London FTB - Feels like massive gamble!

SlapShot

Help! I'm still trying to get my head round the London property market...

We're FTBs and have been renting for donkey's years (combination of a number of factors, largely moving around for work). Now married and relatively settled in London. Fed up with the instability of renting and needing to move anyway, we've been looking to buy.

We've had an offer accepted on a property. Modest 3 bed terrace in a not fashionable part of town in Zone 2. We need a mortgage with a LTV is 65%, we'll be borrowing roughly 3.5 joint salary, mortgage will be 25-30% net monthly income. On the face of it, this seems reasonable.

What blows my mind is this. We're in good jobs and we've got a significant amount of savings (mid-30s, both in decent, but non-City, senior professional jobs). How many people are in our situation? Who can afford to buy the next house and the next, i.e. what supports the market?! It seems like the issue is not really housing supply (though this is a factor) - rents have been more or less static in real terms in the 3-4years we've been renting. More, it's availablity of mortgage finance and interest rates, the housing market (in London) has basically inversely tracked the interest rate. What happens when this turns? With mortgage rates approaching 2%, what happens when they return to 4+%

In short, with the offer accepted and going through the motions of finding a mortgage, and trying to work out whether to fix and for how long, the whole thing feels like a *huge* gamble, this is by far and away the biggest financial decision I've taken in my whole life, and the potential for this to go wrong is massive.

The only scenario in which this is rosy is if economic growth stays subdued with positive but low inflation, and low interest rates continue for a good few years more. Anything else is negative, both from the point of view of property prices and mortgage costs. This is the gamble in my mind, and I'm looking to hedge this risk as much as possible (i.e. 5 or 10year fixes). In the positive scenario, this costs you a little in extra interest; in the negative scenarios, this protects you from a spike in mortgage rates. But you're still exposed to falling prices, unless there's a large spike in inflation. The only glimmer of hope is that, as a large borrower, you're very firmly in bed with the government, who will hopefully act in ways that penalise savers, not borrowers, but this is also a leap of faith!

What do other people think? How do you reconcile the huge financial risk that you're taking? What other hedging strategies are open to you?

I'm not averse to taking financial risks (e.g. I've been an active stockmarket investor through both 2000-2 and 2008-9 crashes, and have worked in and made investments in start-ups etc.) but this is something else!!!

Any thoughts appreciated!

Pixie5740

It's not just London, most FTB feel this way. I think it helps if you look at buying a property as buying a home rather than a financial investment.

I have just bought somewhere in Aberdeen and the only thing propping up property prices here is the oil. I could worry about what will happen with the price of oil but why bother, I'm just focusing on having a lovely home where I can hang pictures on the wall and paint the rooms a colour other than that yellow-tinged cream that so many Aberdeen landlords favour.

ambioni

I think all FTBs feel this anxiety, but in London I can see this being magnified. London behaves almost like a separate nation and really you can't compare the property market there to the rest of the UK.

Most economists are predicting interest rate rises by mid-2016, possibly up to 2 or 2.5% by 2020. This means that 5 yr fixes are very attractive now if you can find a good one (Nationwide has some good ones actually) and fixing for 5 yrs, even at 4% or so would protect you from an SVR that may currently be at 3.9% and which would rise to 5.9% or above in 5 years time

Jhoney_2

Lots of other good points in your favour. Zone 2 areas such as you mention have v.good trans link, open spaces etc. The new overground has made a huge difference to commuting across london as well.

They were also somewhat undervalued if you see what I mean - you classify it as not fashionable - so the projection is good and in fact improving in terms of value and as the demographics change for the better, so will your investment.

E.g Brixton, Battersea where once veeeery unfashionable and disreputable...

Where are you looking/buying?

PS If there's a downward trend, it will impact all propertied, not just yours so no big deal and only the, if you choose to sell.

