Dramatic changes in the world economy in recent months threaten to challenge many of the financial truisms we have taken for granted in the past. For example;
• The price of most goods and services will rise
• I will always be able to get another job
• I will help fund my retirement from my property
Many of these beliefs developed around the unique love affair the British have with home ownership. In the last fifteen years we had got to the point where people were buying property just to make sure they had a foot on the property ladder, regardless of whether they liked the property or not. Many of us looked with admiration at friends who built a buy to let property portfolio and, if you are like me, felt inadequate because you had not. Indeed as property prices have risen year on year, much of our spending on holidays and new cars has been funded by realising equity from property.
So here's the rub, in the current market, with property prices having fallen by 16% in 2008 and further reductions on the cards in 2009, would you or should you enter into the property market?
In my view this is determined by whether you want a home or an investment. If you are looking to bring up a family, or create a home in a location that ticks all your boxes, then the answer is a categorical yes. With low mortgage rates likely to be the medium term scenario, repayment costs compare very favourably with rental costs, and you know you have security of tenure.
If however you are buying to get on the property ladder, or indeed to let, and you think the property you have your eye on is a bargain, I am pretty sure it will be an even bigger bargain this time next year. Indeed many of those portfolio-owning friends I admired in 2007 are now envious of my rather more modest circumstances!
So if you are looking for a home rather than an investment, what impact has the credit crunch and recession had on the housing market, apart from deflating prices?
• Larger deposits are now required, with the best mortgage rates only available to those with at least a 40% deposit and lower income to loan ratio requirements
• Those already in the property market on a fixed rate mortgage could now find it cheaper to pay the penalty for breaking out of the deal and switching to a lower interest rate (subject to having sufficient equity in their property) - ultimately some people may be better off doing this
• Housing chains can take a long time to complete as invariably someone in the chain cannot sell (if you are selling and find a buyer, take the cash and rent if necessary)
• Buy to let mortgages are more difficult to obtain
• Some of the best bargains are to be found in the new build sector, where developers cannot afford to sit out the downturn
So as you can see the whole process is pretty daunting but do not be downhearted, the government is keen to get the housing market moving, and there are a number of schemes available to help those in the Armed Forces: -
Long Service Pay Advance Scheme
Eligible military personnel can receive an interest free loan of up to £8,500, which can be put towards buying a house.
Key Workers Scheme
Since September 2006 certain Armed Forces and MOD personnel have been included in the Government scheme, which aims to assist key workers in London , the South East and East of England buy homes. Options for purchase include:
• Shared equity scheme - buyers can take a 75% mortgage with the remaining 25% covered by an equity loan from the lender and the government
• New Build Homebuy, whereby the key worker purchases between 25% and 75% of a new build property and rents the remainder
• Intermediate Rent Scheme where the accommodation is provided by a registered social landlord and the rent for a property is set at a level between that charged by social and private landlords
Fair Housing For All
In September 2008 a £1 billion housing package was announced by the Government to help first time buyers struggling to get onto the housing ladder, support vulnerable homeowners at risk of repossession, and support the house-building industry. The measures included:
• offering 10,000 first time buyers currently frozen out of the mortgage market the chance to get onto the property ladder through a new £300m shared equity scheme
• supporting up to 6,000 of the most vulnerable homeowners facing repossession to remain in their home through a £200m mortgage rescue scheme
• a £100m investment in Support for Mortgage Interest reform which could help prevent a further 10,000 repossessions
It was also announced that stamp duty land tax would no longer apply to purchases of residential property of £175,000 or less.
Finally, regardless of whether you think of your property in terms of a home or an investment, I am pretty sure that in 25 years time it is going to be worth a lot more than you paid for it, even if at times property indices fall as well as rise.
Here are a few thoughts on riding out the recession so you are prepared for the upturn when it comes:
• Stop wasteful spending, not spending
• Understand where and how you are spending your money
• Consider investing in the equity market if you can take a long term view
• Spread investment across economies
• Only keep £50,000 cash with any one UK institution (lucky you)
Al Voice, MD Forces Financial
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