Building societies are increasingly offering 95 per cent mortgages to young buyers who are struggling to raise the huge deposits required to secure a starter home. The latest into the fray is the Yorkshire Building Society, which is offering buyers with a five per cent deposit a two-year interest rate of 3.25 per cent.
The average price of a flat in London is moving inexorably towards the £400,000 mark. According to Halifax, the current average is £398,038. Buying an average flat would mean raising a deposit of some £20,000 and paying £1,843 a month to service the debt, assuming a 25-year repayment mortgage is taken out.
That figure will rise with bank rate increases. And after two years the Yorkshire Building Society rate will grow to 4.74 per cent, pushing monthly costs for an average flat up to £2,154.
Furthermore, buyers who believe they can recoup their debt with a property profit when they sell should think again. New research from Knight Frank suggests home owners can forget about significant capital growth in the value of their homes. It forecasts that the UK will see price growth of a below-inflation one per cent this year, 2.5 per cent next year, and three per cent in both 2019 and 2020.
A PERFECT STORM
Experts warn that this “perfect storm” of interest rate rises, high levels of lending and mouldering prices could leave owners trapped in homes that are worth less than they paid for them.
“People are desperate to get on the housing ladder but the risk is negative equity,” says finance expert Charlotte Nelson of Moneyfacts personal finance website. “House prices are already starting to slow, and they might get on the property ladder now and prices may drop. That will mean they can’t move or change jobs. And if their living situation changes, it is very difficult.”
CHEAPER THAN RENTING
On the plus side, says Nelson, despite high prices, owning is still likely to be cheaper on a day-to-day basis than renting — although when interest rates rise this may no longer be the case.
Ray Boulger, senior technical director at mortgage broker John Charcol, points out that in the first two years of home ownership, mortgage repayments will knock about five per cent off the mortgage debt, mitigating slightly against the risk of negative equity. His main concern about 95 per cent mortgages is that interest rates are higher than for buyers with a 10 per cent mortgage, who can shop around for deals between one and two per cent.
HOW TO AVOID FALLING INTO NEGATIVE EQUITY
His advice to first-time buyers considering taking on a large mortgage is that they should be “settled and planning to stay in the same area for some time”, so that staying in the property for some time will not be a problem.
He also suggests they skip the traditional first step of buying a compact London flat, and head straight to a larger property in the suburbs, or even outside London.
This should future-proof the purchase — and will also mean only having to pay substantial moving costs once.
Meanwhile, a study by money.co.uk has found that one in 10 first-time buyers regrets joining the housing ladder, feeling that the sacrifices they have made outweigh the benefits of home ownership. The biggest complaints were having to move away from family and friends, a longer commute, and ending up with a property smaller than the home they were renting.