Is Now The Right Time To Buy a Property With Sarah Davidson

The Wallet by Emilie Bellet Vestpod Sarah Davidson

Date: Nov 12, 2020

Since reopening after lockdown, the property market has been incredibly active with record house sales being reported in the UK. Rightmove claims that “prices are now 5.5% higher than a year ago, the biggest rate of increase for over four years” and is “now forecasting annual growth rate to peak at circa 7% by December”.

Thanks to government incentives such as the stamp duty holiday, it may look like an attractive time to move house or buy your first property.

But what effect is the Covid-19 pandemic actually having on the property market?

Stamp duty holiday

Since Rishi Sunak’s announcement of the stamp duty holiday in the UK, a record number of purchasers have acquired properties worth up to £500,000 in value. Indeed, market data supports the effectiveness of the stamp duty holiday in terms of increasing market activity: July saw house prices rise by 1.7% compared to June, and August was met by an even greater price increase.

The stamp duty holiday is a cut in the rate of stamp duty to 0% for all properties worth £500,000 or under until the 31st March 2021.The maximum saving the stamp duty holiday provides in this context is £15,000.

The surge of mortgage applications has led to an increase of processing time from 3 months (as under standard economic conditions) to 5 months. The residential property market’s processing capacity has been further reduced by the shift to working from home where staff are limited by their resources. This will ultimately result in some buyers just missing out on the stamp duty holiday savings given the limited time frame.

The house-buying process and tips for first-time buyers

Things to do before you start looking for properties:

Make sure you have a good credit score – it is a good idea to establish a precedent in your ability to make the full repayment on debt every month as this will signal your reliability to mortgage lenders
Make sure you are registered on the electoral roll – this will establish you as a residence in the area which mortgage lenders will care about

In general, the bigger your deposit, the better the mortgage rate you will be able to find. A general rule of thumb is that you should save a minimum of 10% of the cost of the property in order to be offered a mortgage, although a deposit of at least 25% will enable you to find the best deals on mortgage payments.

Where to keep your deposit? If you expect to buy the property in the short term, you want to keep this money in cash and find the best saving rate. If you expect to take longer than 5 years to save up for your deposit as a first-time buyer, you may want to consider investing some of this money.

Opening a lifetime ISA can help you improve the return on the money you save. You must be between 18 and 40 years old to open a lifetime ISA, after which time you can put in up to £4,000 each year until you reach 50. The government adds a 25% bonus to your savings, which is a maximum bonus of £1,000 a year. You can withdraw from your lifetime ISA when you decide to purchase your first home (up to a value of £450,000) or once you retire. If you withdraw for any other reason, you will incur withdrawal charges.

When it comes to finding a mortgage, the more research and due diligence you do the better. Use a mortgage calculator online to input basic information about your income and any kind of fixed costs that you incur on a regular basis. When looking at what you can afford, you should take into consideration any legal and valuation fees you will have to pay as a consequence of moving. Allow for an emergency cash buffer to cover any unexpected costs that may crop up when purchasing a property.

At this stage in the process, it is highly advisable to talk to a mortgage broker who will have access to a large number of mortgage lenders that are not directly available to property purchasers. This is especially the case if you have an income stream that is ‘abnormal’, which can mean anything that does not constitute full-time employment PAYE. For those who have struggled through Covid-19 and missed any payments on credit cards or taken advantage of payment holidays, a mortgage broker will prove very helpful in this scenario because they will be able to match you with a specialist lender that will more critically assess your financial situation.

Lockdown specifics

What should I do if I am struggling to meet my mortgage payments in the midst of this pandemic?

Given the disruption that Covid-19 has caused in the UK job market, the government has allowed for penalty free mortgage payment holidays which were available to apply for until the 31st October 2020 and have now been extended through to January 2021. If you are still experiencing financial difficulties that are related to the pandemic, it is possible to apply for a payment holiday under the following conditions.

If you have not yet taken a payment holiday on your mortgage, you can request a payment holiday for up to six months.
If you have already agreed a payment holiday of six months, you can extend this period up to a maximum of another six months.

However, mortgage repayment holidays should not be taken lightly. The label ‘holiday’ can be misleading since what you are essentially doing by agreeing to take a payment holiday is agreeing to fall behind on your mortgage payments. This will cost you more over the long term. Instead, speak to your mortgage lender about lowering your mortgage payments for a set time window. Alternatively, you could decide to re-mortgage to a lower payment rate over a longer time horizon.

For people struggling to pay their rent, the key thing is to not bury your head in the sand. Call your landlord and explain how your financial situation has been impacted by Covid-19 to see if there is room to negotiate your rent payments or take a break from your payments for the short term. The outcome of such a discussion is likely to be dependent on your landlord’s own circumstances.

If I am in a fortunate enough position to have saved money during lockdown, should I overpay on my mortgage?

Look into the terms of your mortgage since this will limit how much you can overpay (it is usually capped to 10% of the outstanding mortgage balance every year before you incur a penalty fee). While overpaying on your mortgage could be seen as a good idea given record-low mortgage rates, if you have any other urgent debts it is important to prioritise these. It's important to think about keeping an emergency cash fund – if overpaying on your mortgage jeopardises this fund, you ought to reconsider. Lastly, it might be possible to win a better long-term return through investment strategies such as setting up a Stocks and Shares ISA.

Back to basics

Longer term policies are needed to help support a healthy housing market that will work to dissuade knee jerk reactions in the residential property market and, instead, facilitate the right people who can afford it getting onto the property ladder in a way that works for them.

Inferences from the market data that highlight price rises as a reason to buy property now are somewhat misleading. Firstly, there are the potentially disastrous price effects that could occur in the aftermath of the stamp duty holidays which we have discussed. Secondly, although house prices are rising on average, this does not give us an accurate picture of the price movements of residential property in the individual regions in the UK. Ultimately, house prices, and the increases in house prices, are determined by the supply and demand in a given location. For this reason, it is important to do due diligence when purchasing a property. You should avoid the temptation of making your purchasing decisions based on the movement in mortgage rates, which have been rising over the last three months.

Fundamentally, you should make whether you would want to live in a property over the medium to long term the driver of your purchase. If you are not happy to live in a property for more than 5 years, the costs associated with the move and purchase are likely to outweigh any appreciation in the price of that property. In this sense, Sarah urges prospective buyers to go “back to basics” and think with a “nest, not invest” mindset when it comes to buying property.

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