Deposits are falling, rates rising and prices uncertain. Should I buy my first home during Covid?

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Deposits are falling, rates rising and prices uncertain. Should I buy my first home during Covid?

Whatever way you look at it, the property market had an exceptional year in 2020.It went from trundling along quite nicely in the first three months o

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Whatever way you look at it, the property market had an exceptional year in 2020.

It went from trundling along quite nicely in the first three months of the year, to a complete three-month shutdown during lockdown – during which time dire predictions were made about a coming crash. 

Against the odds, house prices surged after the market re-opened in July, thanks to the Government’s stamp duty holiday and lockdown fuelling people’s desire to move. 

First-time buyers can once again access 10 per cent deposit mortgages - but at a higher cost

First-time buyers can once again access 10 per cent deposit mortgages – but at a higher cost

Home movers were active in the market, with many swapping suburban homes for the sticks.

With so much going on, it’s not surprising that those dipping their toe into property ownership for the first time took the opportunity to sit back and think.

According to comparison site Reallymoving, the proportion of first-time buyers actually fell after the housing market opened up following the first lockdown. 

Between July and December, 12 per cent fewer first-time buyers bought homes than in the same period the previous year.

This was partly because banks pulled their five and 10 per cent deposit mortgage products at the beginning of the pandemic.

Only now are they beginning to return – but at rates that are a percent or more higher than what was being offered pre-Covid-19. 

So what now for first-time buyers? With deals pulled so rapidly the last time the pandemic escalated, they might be tempted to snap one up while they can. Buying now would also give them a chance – albeit increasingly slim – of getting in before the stamp duty holiday ends on 31 March 2021.

But there are signs that the market might return to a more even footing later in 2021, so holding off could mean they benefit from a possible house price fall and lower mortgage rates.

We asked property experts what they would do if they were a first-time buyer right now. 

‘The current market is a nightmare for first-time buyers,’ said Gerard Boon of Boon Brokers. 

‘Prior to the pandemic it was common for an interest rate of around 1.8 per cent to be offered with just a 10 per cent deposit. 

‘For first-time buyers aware of this, they will be shocked to see the current rates offered of over 3 per cent.’

He added that some first-time buyers may struggle to access finance, even at these high rates, because many lenders currently ‘require an Experian credit score of over 900 to be deemed acceptable.’ 

Interest rates of as low as 1.8 per cent were offered on 90 per cent mortgages pre-pandemic

Interest rates of as low as 1.8 per cent were offered on 90 per cent mortgages pre-pandemic

Could 10% deals be pulled again?

Lenders took their 10 per cent deposit mortgages off the market at the beginning of the pandemic, citing worries about their ability to cope with applications when staff were working from home. The prospect of an economic downturn was also a concern. 

Since December, several have relaunched these deals. They include NatWest, Lloyds, Halifax, HSBC, Nationwide Building Society, Yorkshire Building Society and Coventry Building Society. 

Most have rates of around 3.5 to 3.8 per cent depending on the duration of the fix, but there are exceptions. These include digital challenger bank, Atom Bank’s rate of 3.09 per cent on a two-year fixed deal with a £1,500 fee.

Colin Payne, associate director at Chapelgate Private Finance, said: ‘There is now much more than a glimmer of hope for first-time buyers, as lenders return to the market – albeit at much higher rates compared to 12 months ago.

‘As supply of these products increases I foresee rates at this level reducing over the coming months so this should again put first time buyers in a good position to purchase.’

Some experts have said that first-time buyers should bid now if they have identified a property

Some experts have said that first-time buyers should bid now if they have identified a property

Could lenders take 10 per cent deals off the market again? They have said they are more comfortable with the levels of demand in the market, and that staff are now more productive – but during a pandemic anything is possible.

‘There’s no precedent to follow at the moment so nobody really knows what’s coming,’ said Chris Evans, head of specialist mortgages at Pure Property Finance.

He advised that, given this uncertainty, first-time buyers with a property in mind should push ahead. 

‘The 10 per cent products are available at the moment, but there’s nothing to say they won’t get pulled again in the future, so if you have found the right house, have job security and are able to proceed, then go for it,’ he said. 

Will interest rates get better?

Before the pandemic, first-time buyers were getting rates lower than 2 per cent – so some may be tempted to wait it out in hope of a better rate.

But with so much uncertainty over whether that will happen, Evans again said buyers should go for a purchase if they can.

‘There’s nothing to say the rates will improve if you wait, so again, if you are able to proceed now, you should,’ he says.

Whether you bide your time depends on your situation, however. If you aren’t paying rent at the moment – for example if you are living with parents while you save – you have little to lose and could end up with a better rate at the end of it. 

But as rent payments are usually higher than mortgage payments, renters may be wise to accept a higher rate on a two-year fix, with a view to remortgaging at the end of that term.

‘Not buying can be expensive too,’ said Alex Winn, mortgage expert at Habito. 

‘According to the English Housing Survey, in 2019-2020 those with mortgages spent 18 per cent of their household income on their repayments, whereas rent accounted for 32 per cent of private renter’s incomes.’     

Avoid a five-year fix?

With the economic outlook so uncertain, one thing experts have generally advised those getting on to the ladder against is taking a five-year fixed mortgage. 

‘Our general advice for first-time buyers is only to purchase if necessary, and if you are purchasing, try to obtain a short mortgage product term such as a two-year fixed deal,’ Boon said.

This would mean you could remortgage the property after two years and get a better rate.

Even better would be getting a product without early repayment charges – often the case with tracker mortgages. This would leave you free to switch your mortgage product at minimal cost if mortgage interest rates returned to low levels.

