I was watching the BBC News at Ten a couple of weeks back and I was staggered to see the headline screaming: ‘Mark Carney [Governor of the Bank of England] warns a no-deal Brexit would lead to a 35% drop in house prices.’ The reason I was staggered is because I’d seen his statement earlier in the day and this isn’t what he actually said. What Mr Carney had been trying to do was explain the preparations the Bank of England had been making for the worst-case scenario. He wasn’t making a prediction. As he himself pointed out:
“Our job, after all, is not to hope for the best but to plan for the worst.”
Somewhere along the line, journalists across the News (Negative Events World Service..?) media had turned his prudent stress-testing into a prediction. Some balance was restored by the BBC’s economics editor, Kamal Ahmed, who emphasised that: “It was not a forecast. It was an apocalyptic test where the Bank deliberately sets the parameters beyond what might reasonably be expected to occur. The major banks all passed the test, giving reassurance that the financial system can cope with whatever happens next year.” But the damage had already been done.
Cutting Through the Confusion
Last year we wrote a series on behavioural finance – how investors’ best intentions can be compromised by emotions and their short-term environment. By playing to the audience’s worst fears and sensationalising what could actually have been a reassuring story, this BBC report is a perfect example of that. In practice as well as theory, I know how simplistic and doom-laden journalism like this can affect house-buyers and investors’ behaviour. I meet with them every day. I see and hear the effects of it first-hand. With Brexit less than six months away, clients are all asking me the same questions:
Is now a good time to sell a property? Is it a good time to buy a property? Will there be an increase in mortgage rates? What should I be concerned about in the lead-up to Brexit? What’s going to happen after Brexit – will we be better or worse off?
It can be difficult for potential buyers or sellers to know where to look for a steer, particularly when there are also mixed messages on the health of the housing market coming from the mortgage providers. Earlier this month, Halifax reported that house price inflation had risen to its highest rate in nearly a year, while figures from rival lender Nationwide told of the biggest monthly fall for six years.
In a climate of media misinformation and a lack of clarity from lenders, it’s not surprising that people are so unsure about their next steps onto or up the property ladder. At times like this, it’s our job to reassure clients and to remind them that their house is a home more than an investment. We help our clients put their decision-making into a clear context that gives them the confidence to move forward. I’ve had this conversation with clients many times in recent months, so I thought it would be useful to share the key points. They can be broken down into two main elements: the financial planning considerations and the mortgage arrangements.
The Financial Fundamentals
On the financial planning side, your main concern when planning a house purchase is affordability. If you are moving to a bigger house, you might need to take on a bigger mortgage. Could you afford the payments? If interest rates continued to rise, what would happen if they went back up to five or six percent? What would that look like for your monthly payments, and how would it affect you from a financial planning perspective?
When we meet with clients to talk through a potential property purchase this is what we focus on. We use cashflow modelling to help them plan out the impact of a larger mortgage, or an increase in interest rates, on their finances. We sketch out every possible scenario and simulate the effects of any changes to the economic landscape on their own financial circumstances. We fully stress-test the possibilities until they’re left with a robust set of options. It’s all designed to help clients make their decision with the peace of mind and confidence that they are doing the right thing.
The Mortgage Market
Your other main concern when buying a house is what’s happening in the mortgage market. Despite the current political uncertainty, there are still opportunities available. At First Wealth, we are in a fortunate position where we work alongside our sister company First Financial Intermediaries who provide mortgage advice to our clients. Simon Ryder is their in-house expert:
“Following the Bank of England’s base rate increase, some mortgage rates have actually come down. Longer-term fixed rates have reduced in cost because the banks are over-capitalised. This means that there are still five-year fixed rate mortgages available at under two percent and 10-year fixed rates available at 2.5%. Sometimes people forget that uncertainty can often also bring opportunity.
“When clients ask if now is the right time to buy or if I think prices might fall in future, I remind them that this is only really relevant if they are selling. It’s immaterial from a buyer’s perspective. If you’re a buyer, you’ve worked out what you can afford and you can fix the cost of your debt you’re in a good position. We can insulate you against any short-term effects of Brexit by arranging a good five-year or 10-year fixed rate which will see you through the choppy waters.”
Remember that your House is your Home
Once you have talked through your options with your financial adviser and mortgage broker, the most important factor by far in the entire decision-making process is whether your house move is the right thing for you and your family. Many people get caught up in thinking entirely about the financial side of the decision, or making a profit, or identifying the ‘best time’ to buy or sell. (I know how difficult it can be to weigh up all the factors and make that final decision as I have had experience of it myself.) As Simon advises:
“People get overly distracted by whether it is a good financial decision or whether they are going to make money on the transaction. The property market will show that you will make money over time – that’s just a fact. Buyers and sellers should try to avoid worrying about relatively short-term issues when they are in fact making a long-term purchase. And, above all, your house is about your wellbeing.”
Ultimately, it’s impossible to know in advance the best or right time in terms of the market. But what you can be sure about is whether it works for you and your family. If this will be your home where you and your family live, that’s how you should think of it, rather than as an investment which needs to show a return. Working through all the financial planning factors with your adviser, and securing an affordable, fixed-term mortgage will give you the confidence to move forward in your life and the reassurance that you are securely prepared for every eventuality.
If you would like to discuss how your potential property purchase will impact your longer-term financial position, please get in touch for a chat. We’d love to help.
If you would like to review your mortgage situation for a future purchase or to compare your existing mortgage, Simon would be happy to talk you through your options.
This article does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. First Wealth LLP is an appointed representative of Best Practice which is authorised and regulated by the Financial Conduct Authority (FCA). You should note that the FCA does not regulate tax advice.
Think carefully before securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage.