With first-time buyers desperate to scramble on to the property ladder, building societies are increasingly offering 95% mortgages to offset the struggle of raising a huge deposit to secure a starter home.
With the average price of a flat in London sitting at just under the £400,000 mark, buying a flat now means raising a deposit of some £20,000 and paying £1843 to service the debt (assuming a 25-year repayment).
Buyers who believe they can recoup their debt with property profit when they sell are sadly mistaken. Research from Knight Frank this week showed that home owners can often forget about significant capital growth in the value of their homes. It forecasts a price growth in the UK of a below-inflation 1% this year, 2.5% next year and 3% in 2019 and 2020.
What does this mean?
The combination of rising interest rates and high levels of lending could leave owners trapped in homes that are worth less than they paid for them.
With desperation to get on the property ladder mounting and house prices starting to slow, many first-time buyers may find they get on the property ladder only for prices to drop rendering them unable to change jobs or manage their repayments.
Should you buy at all?
Whilst the buyers’ market may sound like a lost cause, owning is still likely to be a cheaper option day-to-day than renting. Although if interest rates rise this may not continue to be the case.
The main concern lies in these 95% mortgages where interest rates are higher than for buyers with a 10% mortgages who can shop around for deals between 1 and 2%.
So how do I avoid falling into negative equity?
If you are considering taking on a large mortgage, make sure that you are settled and planning to stay in your home for some time. Problems mainly arise when buyers want to leave their property and cannot afford to do so.
A way of ensuring this could be to skip the first-time buyers step of buying a smaller flat in the centre of London and head straight to a larger property outside London or on the outskirts which could potentially future-proof your purchase.
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