and make pure mathematical calculations to decide whether to buy a house or not, the decision is way more involved than that.

Procrastinator333

RenovationMan wrote: »

A stagnant housing market with flat house prices coupled with low interest rates is the perfect time to jump up the housing ladder and then make overpayments to increase equity while house values are maintained.

This is the part of your OP I really disagree with.

Jumping on now will likely not mean most FTB's own more of their home 5 years down the line than if they continue to save and rent in the stagnant market.

Certainly not for me. And I don't think for most.