Purchase price lower than valuation- ? Mortgage advice.

Korkyb

Hi all


Following on from a thread about whether my young daughter should buy her first property in the house buying forum.


She has decided to go for it & I'm now figuring out what to advise her mortgage wise (hence new thread in Mortgage forum).


Situation is:


Daughter - (19yrs old)
Salary - £20800
No debts


House in Aberdeenshire - Housing market is currently very, (very) slow due to downturn in oil industry.


Survey valuation - £115k.
Purchase price - possibly 95k ish (houses in area not moving much & seller very keen to move on).
Deposit 19k


LTV at the moment 20% based on purchase price.


I had originally though of a 10 year fix @ 2.49% with First Direct but others who know more than I do felt this was too long given her age & potential for change in circumstances (tied her into a 2% ERC from years 2 to 10).


If she took a medium term deal would the property's value be reassessed when taking out a new deal?


I'm thinking along the lines of her taking a 3 year fix deal (25 year term) at the end of which her outstanding debt should hit the 60% LTV mark based on the property valuation (this is of course assuming A/ there was a new valuation carried out and B/ the property valuation stayed the same/rose).


With a 60% LTV she could then get a better rate for her next fix.


Apologies if I'm being a muppet & oversimplifying things.


My other half (who is even more risk adverse than me) still favours a 10 year deal so will need to convince her that it may not be best in the long run.


Any tips advice gratefully appreciated.

AnotherJoe

Well, getting back to basics, you say your other half is even more risk averse than you, and I suppose you are referring to the risk of interest rates rising, but the both of you, indeed the three of you, have missed the biggest risk of all. A risk that makes your interest rate worry trivial.

House in Aberdeenshire - Housing market is currently very, (very) slow due to downturn in oil industry.
Survey valuation - £115k.
Purchase price - possibly 95k ish (houses in area not moving much & seller very keen to move on).

The oil industry in Aberdeen isn't going to have a revival. Even if you haven't taken on board what's happening to the global oil industry, which in the medium term is going to be a very poor prognosis and long term dire, irrespective of that, just looking at this area, it's as good as it's going to be and it can only get worse. That will have a significant effect on house prices. There's your risk.

So, whilst you concern yourself with the minutea of predicting interest rates for the next ten years, you've missed the elephant in the room, why purchase a house in an area where you can be pretty much certain that at best house prices won't rise and most likely they will continue to decline and lock you daughter into a situation where, when she comes to sell, she'll be the person "very keen to move on" and selling her house at 20% discount from its "valuation" and how much will it have declined from its £95k purchase price?
If you are "risk averse" then buying a house in this area should be the first and overriding concern, not a second level worry about interest rates.
I'll also point out, how many FTB's let alone 19 year olds buying their first house will be in it ten years later ? From a risk POV again you are focussing on a minor risk, interest rates, and ignoring the most likely, she'll want to sell well before ten years are up and most likely she won't be able to port her mortage because she'll be buying with someone else. So, the real risk (apart from the biggie) is that she will have been needlessly paying a higher rate for say five years and then additionally have to pay an ERC.

getmore4less

Oil has given a boost but you can compare the rest of the region to see where prices are in general.


over 300 places sold under £80k in the last year.

AnotherJoe

5 years time put a zero on the 300.

Korkyb

Yep house prices have taken a hammering over the last few years around here but they do seem to have stabilised over the past 6 months and seem to be creeping up. (The property is local to mine & we have been keeping an eye on what is happening).

Similar (identical) properties to the one in question have sold for £105k / £110k recently & the one we are looking at has (IMHO) been very poorly marketed & presented hence the much lower price. I think the others were actually worth less than the one she is looking at.

Yes there's a risk but it may also be an opportune time?

getmore4less

People lived in Aberdeen region before oil and will live there after.

Rental demand can drive the low end and the university market will always prop that up in the city.

AnotherJoe

getmore4less wrote: »

People lived in Aberdeen region before oil and will live there after.

Rental demand can drive the low end and the university market will always prop that up in the city.

Of course but how much accommodation was there to support the "natural" population including uni market and how much is there now and what will that do to prices when pretty much all the oil folk have gone, which they will ?

Korkyb

AnotherJoe wrote: »

Of course but how much accommodation was there to support the "natural" population including uni market and how much is there now and what will that do to prices when pretty much all the oil folk have gone, which they will ?

The bulk of the oil working population hit the high road a few years ago so unlikely to be another mass exodus like there was then.

An awful lot of offshore workers never lived in Aberdeen in the first place - you can live anywhere when you work a few weeks on then a few weeks off.

getmore4less

AnotherJoe wrote: »

Of course but how much accommodation was there to support the "natural" population including uni market and how much is there now and what will that do to prices when pretty much all the oil folk have gone, which they will ?

You would have to do a build analysis to establish what was built to support the increase in population.

If I had been working in Oil 20/30 years ago the 2beds would not have been on my radar it would have been the bigger places.

Allthough that pulls up all prices were they building at entry level?

Farmerbob

if I’m honest Aberdeen/shire needed a reset as far as house prices was as prior to the downturn the property prices were out of control and it was limited as far as people trying to get on the ladder.
The past 6 months I agree things have improved and property is staring to shift again, much of the issue is oversupply of larger properties and new builds, the builders bought up too much land when times were good and are now trying to shift their investment, including heavy discounting.

Staying on point to your query personally I would not encourage the 10y fix as it offers no flexibility should her circumstances change given her age, 3/5 years could be a good in between it really depends on the property, if it’s a one bed then she may outgrow it quicker than two bed, and how much of a pain the commute to work is or she decides wants to live nearer to the action (I’ve lived in both Aberdeen and the outskirts although moved to Glasgow years ago but the family’s still there so up frequently)