Homebuyers' confidence drops - but what should you do?

Rising unemployment and the spectre of more redundancies in the public sector are undermining homebuyers’ confidence.  The proportion of those who believe that now is not a good time to purchase has increased from 21% in June to 26% in September according to the Building Societies Association.

Barriers to purchase

The lack of job security and the ability to raise a big enough deposit remain the greatest barriers to property purchase with 56% of those questioned citing these as potential problems.  Perversely, the flat or falling forecasts for house prices has deterred others.  Falling house prices are good news if want to trade up.  Although you will get less when you sell your existing home, if you are buying a larger property that too will usually cost less.  A 10% fall in property prices from the 2007 high means that a £250,000 property may now sell for only £225,000 but a £400,000 property will cost probably £360,000.  You lose £25,000 on the sale but save £40,000 on the purchase.

‘It is clear that concerns about future falls in property prices are having a significant impact on consumer confidence,’ commented Paul Broadhead, head of mortgage policy at the BSA.  ‘Whilst the survey indicates that consumers perceive access to a mortgage as less of an issue than in March (50% in September compared to 57% in March), job security remains a barrier to house purchase and is likely to remain so until there is greater confidence in the strength of the economy,’ Broadhead said.

Worse ahead

But if people believe now is not a good time to purchase or move up the housing ladder, things are only likely to get worse for two very obvious reasons.  First, mortgage rates are currently at an all time low – but they will have to rise eventually making the monthly cost of house purchase more expensive, less affordable, and homebuyers will not be able to borrow so much.  Secondly, in January of next year the mortgage lenders must start repaying government finance which was provided to prop them up when the credit crisis struck.  This will mean a shortage of mortgage funds.

It’s all about confidence and taking a medium to long term view.  If you need somewhere to live, monthly mortgage costs are not going to fall any further and now is the time to sign up for a longer term fixed rate.  In addition, a survey from the Council of Mortgage Lenders reveals that the desire for homeownership is as strong as ever.

Some 85% of people cited home-ownership as the tenure they hoped to achieve in ten years from now, suggesting that owning your own home remains firmly rooted.  The CML has asked the same questions about home-ownership aspirations periodically since 1975. Last time the survey was undertaken, in 2007, the proportion who expected to be home-owners in ten years' time was 84%.  Clearly the obstacles of large deposits and job uncertainty have not diminished families’ desire to own their own homes.

Protection of a fixed mortgage

To protect against the inevitable rise in interest rates it may be wise to opt for a five year fix.  Unfortunately, as Ray Boulger of mortgage broker John Charcol points out, the mortgage lenders are offering two and three year fixes at significantly lower rates than five year fixes – in spite of the gap between swap rates for two and five year fixes narrowing.  Swap rates determine fixed rates on mortgages.  A two or three year term may mean that you are remortgaging just as interest rates really take off – not a good idea.

Boulger calls it the ‘chicken and egg’ effect – short term fixes are cheaper and because people want the lower rate, lenders reduce the costs still further to compete. ‘There has been an increased take up of fixed rate mortgages over the last few months but most of the competition from lenders has focused on the two-year period, resulting in much more choice in the sub 3% two-year fixed rate market.’

The best deals

So if you are prepared to take the plunge and buy or remortgage what is available?  Trackers are still the cheapest option with HSBC and First Direct hogging the top of the table with lifetime trackers at 2.19% and 2.59% respectively. (Bank Base Rate of 0.5% plus 1.69% at HSBC and BBR plus 2.09% with First Direct.)

The big attraction of these loans is that there is no early repayment fee if you subsequently want to switch to a fixed rate.  The concern is whether the good fixed rates are still around at that time.  The arrangement fee is £99 on both and loans are only available direct from the lender. Maximum loan to value is 60% at HSBC and 65% at First Direct.  For those needing to borrow more Ing Direct has a lifetime tracker at 2.65% with a fee of £945 and maximum LTV of 75%.

If you are not prepared to take the chance on cheap fixed rates being around once rates start to rise, it really isn’t worthwhile going for a two or three year fix because you will almost certainly be remortgaging again just as interest rates are rising fast. 

High fees

In addition, as Boulger points out, the best buys at two and three years – Santander at 2.75% for a two year fix, Principality Building Society at 2.79% - have high fees of £1,995 and £1,499 respectively. This raises considerably the overall cost on an average £200,000 mortgage, effectively adding almost 0.5% to the headline rate.   Godiva, for example, has just launched a two-year fix at a very competitive 2.49%.  But maximum loan is only 60% and there is a hefty fee of 1.5% of the amount borrowed, plus £199.  On a £200,000 loan the fee pushes up the headline rate to 3.28%.