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Climb on the ladder

Almost on a weekly basis, there seems to be a reminder of just how much the value of property has increased over a relatively short period of time. The latest Halifax house price index shows the average UK property is valued at £100,400, rising to £175,900 in Greater London.

Among those already owning property, this information is very welcome and homeowners are no doubt congratulating themselves on their foresight in buying when they did. However, a growing number of people will find this information a source of frustration – those who wish to buy their first home but are unable to raise a deposit or save enough to cover the expenses.

A question that many people ask themselves is whether they would be better off renting or buying their first home. It is worth exploring the main benefits of homeownership over renting.

Data available through Bradford & Bingley surveyors indicates that those renting pay up to 7 per cent of the value of a property. One crucial difference for homeowners is that they can make a capital gain on any rise in house prices.

With reference to the graph above, it is easy to see the benefits of entering the housing market at an early stage, especially when house prices are increasing. Any increase in house prices over inflation is a tax-free net gain for a residential homeowner.

The figures used in the example are based on a £100,000 property using a 4.99 per cent two-year fixed rate. This shows the effect of fairly modest house price inflation at 5 per cent a year over the next 10 years. Also shown is a 4 per cent assumption of wage increases. The net effect is that, for each year that passes, the less affordable property will be.

It is worth bearing in mind that house prices could fall. However, by assuming a fairly modest house price increase – bearing in mind that parts of the country have seen house price rises in excess of 10 per cent in each of the last two years – this provides a very conservative illustration.

Lenders that do not alter mortgage indemnity guarantee premiums could save homebuyers hundreds of pounds and will help to keep down the cost of buying a home.

The graph demonstrates the effect on affordability if house prices rise at 1 per cent above salary increases. Clearly, the sooner an individual buys a property, the more affordable it will be in a rising market. In 10 years, the property will rise in value to £162,889. The net gain of £62,889 will be lost if the customer chooses to carry on renting and does not purchase their home.

The second graph (below) compares the monthly cost of mortgage payments versus the monthly cost of rental payments. The mortgage payments are based on a £100,000 mortgage fixed at 4.99 per cent for two years before reverting to the standard variable rate. Rent is calculated at 7 per cent of the property value, which is assumed to grow at 5 per cent a year.

First-time buyers will be dismayed to have seen that certain lenders have decided to single out areas that they believe will see house price falls. They are effectively asking first-time buyers to stump up a 10 per cent deposit and cover homebuying expenses. Our view is to continue to offer 100 per cent lending nationwide.


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