Is the UK property market a bubble? Nationwide Building Society has suggested it might be. It has warned that interest-rate hikes, cuts in government support and a drop in overseas buyers could lead to “the house price bubble bursting”.
London looks like a bubble to me. Prices rose a crazy 17% in the past 12 months, according to government figures. Prices in the capital are now starting to flatten out. Nationwide calls it a “natural correction”. With a one-bedroom flat in Peckham nudging £400,000, about time too.
We won’t know for sure whether the UK property market is a bubble until it bursts. But you need to protect yourself, just in case.
Return Of The 8% Mortgage
First-time buyers must take particular care. They’re the ones taking on massive debts, just to get a toehold on the property ladder.
Charlie Bean, outgoing deputy governor of the Bank of England, has just warned that the base rate is likely to rise from 0.5% to 3% within the next three years. That would push mortgage rates up to 7% or 8%, so you need to be ready.
Anybody taking out a mortgage today must undergo stringent tests to avoid overstretching themselves, under the regulatory overhaul known as the Mortgage Market Review (MMR).
Lenders will also ‘stress test’ your borrowing, to make sure you can afford your mortgage when rates rise, as they may later this year. That should give you some protection.
Time To Get In A Fix
For added security, new buyers and existing homeowners could protect themselves against rising borrowing costs with a long-term fixed-rate mortgage. Some 86% of all new borrowers are doing that right now. Think twice before taking out a two-year fix, as that will expire just as mortgages start to get expensive.
There are still some incredibly cheap long-term fixes out there. Coventry Building Society, for example, offers a five-year fix to 65% loan-to-value (LTV) at 3.09%, while the Post Office charges 3.69% to 85% LTV. Fix today and you don’t have to worry about rate hikes until 2019.
Pay It Down
Homeowners should also take advantage of today’s low interest rates by overpaying their mortgage. That should give you a cushion when rates do rise.
Most mortgages allow you to make overpayments of up to 10% a year. Check the small print of your policy first, to avoid penalties.
Play The Long Game
Nervous buyers can protect themselves by only buying a property that they are happy to live in for at least five years. That way it doesn’t really matter if house prices fall. Even negative equity won’t be the end of the world. You can just sit tight, service your mortgage, and wait for the market to recover. As it will, eventually.
Don’t be panicked by the current frenzy into buying a second-rate property. You might struggle to sell it on later, especially in a more subdued market. At some point, the housing bubble will burst. Act now, and you can avoid getting soaked.