SlapShot

Thanks for the replies, glad to hear it's not just us! The place we're looking to buy is in N4, so there's definitely some re-generation going on but, so far, there are no trendy coffee shops to be seen!

I guess the real concern is two-fold: hitting a mortgage rate spike e.g. just as when we might have kids and one of us might be working less than full time; being forced or wanting to move during a downturn and having to incur a massive hit on the value. E.g. a close friend bought in 2006, moved to the US in 2010 and still has the property as a millstone round his neck because he's in negative equity and the rent he receives from it no-way covers his costs.

Otherwise I'm happy to accept the mental sleight-of-hand that it's a home not an investment!

Jhoney_2

When do plan to have the kids? I would get a deal that starts a year or to before the first for 5yrs so the cost doesn't affect affordability until nipper 1 is at school and Both able to work. Most lenders have a sliding scale of ERC so if forced, it's annoying but not necessarily prohibitive. Never willingly sell in Negative Equity, overpay now where possible - before you have the kids/single income - to build in further equity.

Jhoney_2

I forgot to say that the location is hardly unfashionable as regards London on the whole. The trendy coffee shops will come, lol.

On the other hand, in terms of investment - I would go south or East as these were the two least valued parts of London. North and West have always had that 'fashionable' demand so there is less profit there imo.

jimpix12

You've made risky investments in the past but something is telling you that London is too risky to buy in the current market...? I would listen to your instincts.

In_For_A_Penny_2

spunko2010 wrote: »

You've made risky investments in the past but something is telling you that London is too risky to buy in the current market...? I would listen to your instincts.

Maybe I misunderstood the OP - I don't think they are looking at an investment property in London (which I agree, at present would be a significant financial risk) - he is looking for a home.

SlapShot

Thanks again.

@Jhoney
Kids ASAP and location is restricted by our respective commutes (S is definitely out and E would be too far east to get comparable value).

@spunko2010 @In For A penny
Yes, home not an investment. Though this distintion (if there is one!) is where i struggle... currently, our rent + taxed interest on our deposit savings is about £200 more than the interest on the mortgage would be. (Place we're renting is slightly cheaper/smaller than the place we're looking to buy). In effect, we're paying our landlord £200 per month to pay the bank's interest and assume the risk of house price & mortgage fluctuations. I'm actually pretty happy with that deal, were it not for the lack of security of tenure and e.g. ability to change/do as we please with the place we live in. In a few months time, I'll go from being a saver to a net borrower and exposed to interest rate fluctuations; also, I will have taken an extremely large position in the london property market (way exceeding the net amount of other financial assets I own, shares bonds etc!). Does explaining this away as being a "home" not an "investment" make any difference to your resultant position and exposures? I struggle with this!

Surrey_EA

SlapShot wrote: »

The only scenario in which this is rosy is if economic growth stays subdued with positive but low inflation, and low interest rates continue for a good few years more. Anything else is negative, both from the point of view of property prices and mortgage costs. This is the gamble in my mind, and I'm looking to hedge this risk as much as possible (i.e. 5 or 10year fixes). In the positive scenario, this costs you a little in extra interest; in the negative scenarios, this protects you from a spike in mortgage rates. But you're still exposed to falling prices, unless there's a large spike in inflation. The only glimmer of hope is that, as a large borrower, you're very firmly in bed with the government, who will hopefully act in ways that penalise savers, not borrowers, but this is also a leap of faith!

For a cautious purchaser surely longer term fixed rate financing is the way to go? 10 year fixes at your LTV level aren't far above 3% which has been unheard of until recently.

All the while you don't wish to sell your home, or refinance, you're insulated from any potential price falls. The price of your property is only relevant when you need to sell it, or if it affects the LTV amount when re-mortgaging.

It is always wise to take a long term view with an illiquid asset such as property, and the long-term trend is that prices increase. As far as London and the SE are concerned situations like the one you highlight where someone is in negative equity after 9 years of ownership are thankfully extremely rare.