Boon added: ‘Most first-time buyers certainly should not be looking to take five-year fixed mortgage products as the current interest rates and early repayment charges are significantly inflated.’

Should I wait until the stamp duty holiday ends?

To what extent the stamp duty holiday is fuelling the boom in the market is up for debate. Some are predicting that house prices will drop significantly when it ends, while others are less dramatic.

Payne said: ‘Unless there was an immediate need to purchase I’d feel that it would be sensible for first-time buyers to hold off purchasing until we enter the summer months.

‘Assuming the stamp duty holiday does cease on the 31 March, I believe that prices will soften slightly as demand drops.’

House prices increased in the second half of 2020, but they could be set for another fall

House prices increased in the second half of 2020, but they could be set for another fall

But others say that the effects of the holiday are already coming to an end. 

Saylan Lucas of Winkworth estate agents in Hackney, East London, said: ‘Many of the sales benefiting from the advantage of the stamp duty holiday will have already happened, so I wouldn’t hold out for any dramatic price drops as the year progresses and the impact of the vaccine takes effect.’

Generally, buying a house in the UK takes between two and three months – so while time is tight, it would still be possible to complete a purchase started today if you were not part of a long chain and everything went smoothly.

There had been rumours that the Treasury would extend the holiday, but although not impossible that now seems unlikely.  

As well as the end of the stamp duty holiday, the wider economic uncertainty surrounding Covid could also cause prices to fall – particularly as government support schemes such as furlough wind down.

It is important to be certain that your own job is secure before taking out a mortgage – but if it is, you could find yourself in a stronger position further down the line.

‘I think the economy will continue to struggle, and that will make it harder for many people to buy which will cut down on the competition,’ said Jasmine Birtles, director at money saving website Money Magpie. ‘I think that it’s possible that more mortgage companies will offer high LTV loans then too.’

If buyers find a home for less than £500,000, their stamp duty will be discounted

If buyers find a home for less than £500,000, their stamp duty will be discounted 

Some first-time buyers have a permanent stamp duty holiday

While home movers rush to complete before 31 March, certain first-time buyers still won’t pay the tax even when we return to the old system. 

If you are buying a home that costs £300,000 or less, you don’t need to worry about meeting the stamp duty deadline on 31 March – you will still be exempt.

‘If you’re a first-time buyer looking to get on the property ladder, there’s no need to panic,’ says Gráinne Gilmore, head of research at Zoopla. 

‘Although the stamp duty holiday ends on 31 March, first-time buyers will still be able to make a saving after this date – paying no stamp duty on the first £300,000 of their home purchase, on homes worth up to £500,000.’

Stamp duty for the amount of the purchase price between £300,000 and £500,000 is charged at 5 per cent – so if you were buying a home that cost £400,000, for example, you would pay 5 per cent of £100,000, or £5,000.  

You can still negotiate

Even though there is lots of competition in the market at the moment, agents said it was still worth trying to negotiate the purchase price of your home. With interest rates high, buying your property for a lower price may be the only way you can reduce your monthly payments.

Vendors like selling to first-time buyers because they aren’t part of a chain, and you can use this to your advantage.

‘If you are a first-time buyer looking for a very specific area or a particular type of home, such as a school conversion, and you find what you are looking for, you should go ahead and buy it,’ said Lucas. ‘But if you are looking for something which is more commonly available, you could ask the vendor and agent if a lower offer would be accepted.’

For example, if you narrowly missed out on the stamp duty holiday, you could ask the vendor to give you a corresponding discount on the purchase price.  

Look at what’s happening in your local market

All of this advice should be filtered through the prism of what is happening to the housing market in your area. 

Rosie Hamilton of GetAgent, the estate agent comparison website, said there was no ‘one size fits all’ approach.

Some areas in the UK witnessed significant house price increases last year compared to 2019

Some areas in the UK witnessed significant house price increases last year compared to 2019

‘The market is incredibly location, and property type, specific,’ she said. For example, if you have the funds, you may actually be able to get a decent deal on a flat in zone two or three London right now.’

House prices have fallen in many parts of London because commuters have seen working from home as an opportunity to move to a bigger home further away from the capital.

Another popular reason for moving during Covid was to get a garden – so you may find higher competition if this is what you’re looking for.

Hamilton added: ‘On the other hand, prices for houses with gardens in the North West, or South West are quite inflated, and it may well be worth waiting until after the stamp duty holiday has come to an end.’  

What is the best type of home to buy?

With prices likely to fluctuate in the short-term, it makes sense to find a property you won’t need to move on from for a few years.

‘Find a home you could see yourself living in longer-term, or for at least four years,’ said Winn. ‘That way, should the property’s value fall over the next 12 months, you’ve got time for its value to rise again before you look to move next time.’

This one-bed property in Hackney, London is on sale with Winkworth for £475000

This one-bed property in Hackney, London is on sale with Winkworth for £475000

‘If the property is only going to fit your needs for the next one to two years, then there’s more chance that any shorter-term drop in house prices could have an impact.’

Birtles thinks it’s worth betting on city centres, too – although only if that is somewhere you would actually want to live, of course.

She said: ‘If I were buying for the first time I would be looking for bargains in city centres. There has been a mass exodus out of cities and into the suburbs and countryside so properties in the centre of major cities are quite competitively priced,’ she says.

‘At some point people will move back into towns, although I don’t think it will happen for a few years, so prices are likely to go back up later on. This year, though, there is a window of opportunity to snap up a bargain.’

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