Should You Join the Pandemic Housing Market? A Guide for British Buyers

Tuesday, February 23, 2021

In the wake of the COVID-19 pandemic, buying a home has become rather difficult in the United Kingdom. Some have put their plans on hold because of unemployment and health concerns. But this didn't stop those who could. The U.K. housing market remained open through quarantine. Many were even willing to travel farther away to view houses once lock downs were lifted.

Much like in the U.S. and Canada, the real estate sector in the U.K. remained robust despite the pandemic. In fact, average house prices rose by 8.5 percent in 2020, the highest in the U.K. since 2014. Lower benchmark rates and a tax holiday contributed to the boom. The market remained open throughout the pandemic. But does that mean you have to jump in and buy your home now?

Your Window of Opportunity

Low mortgage rates are a tempting reason to jump in. Because of the pandemic, the Bank of England (BoE) lowered the benchmark interest rates to 0.1 percent in 2020 to stimulate market activity. This means that the people who could afford it could still push through with their home buying plans. And even if you're not looking for a new home, you can remortgage to lock in lower rates. This results in affordable monthly payments and cuts down your interest costs.

Another reason is the Stamp Duty Holiday between July 2020 and March 2021. The U.K. government suspended the stamp duty taxes charged on properties below £500,000 in England and Northern Ireland. Meanwhile, the local parliaments of Scotland and Wales waived taxes on properties below £250,000. Anyone buying more expensive property only needs to pay for taxes above that amount.

In December 2020, two major lenders (Halifax and Lloyd's) also brought back low deposit mortgages for new buyers. Prospective homeowners need only a deposit (down payment) of at least 10 percent for older homes. Early in the pandemic, lenders pulled mortgages with low deposits from the market. Most lenders demanded a 15 percent minimum deposit for their mortgages.

These conditions played a role in the hot market and rising prices seen through 2020. But lender Halifax notes that this cannot last long. Demand is expected to drop a few months into 2021. The tax holiday is due to lapse by March. And with much of the U.K. economy still closed, unemployment remains high. Fewer people will be able to afford houses, and prices will drop again.

Examine Your Budget

The first thing you need to consider is your budget. Even if you're in a secure financial spot right now, it doesn't mean you can afford a mortgage. Can you afford to put in a large monthly payment into your budget? What about the associated costs of moving? Analyse the details of your budget.

Look for debts you can put on the cutting board. Credit card bills and other outstanding payments eat into your budget. Pay them off one at a time. Clearing your debts does not only free up more money for other expenses. It also helps you build savings for your deposit and improve your credit score.

Consider your deposit. A large deposit secures your mortgage application and qualifies you for lower rates. This will also help you lower your monthly payments. Moreover, a bigger deposit can help you afford a larger home. Your lender will usually approve a mortgage that's four times your annual income. Your deposit can cover the difference if the approved amount doesn't pay for the whole property.

Put Your Best Foot Forward

Get your finances in order before embarking on your home buying journey. Lenders must assess your risk profile before they approve your loan application. The riskier you appear, the less likely you'll get approved. Even if your chances of approval are high, a good impression still matters. Lenders may grant you even lower rates if you impress them.

Prospective lenders will examine your credit history and other financial documents. Your payment records reflect in your credit history. These let lenders know if you are capable of handling more debt.

You improve your credit score through on-time debt payments. Likewise, late payments and too many debts can harm your credit score. A low credit score can also affect family members if you have a joint account or act as a guarantor.

Here are a few other tips to help improve your credit score.

  • Don't be in a rush to apply for every mortgage available. Too many credit checks and rejected loan applications at once may negatively impact your credit score.
  • Look for possible errors in your credit history. Your creditors could record late payments or delinquencies that never were. Correct these and protect your financial reputation.
  • Close accounts from older credit cards based on older addresses. Lenders will look at you with suspicion if these accounts are still active.

A word for non-British buyers from North America. Your credit score, no matter how good it is, is non-transferable. This is vital if you plan on moving to the United Kingdom. You must build up a new credit score from scratch.

Choose Your Mortgage

Consider the type of mortgage you apply for. Not all mortgages fit the same purpose. Do you want regular amortising payments or lower monthly payments? How long do you plan to stay in your home? Can you commit to regular extra overpayments? These questions will determine what type of mortgage fits your long-term purpose.

Unlike in the U.S. and Canada, fixed-rate mortgages weren't always popular with British buyers. Buyers pay higher rates than other mortgages in the U.K. market to ensure their rates and monthly payments will not change soon. And the longer their fixed-rate term, the higher your APR. However, fixed-rate mortgages do provide stability. Your payments will stay identical for several years at a time, which makes them easy to plan around.

