With the property market appearing to be in recovery mode – and even going into hyper mode in many London boroughs, there is lots of good news about property.
It’s important however to understand that before buyers rush into the market, they will be doing so at a “historically low” rate. That’s because interest rates are currently at 0.5%, when the norm since the credit crunch is for them to be around 5%.
Corresponding mortgage rates can be secured from anything around 2% to 5%, depending how big a deposit you have ,so it’s fine to buy in this market, but only if buyers appreciate the cost of mortgages at 2-3% could well double into the future. The issue is we just don’t know how quickly this is going to happen.
Forecasters suggest interest rates could rise as early as this year. The CEBR and Nomura think interest rates could be between 0.75% to 1% by the end 2014, while Capital Economics believe rates won’t rise to 0.75% until 2015.
As a result, many brokers and forecasters are suggesting it’s a good time to lock in rates. Andrew Montlake from Coreco explains: “No matter how vehement the Bank of England are that interest rates are not going to increase any time soon, the real question is whether the financial markets believe this. We have already seen the cost of 5 year mortgages increase recently and for borrowers this means that 2014 looks like it could well be the last time that mortgage rates will be so low.”
If you are looking to invest, medium term fixed rates may be the right way forward. Andrew adds: “Five year fixes are available on a Buy To Let basis from 4.19%, albeit with a 1.25% Arrangement Fee, to 4.99% with just a £995 Arrangement Fee.”
But what impact would a rise in rates have on individuals in the market? From a sellers perspective, selling while the market is “hot” and funding is considered good value is worthwhile considering. If the market quietens down due to mortgage costs going up, this could mean you don’t maximise your sales price.
From a buyers perspective, higher mortgage cost could mean the market isn’t ‘so busy’ giving you time to look for a property that’s right for you without fear of it being snapped up quickly or having to pay over asking price.
For investors, a rise in mortgage rates is OK, unless your rents aren’t covering your costs at the moment and your property isn’t rising in value – or hasn’t since the credit crunch. For those looking to buy now, it could choke off some increased demand, making it possible to ‘bag a bargain’, which as long as you can finance the property long term via the likes of buy to let, then the rate rise may actually work in your favour.
Whatever happens in the market, it’s worth making sure you check you can afford a property not just now, but versus long term costs of mortgage levels being around 5-7%, if you can’t, then it’s time to see your local mortgage broker!