Yet that’s not the same as saying it’s the best time to buy a house.
So examine your own reasons for buying. If it’s a long-term place to live, to give you security of tenure, and the repayments are affordable (possibly even cheaper than renting) it’s a reasonable aim. Here’s what you need to know…
Step 1. Deposit, deposit, deposit.
Every 5% bigger deposit up to 40% cuts the rate – so a little more can have a big impact.
Imagine you’ve a £150,000 home and want a £136,000 mortgage. That’s a 90.7% LTV, the top two-year fix is 3.98%. Yet if you use £1,100 of savings to reduce the borrowing needed, you’d cross a threshold and be at just under 90%, where the top two-year fix is 2.69%. This would save over £700/year in mortgage payments alone.
Saving for a deposit is often a struggle. But from autumn you’ll be given the chance of a cash boost towards buying your first home through the new Help to Buy ISA.
You can save up to £200 every month and the Government will add 25% on top (so £50 on £200). You can also save an additional £1,000 when you first open it, so you can save £1,200 in the first month (£300 will be added on top).
The minimum you need to have saved to get the bonus is £1,600 (so a £400 bonus), and the maximum the Government will contribute is £3,000 (so you will have saved £12,000). Yet don’t open a normal ISA if you think you want one of these.
Step 2. Don’t fall for ‘Help to Buy Mortgage’ branding
While much hyped, the main Help to Buy scheme (ie, not the original only for new builds) is about the Government giving LENDERS a guarantee to enable them to offer more 5% deposit mortgages, meaning more are available. If you’re looking for a 5% deal, it makes no difference to you whether it’s a Help2Buy or not. Just go for the best available.
Step 3. Speedily compare to benchmark your cheapest
It’s important to work out the exact cost you’re likely to pay as soon as possible. Mortgage rates are currently the lowest they have ever been, with five-year fixes below 2% (if you’ve a big enough deposit).
While there’s always the chance they could get cheaper, there’s not that much room to fall, yet there’s far more room for them to rise in future.
To find a mortgage, look across the whole market if possible. A number of lenders like HSBC, Yorkshire BS and Tesco Bank only sell their mortgages direct, and these may be missed by mortgage brokers. So start by doing a comparison that includes all deals. Martin’s Mortgage Best Buys Comparison does this as do Money Facts.
Step 4. Two things that can kibosh your application
The days when lenders flung out deals to all and sundry are long gone. Getting accepted is now a challenge – I would suggest you start preparing at least a year in advance.
a) The credit check. It’s crucial to manage your credit score, eg, never make late payments, minimise other applications, put a landline and not a mobile on applications.
b) Affordability checks. Lenders must stress-test whether your mortgage is affordable even if rates were 6-7%. They’ll want evidence of income, big bills, expenses, even eating out. So being frugal in advance helps.
One way to navigate through these checks, is to use a top mortgage broker – search for one using Vouched For or Unbiased – they have info on how harsh each lender’s checks are, and can help ease acceptance. You’ll generally pay a fee for face-to-face advice, though brokers like London & Country operate fee-free via the phone (they get a fee from the lender).
Step 5. Fixed or variable?
With a fixed mortgage, the amount you repay is, er, fixed, so it’s like buying an insurance policy against possible rate rises. Variable deals move with UK interest rates. Currently you only pay a touch more to fix.
It’s very difficult to predict future interest rate moves. Even top economists are singing a different tune now from a year ago, and there’s even the possibility they may fall before that. So focus on your own situation.
The more important the security of knowing exactly what you’ll pay is, the more you should hedge towards fixing (and fixing for longer). If cracking the rock-bottom deal’s your driver, hedge to short-term trackers.