Renting vs Buying and Mortgage Advice

I have lived 3 years in the UK (in Leicester) on a 5 year work permit and plan to be here at least another two years, possibly longer. We were recently asked to move out of our flat by 27 November (the landlord wants to sell). Looking for a new place to rent, it's dawned on my that it could be wiser to buy. But I have a number of questions about that:

1) What are the 'hidden costs' of buying in the UK?

2) How long would it take for the property to appreciate to the point that it would make the time and expense of buying worthwhile?

3) Where should I go for mortgage advice? Your average bank? Building society? Independent adviser?

I should add that I don't have money for a down-payment and have thus far been told that I would qualify for somewhere between 150-180 K mortgage.

thanks for any help you can offer

ron

Just an opinion, but if you're only going to be here another two years, I wouldn't buy.  I have a similar position, was considering buying, but will be moving up north in 3 years and would be selling again then.  I don't trust the market currently, it seems to be slowing down in growth values, which means values could possibly fall.  Even if they just continue in slowdown mode, it might not appreciate enough to make it worth your while, or even to keep level with interest rates.  It's a different thing when you're buying for the long haul and are prepared to ride out the ups and downs of house prices.  Having said all of this, I'm a rank amateur and this is just my personal observation.  The best thing to do is get an expert opinion (i.e. an independent financial advisor) - it's usually free to do so and they'll give you good advice on the housing market. 

A 2-year purchase can be risky, especially given the current market and with all the one-time costs you will be hit with.  Here are a few costs:

(1) Stamp Duty of 1% of purchase price
(2) Estate Agent fees when you sell, these vary depending on location and how competitive the Agents are in your area, let's just say 1%
(3) Fees to buy house for appraisal, legal, etc.  Could assume around 800.
(4) Interest on mortgage (I don't count principle in mortgage payment because this is a form of "savings" as it builds equity in house).  Let's say 6% annually or 0.5% per month
(5) If it's a flat you could pay monthly fees for upkeep of common areas, say 100.

Assuming you spend 150,000 your one time fees are:
1,500 (Stamp Duty) + 1,500 (Estate fees) + 800 (closing fees) = 3,800

And your monthly cost is:
750 (interest) + 100 = 850

The missing part of this calculation is the change in value of your house.  If prices go up 5%/year you're probably better off, if the house market slumps further (not unlikely) you could lose big.  Alternatively, you could think beyond 2 years and buy longterm: if you move you could hold onto it and rent it out.

Definitely talk to an independent advisor to get advice on the best mortgage for you.  I agree that if you are only going to be here for a few years then buying might not be a good idea - we don't know how long the artificially high price of property is going to be here, and you may find yourself with negative equity in a few years time.  Also, recent reports show that the cost of buying is actually higher than the cost of renting at the moment, so not only will you have greater outgoings per month but you may find yourself with a bit of an albatross once you make the decision to move back home.

Vicky

Hi there

Good points and advice so far - just wanted to add a few bits to add to your thought and evaluation process.

1. Hidden Costs - ongoing costs, insurance (life, contents & buildings), furnishing, utiliies, council tax, maintenence and repairs. You must factor those into your budget for being a homeowner.
2. You're guess as to how quickly the property will appreciate to offset the costs you have into making buying 'worthwhile' is as good as anyones. Factors which will affect it will be , area, type of property, desiribility, access, local amenities etc etc - those with the best of all those things are of course the priciest. Also, with the interest rate's bite taking effect and more so since the Northern Rock wobbly - I personally don't hold out too much hope that there's going to be significant property value increases over the next few years - rather a softened reduction in values.
3. Talk to the major lenders and get a benchmark of what they say, want etc. You mention that you have no downpayment/deposit - this will restrict your options somewhat and more than likely you'll end up paying a higher rate of interest than someone in a similar situation to you with say a 10% deposit. I'd suggest that you avoid high salary multiplier mortgages (the 4 and 5 and 6 times ones) unless you're profession is one of the ones which are 'rock solid' in terms of employability over the years. Talk to independant brokers after that, they will have access to some mortgages that the high st lenders maybe won't offer you - to help, reduce as much of your current debt as much as you can - clear credit card debt, outstanding loans etc - it'll make the 'evaluation' by the broker of you look better for the mortgages he may have.

Only you know the size of your pockets and the lifestyle you want to lead and can work out if and how you'll finance the home and all other aspects of your life. What is said above isn't set in stone for everyone - but gives you a good indication of what to expect and maybe a suitable route for you to buy can be found.

Hope this helps - any other questions, just put them up here..

cheers! DtM! West London & Slough UK!

Thanks to everyone for the very useful advice. I do have a couple of additional questions:

1) Assuming there's no 'upward chain' (for example we buy a new flat), how long does the process take? Someone told me as few as 6 weeks is possible.

2) Dennis, what do you mean by 'independent broker'?

3) mbmasters, what exactly would 'appraisal' and 'legal' consist of? Are these absolute essentials?

thanks again

ron

Hi Ron

1. This question is also like 'how long is a piece of string?' !! - it can and very often does vary. Assuming all is well and there's no onward chain (i.e you're buying a vacant property etc) then it's just down to how quickly the solicitors exchange contracts, the finances with the mortgage lender is finalised etc till you get the keys. It's during these stages you get onto the solicitors backs and the estate agents backs to chase up to complete as quickly as possible. when it all works, it can be done in a matter of weeks (my time from viewing my current apartment to getting the keys was around 4 weeks or so and included the seller moving on in a chain) so i was lucky - other's including other UKY's posts show another story!!

2. Ok, independant Mortgage Brokers are typically those companies who advertise in property publications in the classifieds section. They'll deal with self employed, those with CCJ's, credit and debt problems etc - basically, anyone with certain or specific scenario's and not always bad! - they basically buy mortgages and can then tailor them for specific people and then resell them (essentially thats the way it works) - have a little search online and locally in and around Leicester as well and speak to as many as you can.

3. 'Appraisal' and 'legal' are indeed mandatory requirements when trying to take a mortgage out. Your financial standing will be 'appraised' i.e Job, salary, history, credit history, debts, credit card and store cards balances, any defaults, credit rating etc etc - with no deposit, you are pretty much going to have to get your financial matters disclosed and then verified etc etc. 'Appraisal' will also apply to the property itself - that will need a 'Survey' - basically a structural check of the property and report to the mortgage company (to ensure the building is worth lending on etc) Legal - well that would be the cost of getting a Solicitor to do all the required paperwork - unless you're a solicitor yourself, you'll need to pay for that - so yep, absolute essentials

Cheers!
DtM! West London & Slough UK!

Thanks again for more helpful info, Dennis. We've decided to rent for the time being, but it will be useful in the future to know all this stuff.

best

ron