Buying a leasehold flat in the current 2021 market

Mr_owl

Hello money savers 

I have decided to stop paying off someone else's mortgage through private rent and decided to buy my first property. I decided to buy a little outside of M25 so it is around 30-40min drive to work. I could have bought something inside m25 a little closer to work but I found the area not particularly welcoming and by moving some 10-15miles further out I I am in surrey and I just felt a lot better being surrounded by acres of green space. I  can also buy a better property for the money. My only concern is that since I can't afford a freehold property without overstretching the budget and I also intend to have 85% LTV for a better mortgage deal. All this means I am limited for a leasehold flat. I have found one that I like, larger than average although having only 1bed. I am however slightly stressed about falling into negative equity. Obviously with freehold house situation is very promising in terms of value gains however flats seem to have stagnated if not fallen in value over last 6-12months. Definitely flats are nowhere near as desirable as house at the moment but I found that these nicer flats changed hands reasonably quick too. I am hoping to stay in the property for at least 5years and build some equity, overpaying a little to boost it.
Waiting for a market crash has no point in my opinion as its proven those waiting for price correction can never catch up while being trapped in a rental property paying dead money. I am hoping I am getting a bargain at the moment however I am so stressed at the same time that bank will find the value even lower and it won't lend as much as I applied for.
 Is there anybody else in similar situation? What are your thoughts? I assumed that if bought at the right price, even when value over next 5 years will not change it's worth having 5 years of equity gained (I know it wont be huge amount as interest v principle repayment isn't great during first couple of years) is still a winner if you come from renting as first time buyer as renting for another couple of years will mean more dead money. No one knows what the market for leasehold property will be in 5 years time or more. I hope the cladding scandal will be forgotten by then and leaseholders will get more protection by planned legislation changes that should pass through the parliament in the near future. 

princeofpounds

Renting is not 'dead money', any more than paying interest on a mortgage is 'dead money'. You change from renting the property to renting the money to buy 85% of it. That said, the long term economic outcomes on owning rather than renting are probably going to be better, as long as you aren't vulnerable to economic shock along the way.

I agree with you that it normally does not make much sense to worry about exactly where the market is heading if you are looking at buying property for your own residence and you are not overstretching yourself. You will probably never crystallise that property value into a capital gain/loss unless you decide to sell up at some stage.

Not overstretching yourself is important in a few different respects. If you don't buy a property wildly disproportionate to your earnings, then you should be able to earn your way to higher equity shares in the property if you need to do so. If you buy with a higher deposit, then you provide yourself with a bigger buffer. If you are young and your income is likely to rise in future, even better.

Flats aren't soaring the same way as houses at the moment because the pandemic and WFH trend is increasing the value of green space and larger properties, and reducing the value of easy access to city centres. That will probably moderate quite a lot as the economy opens up, even if it doesn't fully reverse.

Broadly speaking it seems like you have a manageable goal, so stop worrying. If the bank undervalues, then the bank undervalues - you go back to the seller and negotiate a further price cut. Or you go find another flat... there are hundreds out there, and there is no deadline to look for one.

AdrianC

Remember that "negative equity" doesn't mean that your flat has dropped slightly in value. It means you owe more than it's worth.

That would require a drop of more than 15%, because you're repaying the capital with your mortgage.
Assuming a 30yr 2% mortgage, after five years, you'll have repaid 13% of the capital - so to be in -ve equity would require a 28% drop in prices...

Mr_owl

AdrianC said:

Remember that "negative equity" doesn't mean that your flat has dropped slightly in value. It means you owe more than it's worth.

That would require a drop of more than 15%, because you're repaying the capital with your mortgage.
Assuming a 30yr 2% mortgage, after five years, you'll have repaid 13% of the capital - so to be in -ve equity would require a 28% drop in prices...

It is a good point. Mortgage is going to be unfortunately of higher rate 2.75% but 28years. Maybe I am overthinking. Even if no negative equity takes place it would hurt potential remortgage options and instead to paying off the mortgage faster or lowering monthly repayments I could find it a lot more expensive.

 In regards to previous reply I can see where you come from saying that it will be still a form of renting money to pay off the remaining 85% of the property. My understanding is that although mortgage is a long term commitment it will certainly end with a property owned outright  where with renting you get nothing at the end and it can go on forever as we need a roof over our heads. 

Thank you for your replies lets hope the trend for flats will reverse slightly and remortgaging will be a doddle.

AdrianC

https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

OK, so 28yr 2.75% - after 5yrs, you'll have repaid just over 12.7%. If prices dipped that much, you would still be remortgaging at 85% LtV. If prices stayed the same, you would be remortgaging just over 70% LtV.

Renting is paying money and receiving a service - maintained accommodation - in return. Landlords are not printing money hand-over-fist. Most, if they only realised it, are close to losing money.
Nobody ever says that leasing their new car rather than taking out a loan is "wasting money", do they?

Mr_owl

AdrianC said:

OK, so 28yr 2.75% - after 5yrs, you'll have repaid just over 12.7%. If prices dipped that much, you would still be remortgaging at 85% LtV. If prices stayed the same, you would be remortgaging just over 70% LtV.

Renting is paying money and receiving a service - maintained accommodation - in return. Landlords are not printing money hand-over-fist. Most, if they only realised it, are close to losing money.
Nobody ever says that leasing their new car rather than taking out a loan is "wasting money", do they?

Yes I'd agree to a point with you but sometimes apart from having the roof over your head when renting you actually do not receive any service at all. Landlord and some letting agent are all interested in only collecting money rather than actually providing service of anything near acceptable quality. In my case mortgage repayment will be around £250 cheaper than rent and even my travelling costs will increase, overall it's still going to be slightly cheaper and for the fixed period will not get any more expensive whilst with rent you are at the mercy of landlord. If the wind blows my way and I will be able to remortgage with increased equity. It will get either cheaper, where rent will stay at the very best case stay the same or I will be able to slash a few years from the mortgage term.
Being first time buyer I am all concerned about the fact that after years of renting when I am finally able to get anything of my own my plan to either climb the ladder will not work out and I will not be able to lower my monthly outgoings by remortgaging or paying it all off earlier. Hopefully I will be laughing about all of this once the dust settled and we are again enjoying normal times.

princeofpounds

AdrianC said:

Remember that "negative equity" doesn't mean that your flat has dropped slightly in value. It means you owe more than it's worth.

That would require a drop of more than 15%, because you're repaying the capital with your mortgage.
Assuming a 30yr 2% mortgage, after five years, you'll have repaid 13% of the capital - so to be in -ve equity would require a 28% drop in prices...

For comparison, property prices dropped about 20% during the 2008/9 GFC. Now (not so) arguably they were bailed out with interest rate cuts, but you can see that you would need a similarly powerful event to threaten you with negative equity in this scenario.

NameUnavailable

There will always be a market for 1 bed flats (and studio's) as for many people that is all they can afford, or all they need.

Once the lockdown is lifted I think we'll see much more of a return to normal than some are predicting. Employers want their staff in the offices! I don't think we are going to see a work from home revolution as much as i'd like it myself.

If the flat works for you then go for it. Just be careful about service charges, lease length and ground rent amounts.