Is it Time to Buy a Home

On the 24th of April 2013 the Bank of England and HM Treasury announced that the Funding for Lending Scheme (FLS) would be extended until January 2015.  It was also modified to include selected non-bank providers of credit to the UK economy.  Between the FLS Scheme, a Bank of England Bank Rate of 0.5% and £375 billion of Quantitative Easing mortgage rates have fallen a long way.  Let’s look at the data.

The Bank of England publishes a number of datasets on this topic and I have picked 5 which cover the more common mortgage types available today.  They are the sterling monthly mortgage interest rate of UK monetary financial institutions (excluding Central Bank) covering:

• Standard Variable Rate (SVR) mortgages.  These were starting to rise at glacial speeds but have now pulled back a little.  Today they sit at 4.34%, flat month on month and up 0.24% year on year. 
• Lifetime Tracker mortgages.  These have been flat for some time now.  Currently they are 3.56% which is flat on the month and sees a decrease of 0.04% on the year.
• 2, 3 and 5 Year Fixed Rate Mortgages with a 75% loan to value ratio (LTV) continue the falls that appear to have accelerated in a downwards direction at the same time the original FLS was announced.  Today we see these mortgages at 2.87% (down 0.04% on the month, 0.79% on the year), 2.98% (down 0.32% on the month, 1.05% on the year) and 3.61% (down 0.02% on the month, 0.68% on the year) respectively.  Since the FLS scheme started the falls are 0.82%, 1.03% and 0.50% respectively.

A history of these mortgage rates can be seen in the chart below which also shows the announcement dates of the Bank of England Bank Rate of 0.5%, 4 tranches of Quantitative Easing and Funding for Lending.

Click to enlarge 

With inflation currently running at 2.9% you can now get an average real inflation adjusted 2 year fixed mortgage for -0.02%, a 3 year for 0.09% and a 5 year for 0.72%.

I’m currently out of the UK property market in rental accommodation but with my Assured Shorthold Tenancy coming up for renewal in the near future plus a Letting Agent that treats me slightly worse than belly button lint every time the annual negotiation begins, it’s time to reassess whether it’s time to buy.  Today is not meant to be a comprehensive piece of data analysis in typical Retirement Investing Today style, that will probably come later as I formulate my thoughts, but more some musings of what is currently running through my mind in the hope of generating some comment from you the valued reader.

Before musing about whether to buy let’s briefly get a summary of some of my economic opinion and data analysis that has been covered over many previous posts on the table:

1. The previous models I have used to examine UK housing predict that houses are affordable but not good value. 
2. The UK Government and Bank of England are actually trying to engineer a Financial Repression and not Austerity.
3. House prices have been flat in nominal terms since the start of 2010 but are falling in real inflation adjusted terms.  
4. The government wants to protect nominal property prices as allowing property prices to fall would greatly damage re-election chances.  I don’t believe they are protective of real inflation adjusted prices as it’s a great way to improve value without the majority of the population noticing.  They've shown their hand on this topic with the original FLS scheme plus the extension, Help to Buy Equity Loans and the Help to Buy Mortgage Guarantee which will start on the 01 January 2014 to name but four.     
5. On a personal side I, along with many readers I'm sure, utilise NS&I Index Linked Savings Certificates (ILSC’s).  Their RPI + X% plus tax free status has served me well since I started aggressively buying in 2007 resulting in a significant portion of my wealth now being tied up in them.  The problem I have is that the 3 year variants have now been rolled over once and are starting to reach the end of their second term.  At the end of the second term you aren't given the option to reinvest but are forced to take the cash back.  [Edit 26 May 2013.  Readers have highlighted that I’ll be able to reinvest for a third term.  I can no longer find where I read that I was only eligible for 2 terms and the T&C’s aren’t clear with “After any term a Certificate may be eligible to earn interest for a further term of the same length.  The Treasury will decide...”  All I can say is that I hope so as it will take some pressure off and I will find out very soon.]  Unfortunately, NS&I aren't offering any new tranches to invest in and so that money has to be found a new home.  It can’t go into the stock market as my strategy is currently telling me to reduce equity holdings.  That’s therefore going to leave a savings account paying something like 1.4% which after tax and inflation will see this wealth will be going backwards at the rate of a real 2.1% per annum.  Alternatively other low risk options like UK government bonds are also going to send me into negative territory after taxes and inflation.

So what’s stopping me running out and buying a home today?  Essentially it boils down to two main risks – mortgage rates and house prices.  Let’s look at each in turn.

Mortgage Rates

My original plan was that at some point I’d buy a home and then manage the loan so that at age 55 (15 years hence if I was to buy today) I’d end up on an SVR mortgage still owing the equivalent of 25% of my pension pot.  I could then use the 25% tax free lump sum from the pension to pay off the mortgage.  This strategy allows me to maximise my pension contributions while working and then maximise my ISA contributions, between early retirement day and 55, which I've highlighted the importance of previously.  It’s only 15 or so years ago that average mortgage SVR’s were nearly 9%.  Were they to return to somewhere near that level over the next 15 years, say if the market doesn't like the Financial Repression it’s seeing and responds with vengeance, then my early retirement plans would certainly be in jeopardy.

Can I protect myself from this rate rise risk?  Given my current position I think I may have found a way.   Some mortgage providers are now offering extended fixed rate mortgages at what look like pretty competitive rates when you consider the average fixed rates above.  For example, Leeds Building Society is offering a 10 Year Fixed Rate Mortgage for 3.99% fixed up until 30 June 2023.  Firstly, take a mortgage like that.  Secondly, use my current cash holdings plus imminent ILSC’s cash returns for a very healthy deposit instead of taking a negative return elsewhere.  Thirdly, use the continual ILSC cash returns that will continue over the next few years on top of some new savings to pay off the mortgage quickly while still continuing to maximise ISA contributions and it looks feasible while protecting me from interest rate risk.

Price Risk

There are really only three scenarios’ that can play out here:

• The market rises in nominal and real terms.  I think the chances of this occurring are low but I've been wrong in the past.  Could, for example, The Help to Buy mortgage guarantee engineer this.  Only time will tell.  If this occurs then I win by buying now instead of later instead of wealth being eroded by inflation if I don’t buy.
• The market continues to tread water nominally but falls in real terms as is the current trend.  This is in my opinion is starting to look like the likely scenario given it’s also the scenario I think our government want.  There is a saying in the US, Don’t Fight the Fed.  Will the same hold true in the UK?  If it does I’ll call my position a wash.  I might lose a small amount of wealth as I can currently get a very small nominal return on my investments but that will more than be made up by being able to drill a hole in a wall or plant a fruit tree in the garden for my family to enjoy.
• The market falls in real and nominal terms.  I will have a reduced retirement “salary” as I've had to use more of my stored wealth to put that roof over my families head.  However that said the cost of a home will be known (as I’ll be living in it) meaning I can plan my early retirement with much more confidence.  Additionally I’ll still have a very early retirement and be living comfortably.  It just might be a little later than if I had waited longer to buy.

As always DYOR.

What would you do?  Is anybody buying or considering buying right now?  Your comments are valued as always.