Why is it better to have a good deposit for a house when buying a home? The short answer is that having a large deposit is cheaper for two key reasons. Firstly you have a greater choice of lenders who are willing to offer a mortgage. Secondly, the rate of interest that you pay is much less (currently almost 2.5 times less). A third reason would be that it is a larger buffer against a sharp fall in property prices, reducing the possibility of negative equity, which in the US is no big deal, because they just hand the keys back, but here in the UK you have to pay your debts.
If you believe the owning property is a particularly good thing, you may well support the Government help to buy scheme, enabling people to buy their first home. Since the credit crunch lenders have cut back the amount that they lend and the risk that they take. As a result it is difficult to find a competitive mortgage rate unless you have a large deposit of significant equity in your home. The new Government scheme basically underwrites the risk which is not passed on to the lenders (several of whom we all effectively now own). So to be blunt, the taxpayer is taking the risk… again.
Why have property prices risen so much?
I am not against property ownership at all. However current property prices are daft. They are fuelled by overzealous estate agents, surveyors and lenders who all essentially collude in the myth that property is fairly valued. Frankly they all have to, because to do otherwise would be so out of touch with the market that they would go out of business, so I’m not blaming anyone. However the main culprit is the lender, who essentially makes money out of nothing (they do not have the resources to back the loan; merely re-lend your deposit and all of our collective cash. This “easy money” has fuelled the myth that property values have soared legitimately. They haven’t. There is a massive disconnection between income and property prices. As salary inflation has remained relatively static of late and property prices have “risen” the gap is constantly widening. Sadly, there are no easy solutions – big salary rises or a reversal of property valuations.
How much more is a 90% LTV?
Britain is peculiar in its obsession with home ownership, most of Europe rent. That of course does not mean the we Brits are wrong – look at the state of European finances and we are apparently rather savvier. Today’s news that if you have a 60% mortgage (40% equity or deposit) your mortgage is likely to cost you almost 2.5 times less than someone with a 10% deposit. In short it pays to have cash and to have less debt. You know this of course, but that doesn’t help the next generation who are going to struggle to buy a home and due to inflated property prices the size of the deposit is becoming out of reach for many. So rather than address the root causes, the Government has merely said, borrow the money and they will cover the risk. Not what I would call wisdom in action, but by far the most palatable of alternatives of massive salary increases (which may not work) or a massive property devaluation.
Dominic Thomas: Solomons IFA
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