First-time-buyer advice edges towards ‘wait and see’
We’ve been here before in describing the UK peculiarism that most of us aspire to own a home with more gusto than do peoples elsewhere.
Hence the question should I buy or rent? would trigger a big chorus of that long-forgotten N*Sync song. Baby Buy Buy Buy. BUY BUY!
Yet back in the really real world of August 2023, there’s a humungous difference between should I buy or rent and do I ultimately want to own a home.
The latter is an ideal and an easy yes, but the former — what one should do — is context dependent. And right now, by jings, there’s a whole lotta context …
The state of play
Fresh news from Zoopla says that now, for the first time since 2010, the average rental is cheaper than the average first-time mortgage in the UK. Interest rates, pure and simple.
UK Prime Minister Rishi Sunak recently nudged new buyers towards longer mortgages – stretching the repayment timeline to 30 or more years, for example – to limit the expense of it all …
But that’s effectively a short-term fix at a long-term cost. Say a house costs £250,000 and you’ve a £50,000 (20%) deposit. When mortgage rates were 3.5%, repayments on a £200,000 mortgage would’ve been £1,000 per month.
To get a £200,000 mortgage down to £1,000 per month at 5.25%, the term would need to be extended to 40 years. Forty years … oh and it pushes the total amount repayable to £480,000 as opposed to the £300,000 as was.
It doesn’t sound optimal, does it.
Rent then?
We haven’t seen volatility like this in the UK mortgage market for at least 15 years and many predict there’s more to come.
And while every decision is personal and context-dependent, many experts’ general advice to would-be buyers, especially first-timers, now swings towards wait and see.
But, unfortunately, sitting back and biding time in a rental ain’t no bargain option either.
Fairly obviously, the rental market isn’t immune to rising mortgage costs. Government data says that six in every ten landlords have a live mortgage to pay thus swelling costs typically reflect in rent. Rents have been growing faster than average earnings for two years and, in June, rental inflation sat at 10.4%.
It’s all a bit rock and hard place.
Contingency thinking
There aren’t any easy answers here but if you find yourself at the buy / rent crossroads, here’s a couple to five things to think about in your decisioning:
Five-year threshold
The maths usually says a purchase isn’t worth it, financially speaking, if you’ll own the property less than five years; given the fees, tax and add-ons take time to claw back. If in doubt run your numbers through a Rent vs Buy calculator – there are plenty online.
Find a neutral gear
Buying a home can be massively emotional. That’s not a negative thing, but it’s important to try and separate your emotional from your rational self when deciding. If you fall in love with a place that’s over budget you may need to tag in your logical side … painful as it is.
Appraise your security
Really dig deep to assess how secure and steady your current employment position is. Might things change? Is your industry / job at risk? How’s the job market? It’s not fun to think in worst-case-scenarios but still a necessary and prudent part of the process.
Financial fitness
The principles of money management should still apply after you become a homeowner so plot your post-purchase budget to see where you’ll stand. Ideally, your mortgage and bills will be 25-30% of your income after tax to leave room to save, spend and stay strong.
Anticipate
Think in curveballs and maybes. What may change in your future and have you contingency plans? If you spot a potential issue on the horizon then factor it into your thinking. Buying a home is wonderful, but it’s also a decades-long commitment.
What’s going on for you?
The housing market’s in flux. Estate agents will tell you that house prices, though sliding, are still 5-10% above where they should be and increasing numbers of properties remain unsold after six months.
Many believe house prices will soften more significantly into 2024; once sellers accept what is and adjust their expectations.
So with advice veering towards wait and see. renting is back in the frame. Though it too is a market in rough shape, it could be the safer way to go if you feel borderline about your ability to buy a house, cover your costs and feel financially fit for an uncertain future.
So please do your research and click around the Money Means articles we link to above. Oh and let us know if you’ve a buy / rent conundrum on your hands – we’d love to hear what’s going on for members of our amazing community.