House buying risks

Keswick1uk

So, our son has asked for our advice. He has saved enough for a 20 percent deposit and costs for a £200k home.  This will likely be a 2 bedroomed terraced place or a 3 that needs work doing, which he is happy to do a room at a time. He can then try and raise a 160k mortgage on his 36k salary. His work is stable.

He currently rents a studio for £550 a month.

This makes me nervous when he asks for advice as to where he might be after a 5 year fix, if interest rates rise. They can double and still be a low rate, but that would make affording the house so expensive,  and will likely cause a reduction in value too and possible negative equity.

These worries stem from us being caught in negative equity and high interest rates in 1990s. 

So, I'm looking for your views on what your advice would be to help temper our experience a bit (or back us up!) Don't mind which it is. 

SpiderLegs

In what way will interest rates doubling make the house unaffordable?

Crashy_Time

Keswick1uk said:

So, our son has asked for our advice. He has saved enough for a 20 percent deposit and costs for a £200k home.  This will likely be a 2 bedroomed terraced place or a 3 that needs work doing, which he is happy to do a room at a time. He can then try and raise a 160k mortgage on his 36k salary. His work is stable.

He currently rents a studio for £550 a month.

This makes me nervous when he asks for advice as to where he might be after a 5 year fix, if interest rates rise. They can double and still be a low rate, but that would make affording the house so expensive,  and will likely cause a reduction in value too and possible negative equity.

These worries stem from us being caught in negative equity and high interest rates in 1990s. 

So, I'm looking for your views on what your advice would be to help temper our experience a bit (or back us up!) Don't mind which it is. 

Rising interest/mortgage rates will reduce the house value yes, because new borrowers won`t get such favourable fixes as your son might get now.

Keswick1uk

I don't know what mortgage rates are at moment but say a 5 year fix is 3 percent.

If rates rise and mortgage rates are 6 percent is 5 years time then the interest element of the payment then being paid will likely be double. 

Plus a more expensive mortgage market is likely to affect house prices too.

Of course my brain imagines mortgages at 13 percent (because that's what we really paid for quite a few years)!

I know we have been influenced by being in the market at a difficult time but we were surrounded by repossessions luckily not us (no, the Government of the time didn't care) so it's hard to forget that. 

Slithery

Unless prices drop by 25% over the next 5 years (which has never happened) negative equity won't be an issue.

Crashy_Time

Keswick1uk said:

I don't know what mortgage rates are at moment but say a 5 year fix is 3 percent.

If rates rise and mortgage rates are 6 percent is 5 years time then the interest element of the payment then being paid will likely be double. 

Plus a more expensive mortgage market is likely to affect house prices too.

Of course my brain imagines mortgages at 13 percent (because that's what we really paid for quite a few years)!

I know we have been influenced by being in the market at a difficult time but we were surrounded by repossessions luckily not us (no, the Government of the time didn't care) so it's hard to forget that. 

The people doing the silly borrowing this time around probably don`t even know that happened (some will but they will have blanked it from their mind as it is "always different this time!") so the bigger the bubble the bigger the pop! I don`t think the government care much this time either, only so far as it affects banks and commercial landlords maybe?

Keswick1uk

Slithery said:

Unless prices drop by 25% over the next 5 years (which has never happened) negative equity won't be an issue.

They did our first house was sold for 69k, we bought 52k and sold a few years later for 48k.
But I know where you are coming from. There's only so far they can drop before people pile in....although cost in interest might make a difference?  Interest rates have also never been so low with such capacity for rising.

MysteryMe

If he gets the 3 bed he can always get a lodger if rates rise to the point he is struggling with the mortgage.  That £4k you lost is basically 8 months rent he's paying on a bedsit.

Keswick1uk

Yes, that is very true actually.  Before the studio he was in a house share and rooms were £400. And that's tax free and would help. 

SpiderLegs

Keswick1uk said:

I don't know what mortgage rates are at moment but say a 5 year fix is 3 percent.

If rates rise and mortgage rates are 6 percent is 5 years time then the interest element of the payment then being paid will likely be double. 

Plus a more expensive mortgage market is likely to affect house prices too.

Of course my brain imagines mortgages at 13 percent (because that's what we really paid for quite a few years)!

I know we have been influenced by being in the market at a difficult time but we were surrounded by repossessions luckily not us (no, the Government of the time didn't care) so it's hard to forget that. 

If your view of whether to buy a house is based on your own particular circumstance from thirty years ago, then one has to wonder when would it be a reasonable time to buy a house?
it sounds like the answer is never?

Crashy_Time

Keswick1uk said:

Slithery said:

Unless prices drop by 25% over the next 5 years (which has never happened) negative equity won't be an issue.

They did our first house was sold for 69k, we bought 52k and sold a few years later for 48k.
But I know where you are coming from. There's only so far they can drop before people pile in....although cost in interest might make a difference?  Interest rates have also never been so low with such capacity for rising.

People didn`t pile in for years after the late 80`s crash? In fact it was the deliberate lowering of rates in the early 2000`s  that started this mega-bubble that we are now sitting in?