House buying risks

Redwino222

This is a decision your son will have to take for himself.  Interest rates and house prices will shift over decades.  If he puts it off and off he might never get on the property ladder and will waste money renting.  The market is quite hot right now / but the stamp duty holiday is coming to an end very soon.  

Interest rates depend on circumstances.  I have a five year fixed for 1.3%.

lesalanos

How will his salary change in the next 5 years? 

ciderboy2009

@Crashy_Time - Remind me.  How many years is it now that you've been predicting the 'bubble bursting' imminently and it not happening?

TBagpuss

None of us can predict what interest rates or house prices will be like in 5 or 10 years. 
However, you son is in a good position - he has a 20% deposit so even if house prices fall, he'll have a cushion of equity before he risks negative equity. If he has managed to save £40,000 presumably he's reasonably good with money, so may well be in a position to save / over pay. Even if he doesn't, then over 5 years he will have paid down some of the capital 

If he buys a 2 or 3 bed property he will have the option of looking for a lodger to boost his income if ne wants /needs to.

A 10 year fix may have disadvantages - it's well within the bounds of possibility that he may want to move house in the next 10 years - new job / new relationship / arrival of children so he would need to look at the costs of an early redemption and balance that against the security of a fix for a long period of time.

getmore4less

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. 

Crunch the numbers  using the same as the rent for a studio.

£200k, property 20% LTV, £160k mortgage 4.4 multiple,  no adverse credit issues should be doable.

I have the Barclays sheet up so 2.27% taken over 35years(there will be others but ballpark this will do)
in 5 years time

amount	rate	payment	owing
£160,000.00	2.27%	£552.46	£144,144.67

Into the 75% LTV range current retention rate is 1.74% no fee  or a 7y 1.49% with £749 fee

if that had been taken over 40year but paying the £552 

the new option would be £144,150 over 35years which give some margin for a rate rise.

amount	rate	payment	owing
£144,150.00	2.98%	£553.15	£131,538.51

There is ~1.5% rise safety net and still have the same payment and that 5 years living in a nicer place.
if he can over pay a bit it could look very good 

remember with these numbers we are  talking about similar to ther rent but only £300pm  was renting the money and that goes sown over time where as the rent is going to go up.
The other £250pm was creating equity.

Get place he can take in a lodger for some of the time the mortgage will smash the mortgage  and the bills 1/2 to add even more.

if he could afford a bit more per month how about a 2y fix with a 75% LTV target £150k based on no price change.

amount	rate	payment	owing
£160,000.00	1.97%	£672.00	£149,988.28

3 bed and lodger could have him set up really good in 5 years say £400pm extra.

amount	rate	payment	owing
£160,000.00	2.27%	£953.00	£118,720.69

(2 year option would look even better)

Even crashy could not come up with a doomsday scenario that makes staying rented the better option.
(he has even tried to throw in you can't kick a lodger out that's is getting desperate)

getmore4less

AdrianC said:

Keswick1uk said:

I'm wondering if a 10 year fix would be better.

Basically, you're asking us to guess what'll happen to interest rates in 3-5-10yrs. Sorry, that's above our pay grade...

Remember that base rates are FAR lower than mortgage rates at the moment - so there's scope for base rates to rise substantially without much effect on mortgage rates. They've dropped without much effect, after all...

If he has a 2.5% 30 year mortgage, then in 5yrs time he will have repaid 12%, so with 20% equity now, will be looking at <70% LtV assuming prices stay flat. In 10yrs, he'll have repaid 25%, so 55% LtV, again assuming.

-ve equity at that point is all but impossible without the kind of price crash that even Crashy would find surprising.

amount	rate	payment	owing in 5y
£160,000.00	2.50%	£632.19	£140,920.61

paying off 12% of the mortgage does not equate to 12% equity its 9.5%   ~£1k short of 70% LTV

A bit of HPI would fix that.

p00hsticks

lesalanos said:

How will his salary change in the next 5 years? 

Yes - if he's buying by himself, I'd say that the main concern would be how secure his job is and how likely he would be to get another one if for whatever reason he lost the current one, rather than what interest rates might be doing 5 years down the line.....

getmore4less

Keswick1uk said:

Or remortgage. 
Which people do have to, relatively regularly. I'm not worried for now. I'm wondering if a 10 year fix would be better.

Once you get to better LTV(65%) there are options for a 10y fix with 5y ERC period.

Often when you crunch a shorter fix but paying the same as the longer one with the higher rate is enough along with the improvement in LTV that gives better rates to give a good safety margin

Another option if going 3bed lodger and do it up might be an offset,  where all the surplus cash is ready to fund the DIY and any increase in rates down the line.

getmore4less

Crashy_Time said:

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?

The base rate changes in the early 2000 were relatively small started at 6% sat at 4% for all of 2002, dipped to 3.5% for 4months 2003 then went back up again till the real drop late in 2008.

Hannimal

Your son will spend 33 000 in rent alone over 5 years, assuming the unlikely scenario that his rent remains the same and he stays in a tiny studio. It is a no-brainer to get on the property ladder if you can afford it. Renting is not getting any cheaper.

I would urge you to ignore Crashy_Time. He is a bit of a conspiracy theorist and in the time he has been telling people here that property prices will crash, they've gone up by £100k in my neighborhood. It's good to have some caution and be aware that the future is unpredictable, but he is scaremongering.