28 Jul 2016
Author: Stephen Breen
Although more than a month has passed since the referendum, there is still a huge degree of uncertainty in the housing market. On one hand, PwC has predicted deceleration in house price growth although no major crash – while on the other, the French bank Société Général has estimated house prices could drop by as much as 30 per cent. The reason for so much discrepancy is that nobody knows for sure what will happen going forward, particularly as Brexit negotiations haven’t even begun.
Here, we’ll look at the different considerations for first-time buyers, families and downsizers when negotiating the property market in the post-referendum climate.
First time buyers
Low interest rates and various Government initiatives boosted first time buyer numbers from March to May this year. 80,500 first time buyers purchased properties – 13% more than the same period last year – making up 24% of the market.
Some first time buyers may have felt the need to hold back in case house prices drop, mortgage rates improve any further or mass redundancies are made. Indeed, Lloyds announced only this morning that it plans to cut another 3000 jobs and close 200 more of its branches, in addition to the 9,000 job cuts and 200 branches earmarked for closure in October 2014. However, this move is not entirely attributable to the Brexit vote – Lloyds says less customers are using its branches as more people turn to online banking. While redundancies are a very real concern in a period of economic uncertainty, first time buyers should keep in mind that it is possible to take out redundancy insurance for a reasonable cost.
No one is sure of the long-term impact of Britain’s vote to Leave, but first-time buyers are unlikely to find that house prices suddenly drop or that mortgage rates decrease substantially. Even if the Bank of England drops its rates, there is no guarantee that these savings will be passed on to borrowers in the form of better deals. In the past, a drop of 0.25% in the base rate might have resulted in a drop of just 0.1% in mortgage rates.
First time buyers are, however, likely to see a couple of negative effects from the referendum result – stringent lending criteria and more expensive mortgages for those without a decent deposit. It makes sense to look at any help available to mitigate these problems.
A number of initiatives are available to help buyers ease the burden of their first house purchase. These include:
Help to Buy Equity Loans: New builds only, but both first time buyers and homeowners looking to move are eligible. Buy with a 5% deposit and the Government will lend up to 20% of the purchase price on top. You therefore only need to secure a 75% mortgage. Available until 2020.
Help to Buy Mortgage Guarantee: Existing or new build properties – both first time buyers and homeowners looking to move are eligible. The Government guarantees part of your mortgage so if you only have a 5% deposit, you’ll still need a 95% mortgage. However, you’ll be able to access better deals as the lender has the reassurance that if the property has to be repossessed, the Government’s guarantee means they won’t usually be out of pocket. Available until December 2016.
Help to Buy ISA: First time buyers only. Deposit up to £1,200 and then £200 a month after that. The Government will top up the funds by 25% when you come to buy a property. You and your partner can each have an account and each get the bonus, provided you’re both first time buyers.
Starter Homes Scheme: This new scheme will give young first time buyers (under 40 years of age) at least 20% discount of the market price of a starter home. More details can be found on the Council of Mortgage Lenders website here.
Family Springboard mortgages are also worth a look, for those with a low deposit. With Barclays’ deal, you can borrow up to £500,000 for a UK property without a deposit and enjoy a fixed rate for three years, before moving to a LifeTime Tracker Mortgage. To be eligible, a member of your family must deposit 10% of the property price into a ‘Helpful Start Account’ when you apply. They will get this back after just three years with interest, provided that you make all your repayments. If you default, their money may be retained for a longer period. Currently this deal is being offered at 2.79% until 30th September 2019.
Getting good value
With so much uncertainty, it makes sense to look for a good deal. Experts think discounts of up to 10% are currently achievable, particularly on new build properties, with greater discounts on those that were already overpriced.
Since it costs money to move, it is advisable to look for a property that will meet your needs for some time. According to a report by Countrywide, in London or the Southeast the 61% of people who buy a one or two bedroom flat will move within 4.5 years. For the rest of the country, 70% of first time buyers will choose a home that has 3 bedrooms or more – and stay for longer. North of Manchester, a first time buyer will stay for an average of seven years – compared to just five in the South.
Families tend to trade up, from small flats right the way to large family homes, and the pace at which this is achievable all depends on affordability. To accelerate this process, it makes sense to move to an area where property prices are cheaper.
280,000 people left London in 2015, destined for areas where property is more affordable. Birmingham is a firm favourite, with commuter towns and cities including Brighton, Sevenoaks, Hatfield, Reigate, Thurrock and Canterbury also being popular. With house prices in London slowing down, there is more reason than ever to seek better value outside of the capital. However, given the uncertainty caused by the Leave vote, sellers may get less than expected for their London home.
For families making their second or third move, location should always take priority, which might include proximity to work or a good school. To get a large enough home that ticks the location boxes compromise in other areas may be needed. Everyone in the family has their own view of what is ideal, but sometimes it may be necessary to move to a house that isn’t perfect or needs some work to get good value – particularly where the choices are limited.
Stress test your finances
Although more home-movers than ever before are buying without the need for a mortgage, those who do need finance should consider what would happen if interest rates were to rise. This is inevitable over the next five to ten years and may lead to higher mortgage payments, unless the borrower is locked into a fixed deal. Long term fixed deals, although slightly more expensive, can offer more certainty.
Around 90,000 households will downsize every year according to Savills. Downsizers typically have the budget not to require finance, but have limited choices available to them. YouGov’s annual Homeowner Survey revealed that while 19% of homeowners aged 55 plus would like to downsize, they have not done so due to lack of choice.
Over the next few years, these stats are likely to grow, with the number of over 65s increasing from 11 to 18 million and making up a quarter of our population. There are few suitable properties available as the housing market has failed to adapt to the growing demand from this demographic.
Downsizers tend to want a smaller property with easy maintenance that can be locked up and left should they want to travel. Central London draws many in with its easy transport links doing away with the need for a car – and a good range of entertainment close at hand.
Whether you’re a first time buyer, family or downsizer, our property team are always available to discuss your options with you.