A warning to first time buyers

Percy1983

No more mewing has hit my parents hard, there mortgage is more now than when it started 27 years ago..

I don't get it, if my house was worth twice as much tomorrow I would still have the same amount of money in the bank to spend and wouldn't feel any more/less secure.

michaels

shortchanged wrote: »

But how can you guarantee permanently lower interest rates?

Apparantly the BoE's remit on setting interest rates does not factor in house prices. :whistle:

This is just pie in the sky stuff and the sort of mentality that creates problems in that there is no concept of future risk.

May be my example is too theoretical, afterall no one can predict the future of interest rates over a 30 year period and people do not buy 30 year fixes as no one can predict their lives for that long. However it is not unknown for different periods to have different 'normal' interest rates - compare the 50s/60s, 70s/80s, mid 90s-2007 and indeed look at Japan after theer bubble burst.

I think what can be taken from the historic data is that within quite wide tolerances it is not possible to state that a certain level of house prices is 'unaffordable' and therefore 'certain to correct' just because it differs from some 'historical' norm that actually applied during a period where interest rates differed markedly.

shortchanged_2

michaels wrote: »

May be my example is too theoretical, afterall no one can predict the furute of interest rates over a 30 year period and people odo not buy 30 year fixes as no one can predict their lives for that long. However it is not unkown for different periods to have different 'normal' interest rates - compare the 50s/60s, 70s/80s, mid 90s-2007 and indeed look at Japan after thier bubble burst.

I think what can be taken from the historic data is that within quite wide tolerances it is not possible to state that a certain level of house prices is 'unaffordable' and therefore 'certain to correct' just because it differs from some 'historical' norm that actually applied during a period where interest rates differed markedly.

Yes fair point. But as I stated it is very dangerous for people to plan one of the biggest purchases of their lives on hoping that interest rates are going to stay low during the 25 odd years of the period of their mortgage. That is one big gamble.

wotsthat

shortchanged wrote: »

Yes fair point. But as I stated it is very dangerous for people to plan one of the biggest purchases of their lives on hoping that interest rates are going to stay low during the 25 odd years of the period of their mortgage. That is one big gamble.

That's a bit of a strawman really.

No one should buy a house where they need to rely on rates staying low for 25 years - and no one has made that point - rather you've seen an example of why, especially in times of low interest rates, the traditional price/ earnings ratio might be a little less reliable as an indicator of whether prices are above or below historic norms.

If, as you suspect, the government want to keep prices propped up and the BoE are keeping rates low as a special favour for homeowners then now is looking like a cheap time to buy irrespective of what the price/ earnings ratio is compared to some point in the past.

shortchanged_2

wotsthat wrote: »

That's a bit of a strawman really.

No one should buy a house where they need to rely on rates staying low for 25 years - and no one has made that point - rather you've seen an example of why, especially in times of low interest rates, the traditional price/ earnings ratio might be a little less reliable as an indicator of whether prices are above or below historic norms.

If, as you suspect, the government want to keep prices propped up and the BoE are keeping rates low as a special favour for homeowners then now is looking like a cheap time to buy irrespective of what the price/ earnings ratio is compared to some point in the past.

Are you sure about that wotsthat?

There are a few on here who try to make out that the current low interest rates are the new norm. Dangerous, very dangerous stance, particularly when house prices remain high.

Mr._Pricklepants

shortchanged wrote: »

There are a few on here who try to make out that the current low interest rates are the new norm. Dangerous, very dangerous stance, particularly when house prices remain high.

So your advice to current potential FTB's is......?

wotsthat

shortchanged wrote: »

Are you sure about that wotsthat?

There are a few on here who try to make out that the current low interest rates are the new norm. Dangerous, very dangerous stance, particularly when house prices remain high.

Whether people think low rates are now normal is irrelevant as lenders are now far more cautious and unlikely to lend to someone that doesn't have the financial strength to weather interest rate rises.

Sensible people will factor in a margin of safety even if they think a rate rise is unlikely. Can't see too much of an issue - FTB's are currently paying quite a lot under the average house price and have stumped up a 20% deposit too so their mortgages aren't far north of £100k. A nice 5 year fixed rate would protect them from rate rises for a while too.

Mr._Pricklepants

wotsthat wrote: »

Sensible people will factor in a margin of safety even if they think a rate rise is unlikely.

Let's even assume a rate rise is very likely. Still doesn't warrant the stance shortchanged et al are taking on here (dangerous, very dangerous, a gamble!).
The article in OP states clearly the government will continue to support the housing market. Whether we agree or not with this policy or the tools being used is irrelevant. It's here to stay for the foreseeable future.
Combined with current interest rates and the help to buy program kicking in soon, it would be foolish to wait it out until prices have reached 'affordable levels'.
As wotsthat says, a risk averse person can always jump into a 5 year fix and work flat out during these 5 years to increase equity and reduce LTV so that any surpise rise after these 5 years is manageable. You'd be surprised how quick a mortgage can be eroded with some regular overpayments during the first 5 years.

Alternatively, one could continue to rent and wait for lower prices.

Percy1983

Mr._Pricklepants wrote: »

So your advice to current potential FTB's is......?

Personally I would say leave plenty of wriggle room.

It would take interest rates of 14% to cause me trouble and tighten the budget as an example.

wotsthat

Mr._Pricklepants wrote: »

You'd be surprised how quick a mortgage can be eroded with some regular overpayments during the first 5 years.

Of the younger people that I know none of them borrowed the maximum possible and all took fixed rates. To be fair none of them are making overpayments but are progressing through careers and finding the mortgage easier to manage with every year that passes.

One couple bought at peak and their house is now worth less than they paid. However a decent deposit and solid repayment history mean they are still in a sound financial position in spite of this. They're certainly glad they didn't rent instead.

I was ultra cautious as a FTB and bought a house that was easily affordable. Five years later I wished I bought a bigger house to start with and saved the subsequent moving costs.

I think FTB's are naturally more cautious than Shortchanged gives them credit for.