The best mortgage deals amid falling house prices

Buy now and risk your deposit being eroded if house prices fall. But wait until house prices settle and there could be a mortgage shortage.

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by Lorna Bourke on Aug 14, 2010 at 00:01

House prices have started to drift downwards again according to the Royal Institution of Chartered Surveyors with estate agents and surveyors who saw a fall in prices outnumbering those reporting a rise.

Much of the slowdown is no doubt due to the summer holidays, traditionally a quiet time for sales. While this is not good news for homeowners looking to sell, a dip in prices which are now only 10% below their 2007 high, will make buying more affordable for both first time buyers and their traditional competitors, buy-to-let investors.

Recent surveys from both the Halifax and the Nationwide have also shown that the upturn in house prices, which started in the spring of 2009, has been cooling off. Other indices including the Department for Communities and Local Government house price index confirm the slowdown with an increase of just 0.8% in the second quarter of 2010, down from 2.8% in the first three months.

Meanwhile there has been an increase in activity in the market. Mortgage lending to home buyers picked up again in June with figures from the Council of Mortgage Lenders showing the number of mortgage at 52,000 is up 19% on May and 14% on June 2009. The CML described the pickup in activity as ‘significant.’

Time it right

The difficulty for both first time buyers and buy-to-let investors is, if they buy now they risk seeing their deposits eroded if house prices fall. But if they wait until house prices settle, there could be a mortgage shortage.

Property sales are running at approximately half the level of the boom years of 2006-2007 but have been rising since the beginning of the year. Mortgage money is likely to be tight from January of next year when the mortgage lenders are obliged to start repaying at least £380 billion of loans advanced by the Bank of England when the credit crisis hit. So if you wait for house prices to bottom out you may not be able to get a mortgage.

First time buyers

So where does this leave those prepared to take a chance and buy now? There are plenty of 90% home loans around for first time buyers albeit at an average rates of around 6%.

The cheapest 90% fixed rate loan is a two-year fix just launched by Yorkshire Building Society at a market leading 4.95%. There is a three year version which is probably more sensible at 5.69%. The fee for both is £995. The Post Office has a 90% loan to value two-year fix at 5.45% and a three year version at 5.99% - as does Santander.

Although it is more expensive, arguably the best bet for FTBs because of the security it offers is a loan up to 90% on a five-year fix from Britannia and The Co-operative Bank priced at a 5.89% with a £499 fee. The Post Office has the same five-year fix and 90% loan to value at 5.99%. This might sound a poor deal when you consider that those with a 40% deposit can borrow for as little as 3.95% from HSBC on a five-year fix. But five-year fixed rates have seldom been below 5%.

Buy-to-let

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2 comments so far. Why not have your say?

I remember an IFA saying when you buy a pension you gain from pound cost avrageing

well thats what i do with houses I buy when ever I can if i have 30% deposit and have a 8% Yeild I buy

Mortgages are getting better but its a slow and will stay that way for a long time and for what its worth I think tracker rates will be low till 2013

But saying that I like to keep half of my portholio on fixed if I can just to stay safe

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Debt-free

Aug 16, 2010 at 09:41

This article is presenting a false dichotomy - 'buy now and risk falling prices or buy later and risk not being able to get a mortgage'. If this is true then price falls will accelerate in the early months of 2011 as the new mortgage shortage bites, giving an even more compelling reason to wait.

Of course, the truth is that anybody contemplating buying a house should wait, not until next January or even until the Spring. The time to buy will be when all hope has been lost and everybody has given up on housing as an investment - seems a strange and alien concept now, and many younger readers will laugh, but in the early-mid 90s (when I bought my first flat) people thought I was mad to buy and every financial adviser was counselling caution. With hindsight I was buying at the right time, but the only way of telling it was the right time to buy was that absolutely nobody was saying it was the right time to buy!

As for mortgage availability, that's a complete red herring for two reasons:

1. When prices are really at the bottom you won't need a very big mortgage because a 30% deposit at today's prices will be more than 50%; and

2. The banks will start demanding smaller deposits when they no longer have to factor in 30% price drops.

I had to go through a detailed face-to-faced interview with the Halifax to get my first mortgage - and would have been laughed out the door if I'd tried to borrow more than 3x my income - but the point is, I didn't need to borrow heavily because prices were realistic, and I only had to put down a 5% deposit because the banks know prices really wouldn't go any lower.

The only sensible advice to give potential first time buyers is: don't buy for at least another year or two. If you can't get a mortgage, neither will anybody else and that will bring prices down further.

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