Mortgage Guides

Is now a good time to get a mortgage?

Article updated: Tuesday 4th October, 2011

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By Martin Fagan

It’s no secret that the housing and mortgage markets have stalled over recent months and it seems like house prices are likely to fall even more this year - so the question remains, is now really a good time to be thinking about getting on the property ladder?

February’s report from the Centre for Economics and Business Research (cebr) forecast that house prices are likely to drop another 1.7% over the course of 2011.

At the same time mortgage lending remains subdued across the market making it difficult to obtain the finance to buy a property.

This is confusing news if you’re a potential first-time buyer wondering when would be a good time to get a mortgage and take the first steps onto the property ladder.

However these two issues - house prices and mortgage availability - are key when you are working out whether now is a good time to buy.

What will happen to house prices?

It is impossible to call the property market – if we knew what the future held for property prices, life would be a lot easier, but the truth is that even experts can only make an educated guess.

Lenders are still being very picky about who they will lend money to

The housing market may have stalled but that does not meant it is stabilising and in fact experts are predicting that house prices will fall further over the next 12 months.

The Centre for Economics and Business Research is forecasting a 1.7% drop in house prices over 2011 to reach an average of £175,416.

However, after this year the cebr is expecting them to then rise, albeit tentatively, over the coming years.

So when deciding whether now is a good time to buy, you need to decide where you think house prices are going, and to what extent you are willing to take the risk of further price falls.

It’s worth noting that the longer you are planning to stay in your new house, the less of a danger house price falls should pose, as over the long-term you would expect them to rise albeit tentatively, over the coming years.

Can you get a mortgage?

A crucial part of deciding whether to buy a house is finding out whether you can secure a suitable mortgage, and this will depend on the current mortgage market as well as your own personal circumstances.

Following a number of years when the dearth of mortgages on the market has been a serious problem facing potential buyers, 2011 has so far seen an improvement in the availability of finances to homebuyers.

According to new data from the Council of Mortgage Lenders, gross mortgage lending in June 2011 totalled £12.6 billion, up 16% from £10.8 billion in May. Gross lending for the second quarter of 2011 was an estimated £33.5 billion, an 11% increase from the first quarter of this year.

Despite the boost in the amount of money lenders are willing to advance, they are still being very picky about who they will lend money to and have very strict criteria which you, as a potential borrower, has to meet.

But if you have a sizeable deposit, a good credit history and can prove you will be able to afford a mortgage then you will probably be offered a loan.

Even if you find a decent mortgage deal, whether you will be able to secure it will depend on whether you have built up a substantial deposit.

Although higher loan-to-value deals are creeping onto the market, you’re likely to need at least a 10% deposit and the best deals are still reserved for those with even bigger deposits.

Please see our guide on how much you might be abe to borrow at the moment.

Fixed rate or tracker?

Assuming that you meet all the lender’s criteria, you next decision will probably be whether you should opt for a fixed-rate mortgage or a tracker - a decision which is a minefield in itself.

At the moment the Bank of England base rate is at an historic low of 0.5% so it would seem that a tracker mortgage is the way forward. However it is not that cut and dry.

It’s a good idea to sit down and think about where interest rates may go and how affordable that would make your mortgage. You need to think about whether you want the certainty of knowing what your monthly mortgage payments will be.

If you do then you should fix your mortgage, even though you will probably pay a higher rate of interest than if you choose a current variable rate deal.

That said, when the base rate does increase it will be variable rate customers who suffer. So, if you are tempted by a variable-rate mortgage, you need to consider how your finances would cope if your mortgage rate did suddenly increase.

Mortgage rates

While it was once possible to get a tracker mortgage that tracked below the base rate, now the average two-year tracker (variable rate) mortgage is tracking at 3.38% above the base rate, according to financial information company Moneyfacts.

As with all mortgages, the bigger your deposit and the less you need to borrow (the LTV ratio), the lower the interest rate you’ll pay. Also, the longer the period of the fixed-rate, the higher the interest will be.

According to Moneyfacts: • The average two-year fixed-rate is 4.35% - the highest on the market is 5.2% (requiring a 5% deposit so 95% LTV) and the lowest is 3.5% (requiring a 30% deposit or 70% LTV) • The average three-year fixed-rate is 4.87% - the highest is 5.2% and the lowest 3.6% • The average five-year fixed-rate is 5.33% - the highest is 6% and the lowest is 4.7% • The average tracker (variable) rate is 3.38% - the highest is 4.9% and the lowest is 2.6%

Therefore it’s important to consider that, with the average tracker at 3.38%, if the base rate increased from 0.5% to 5% within the next two years taking the rate on your tracker to 7.88%, your monthly repayments on a 25-year £180,000 repayment mortgage would increase by £492 a month - to £1,398 from £898.

Advice

When it comes to deciding on a mortgage, it’s not a case of one size fits all and the best mortgage for you will be the one that suits your financial circumstances. As this will arguably be the most important financial decision you’ll ever make, you should speak to in independent financial adviser (IFA) or independent mortgage broker about your circumstances and what the best deal for you may be.

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