On the other hand, variable-rate mortgages are easier to apply for and often have lower upfront rates. But because their rates go up and down, your mortgage payments each month may vary. Many of these mortgages also let you overpay your mortgage without limits. If you can commit to a fixed overpayment schedule, you can save a lot of money on interest in the long run.

  • Tracker mortgages: Tracker mortgages are the most popular. These offer a base rate plus a percentage based on a rate set by the BoE. For instance, if your lender's base rate is 2 percent, and the BoE's rate is 0.1 percent, then your rate would be around 2.1 percent. This option puts a cap on how high your rate can go. Your tracker mortgage can either last through your whole amortization period or for a span of a few years.
  • Standard Variable Rate mortgages: Because of their higher rates, standard variable rate (SVR) mortgages are usually avoided. Most of the time, you would remortgage before your loan reverts to an SVR one to save money. But if you plan on moving soon or if rates are low, an SVR mortgage might be an acceptable bargain.
  • Discount mortgages: Discounted mortgages offer a lower percentage than other options. For a brief time, you pay a discounted rate lower than the lender's prevailing rate. These last for about two or five years before they revert to an SVR.
  • Offset mortgages: If you are a freelancer with a lot of savings, consider an offset mortgage. Lenders tie these mortgages to an interest-free bank account. These savings offset your mortgage balance. While you can still use this money, you can save more money by keeping it there.

Think Outside the Box

The pandemic has also changed the way people looked at housing. Those who still had jobs did them at home. If this trend continues, more people wouldn't need to live so close to their place of work. This can free you from the need to look at expensive cities for your new home. The trend can be seen in how much home prices rose across the country. Northwest England had the biggest change in prices at 11.2 percent. Greater London meanwhile had an increase of 3.5 percent. Cheaper areas have become hot new markets.

While you don't need to be so picky with locations anymore, you must consider the house you choose with care. For most new buyers, space is an important concern. The pandemic meant that many had to stay huddled in cramped homes with their families.

It's tempting to get a home with more elbow room for your family. Focus on getting a home with enough usable space that your family will be comfortable with. If you expect to work from home more often, look for a house with a home office. Avoid getting carried away. A larger home is both pricey and comes with bigger upkeep costs.

Stay Safe

Remember, we are still in a pandemic. To reduce the chances of transmission, take precautions throughout the home buying process. If you must go outside, wear the appropriate mask and observe physical distancing.

Whenever you can, schedule your initial viewings online. Your first viewing is often all you need to decide whether a home is worth considering. Host a physical viewing only when you are sure that this is the home you wish to buy. Open-house viewings are discouraged right now. Talk to your agents well in advance to ensure that the safety procedures are in place for your visit.

When you do seal the deal, consider how long the moving process will take. Make reservations to any open hotel if the process will take several days. Do most of your own packing to protect yourselves and the movers.

Other Considerations

First-time homeowners have a lot of questions on their plate. It pays to do your research and look at all your options. If you can't afford a standard mortgage or want an alternative to buying and renting, there are other options. Look at the U.K. government's Help to Buy programme for any scheme that works for you.

If your budget is tight, you might not give overpayments much thought. But if you can make them, they can save you money over the lifetime of your mortgage. Learn about your mortgage's overpayment allowances and penalties. This can help you make the most of the extra payments you're allowed.

Take It Slow

Property values can rise too much during hot markets. You might think that you'll miss out on great deals if you don't move fast enough. Both Bloomberg and Forbes warn against jumping in the home buying bandwagon. They argue that rising prices can cancel out your interest savings. Move too fast, and you end up underwater. This is where you owe more money than your house is worth, which happens when property values drop.

All real estate markets are local. And in any market there are both reasons prices may go up or fall at the same time. For example, London has seen a large influx of Hong Kong buyers, though prices for premium properties have still trended downward as some City of London workers moved abroad after Brexit and other urban dwellers preferred rural estates with more space in the face of rolling lock downs.

Even if you could afford a mortgage, resist the temptation to rush in without certainty for what you need, what your family situation will look like for years to come, and have job certainty. While you think you'd be priced out now, you could get a better deal if you waited a little longer. Instead, sit down and prepare. Pay off debts, improve your financial records, and save more. Careful planning can improve your chances of securing a mortgage with good terms. It can also help you save more money in the long run.

There is also an offset between interest rates and real estate prices. If longer-duration interest rates rise monthly mortgage payments reset higher for the same home price. This, in turn, can lead to home prices falling so that people with a similar earning power can still afford a similar monthly payment at a higher interest rate.

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